This site is dedicated to getting people to think a bit outside the box and make some money whilst in their pajamas. Most people think that money only comes from going into an office (or a fast food joint or retail store) and putting in eight, ten, or sixteen hours sitting in a cubicle, or, if they’re lucky, a corner office with a view. This is definitely one of the ways that people make money. Some of them are quite successful in bringing in money this way. However, until the power of passive income is brought to bear, they will have to continue going into the office eight or more hours a day to continue to make more of the green stuff (or colorful stuff if you happen to live outside the US).
While teens might be thinking of ways to make money this summer, or a working-class parent might be looking for ways to make more money all of the time, saving up money over the long-term can be a great way to start toward passive income. The difference between active and passive income can be summarized in this statement:
You work for active income. Passive income works for you.
In other words, you have to actually go to work and do some task or create some item that people are willing to pay for in order to make money the old-fashioned and more common way of making active income. Passive income is that money that is created from having capital or knowledge invested in a money-making tool. This capital is probably going to have some work associated with it initially. Few people are born with silver spoons in their mouths, so they will have to do some work to make some money to start with. This is where self-discipline comes in. I’ve already noted the power of a dollar on this site, but to summarize what I’ve pointed out before, saving a dollar a day from your teenage years to your normal retirement age of around 65 could net a nest egg of over $250,000. Saving four dollars a day over that time will net a cool million. Save even more, and we can really, really get into some pretty cool numbers or a retirement (or semi-retirement with only work you want to do) that could start decades before most people think you really should retire.
How to Get Passive Income
There are several ways to get passive income. One of which is the old-school savings account or certificate of deposit. However, there is a problem with this. The income that you get will actually decrease over time unless you add more money to your stash of cash because the interest that you will get in these days of near-zero fed funds rates will get eroded by inflation. Nonetheless, for every $1,000 that you’ve got in one of these instruments, you could theoretically make a dollar or two a years. Have a cool million? We’re talking about $10,000 or $20,000 in passive income. Some families live quite comfortably on this income every year.
Some people really like dividend stocks. These stocks will pay a dividend from their earnings on a regular basis (usually quarterly). In fact, one blogger known as Dividend Mantra is trying to get enough passive income together to retire on his dividend payments alone. The lower your expenses are, the quicker this goal can be achieved. For example, you’ll need much less passive income if you’ve got $20,000 in annual expenses vs. if you’ve got $50,000 in annual expenses. Mine are actually closer to the higher figure, but this can still be done if an income is higher and you can save quite a bit of money.
One of the cool things about this dividend stream is that it only went down a bit more than 20% in the last market crash in which the overall market went down more than 50%. This means that passive income from dividends can actually wind up being a better deal. Also, for those who are still building a nest egg, these dividends can go toward buying more shares that will increase the amount of dividends that a person can earn over time. Here’s a good post from Joshua Kennon on how reinvesting dividends on an initial $10,000 investment affected an investment in Coca-Cola stock over 50 years.
While dividends are technically regular stocks, not all stocks pay dividends, which are in effect cash payments to investors. Other stocks can still pay off because of price appreciation. When adding in dividends and price appreciation over time, the stock market has returned an average of 8 to 10% over the past century plus. That’s a pretty good track record. Until recent years, Apple (which happens to be one of the best-performing stocks on the market) did not even provide a dividend. However, in the late 1990s, the stock was in the $4 range. Those who invested money at this point were not hurt by the lack of a dividend, however. The stock’s price went up over $600 per share before splitting last year. A person who bought at the bottom, or even the middle, of this spike would have profited handsomely, even without a dividend. They would not have had to have worked an extra second to make that money, as Apple would have contributed to their income.
Bonds are long-term debt instruments that have performed quite well over time. Governments like the national governments of the US, Canada, the UK, or even Paraguay frequently issue bonds to finance current spending levels. They promise to pay out a certain yield (basically a payment for allowing the government to borrow your money, much like a savings account for a bank). State and local governments, as well as corporations, will also frequently issue bonds. Some of these bonds are taxable, but municipal bonds are free from federal income taxes. When thinking of tax ramifications, be sure to check with an accountant or financial planner to see what will pay off best. The amount that a government or business has to pay in interest is related to their perceived stability. For example, the US currently has a very low interest on bonds payable, while Greece is in danger of defaulting on their debt and has to pay a high premium.
Getting Others to Make Money for You
There are marketing systems in which individuals can get referral income in various ways. For example, Amazon has an associate’s program in which web content providers can get a certain cut of any sales that their page or site generates. This starts out at a 4% payment, but goes up from there. Of course, like the other options, there is some work required at first, but over time, this can start to add up to a decent income for those who are motivated and successful. Much of this income can start to take on a passive nature and can then be invested to make even more passive income. Amazon Associates is just one of many options in this regard.
This, like most of the other forms of passive income, involves some risk. A renter could totally trash a house or trailer, the market could totally collapse and cut the value of the property, or a tsunami could come and completely inundate your investment. All investment involves risk. There is risk to my personal home. This is why I have insurance. After a rental property is paid off, though, everything over taxes, insurance, and upkeep can go into the column of passive income. Even if the property is only partly paid off, the rent that the tenant pays should pay off the debt. It’s probably not a great idea to leverage a huge sum of money for most people, as a market crash could lead to a foreclosure, but investing in real estate can pay off.
For example, if you had a paid-off house that was valued at $100,000, you could probably get anywhere from $500 per month and up in profit, depending upon the local market. Even if it was not paid off, the renters would be in the process of paying it off for you, which is a form of passive income. If you’ve tired of dealing with renters, you could then sell the house for the $100,000 give or take and invest that in something else, so rental property can also be a good way to get passive income.
These are just a few of the ways that people can make passive income on the money that they’ve already put to work. This money never goes to sleep, but continues to work all year round, making more passive income that adds to a snowballing amount over time. As I mentioned in the title of this article, passive income really is the best form of income. Having money work for you is much greater than having to continually work for more money. I’ve got a way to go in building up my nest egg, but as an old Chinese proverb states: The best time to plant a tree was twenty years ago; the second best time to plant a tree is today. Passive income is definitely what I would call making money in pajamas.
DISCLAIMER: I am not, nor do I claim to be any sort of certified financial planner. This article is just intended for general informational/entertainment purposes. Before making any investments, you should contact a certified financial planner. Always remember, past returns are no guarantee of future successes.