The journey towards financial freedom and independence often involves passive income, which can be a primary component in long-term wealth creation. Passive income refers to earnings that are generated with little or no effort on the part of the recipient. Working towards $100,000 per year in passive income may be achievable by strategically investing in diverse income streams, such as rental properties, dividend stocks and fixed-income securities. While these investments can help build wealth, there are potential risks associated with passive income, such as market volatility and income fluctuations.
Do you have questions about passive investing? Consider consulting with a financial advisor today.
What Is Passive Income?
Passive income pertains to earnings generated regularly, with little to no effort needed from the recipient. Active income, on the other hand, involves earnings derived from an individual’s direct effort or labor, such as the salary earned from a full-time job. You can think of active income as trading your time directly for money, while passive income is earned no matter what you’re doing.
Examples of active income sources include hourly wages, commissions and freelance work. Passive income sources may include rental properties, dividends from stocks or royalties from intellectual property. Passive income can also be earned through side hustles or businesses that you’re able to build to drive revenue without you directly working. In this article, though, we’re primarily focused on passive income investments.
Ways to Make $100,000 Per Year in Passive Income
When selecting different passive income streams, consider factors such as risk, initial investment and your return on investment (ROI). Combining various passive income sources can help you work towards your financial goal of $100,000 per year without having to trade all of your time to achieve that goal. Below are five common ways or investment types you can use to achieve that goal.
1. Invest in Real Estate
Rental properties generate income through tenants who pay rent each month to live in a property you own. The landlord’s role is to manage and maintain the property to ensure consistent income. Before investing in rental properties, consider factors like location, potential rental income, appreciation potential and property management requirements.
Real estate investment trusts (REITs) allow investors to purchase shares in a company that owns and manages income-producing real estate. REITs distribute income in the form of dividends to shareholders, providing a stable passive income stream. When considering REIT investments, research the REIT’s management team, track record and portfolio, while considering fees and other costs.
It’s essential to understand the risks and time involvement associated with managing rental properties as it may not always be simple and low-effort. Many landlords may tell you that you’ll be trading plenty of your own time in exchange for the income you receive, making it less passive than other options. This is why a REIT might be a better option for some to diversify into real estate.
2. CD Laddering
A certificate of deposit (CD) is an investment that can be made for a variety of terms. This asset pays a percentage of interest during the term and it is usually considered a safer investment. However, know that your funds will be inaccessible without you paying a penalty in this scenario.
One common strategy includes CD laddering, which involves investing in several certificates of deposits with different maturity dates. For example, investing equal amounts in 1-year, 2-year, 3-year, 4-year and 5-year CDs. As each CD matures, you would reinvest the proceeds in a new 5-year CD. This could result in a continually rolling ladder of CDs that produces income and returns each year.
By regularly reinvesting maturing deposits, investors can enjoy higher interest rates over time. The relationship between interest rate fluctuations and the potential income from a CD ladder strategy affects the expected returns. This strategy provides predictable income with low-risk exposure.
3. Dividend Stocks
Stocks are a popular investment for wealth building, but you can actually earn income on many stocks if they pay dividends. Building a diversified dividend stock portfolio involves selecting numerous companies with a history of consistent dividend payments, strong financial health and potential for future growth.
By investing in dividend stocks, investors looking to make $100,000 per year in passive income will benefit from the power of compounding and dividend growth. However, risks associated with dividend investing may include market volatility and potential dividend cuts during economic downturns.
4. Fixed-Income Securities
Investing in bonds or debt issued by companies or governments allows investors to receive regular interest payments (coupons) over the life of the bond until maturity. Diversification within fixed-income securities, including different types of bonds, such as Treasury bonds, corporate bonds and municipal bonds, offers varying risk levels and potential returns. Gains from interest payments are generally lower but more secure than stock investments, offering a reliable income stream suitable for passive income seekers.
5. Start a Side Hustle
Starting a side hustle that generates passive income could include creating online courses, engaging in affiliate marketing, writing for websites or books. The necessary skills and resources depend on the specific side hustle, but consistency and patience are crucial factors for success in almost any business. It’s important to differentiate between truly passive side hustles, such as creating an online course and those requiring ongoing efforts, like consulting work. The right one, especially if you have the necessary expertise, can change your total income drastically.
Importance of Income Diversification
Having multiple income streams offers several benefits, such as spreading risk, increasing earning potential and reducing reliance on a single income source. An income stream serves as a regular source of earnings, helping individuals and families meet their financial needs. Individuals can have multiple income streams from a variety of different sources.
By reducing reliance on a single income source, such as a full-time job, one can protect their finances against challenges and ensure more long-term financial stability. If you happen to lose your only income stream, then it can really damage your financial outlook. However, if you lose one of many income sources, then you might have more flexibility to adapt.
For example, consider an individual who loses their job unexpectedly. If they have diversified their income with investments in rental properties, dividend stocks and a side hustle, they will be better able to withstand the loss of their primary income source. Consulting a financial advisor for personalized advice on income diversification strategies can be a wise move for those seeking to diversify their income as it won’t be the same for everyone.
How to Create an Investment Plan
It’s essential to assess your risk tolerance to determine the suitable proportion of high-risk and lower-risk assets in your investment portfolio. Setting short and long-term financial goals involves identifying the desired passive income amount and the timeline needed to achieve it.
Accumulating an emergency fund is an example of a short-term goal, while a long-term goal could be reaching $100,000 in annual passive income. Evaluating investment options requires researching and understanding expected returns, risks and diversification opportunities. Periodic review of financial success and tuning the strategy allows you to reassess goals, progress and risks in a disciplined manner.
Consulting a financial advisor when creating an investment plan tailored to your personal financial goals and risk tolerance can be both beneficial and crucial to finding the right income diversification. Based on your goals and the amount of money you have to invest, your plan could look dramatically different.
Bottom Line
The path to working towards $100,000 per year in passive income takes time, discipline and consistent effort. Building diverse income streams is essential in achieving financial freedom and independence. By spreading your sources of income over multiple investments and avenues, you are better prepared to weather financial challenges and achieve long-term wealth.
Tips for Investors
- A financial advisor can help you create a passive investing plan. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to see how much your investments can grow over time, SmartAsset’s free investment calculator can help you get an estimate.
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