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How To Start Making Passive Income

by retirebyforty on April 13, 2012 · 83 comments

in income, investing

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how to start making passive income

You can be making money as you relax in the Caribbean

As many of you know, passive income is the core strategy of my early retirement plan. Currently, we have about $1,400/month of passive income. Of course, it would be better to have more passive income, but even $1,400/month took a very long time to build. Some readers were wondering how I got started so I wanted to write a bit more about the beginning stages. We took the long slow road to passive income. I’m sure there are faster and easier ways to do this and I’m searching for that elusive golden goose too.

Start Making Passive Income

  1. Spend less than you earn and save some money in the bank. This is the first step to passive income and I’m sure many of you are already doing this. Your savings account pays interest and that’s the first passive income most people see. The interest rate is so low now so you won’t see much income, but you have to walk before you can run.
  2. Invest in equities. I invested in mutual funds and growth stocks soon after I started working. I kept investing through the down cycles and was able to build up a modest after-tax stock account. Over the last 2 years, I have been moving these investments toward dividend paying stocks to generate passive income. The building process took a long time for me because the stock market was so volatile since 1999. If you are just starting out, you can invest in a low cost index fund/ETF such as VTSMX and eventually switch over to a dividend portfolio. I think that is probably the easiest way to go for someone just starting out.
  3. Rental home. We purchased a home in 2000 and lived there until 2007. When we moved, we rented the house out instead of selling it. I think many landlords started out this way. The rental home worked out well for us so that gave us the incentive to acquire a 4-plex. The 4-plex is cash flow positive so far in 2012 and it should get even better in 4-5 years.
  4. P2P lending. I actually won $50 from prosper.com during #YakChat(twitter chat) and that got me started with the lending account. I funded the P2P account with $1,000 and have been receiving about $10 in interest per month. The return is better in the beginning because people usually default later on in the loan so we’ll see how it goes. I’m planning to increase the sum to $10,000 eventually. This will generate about $100/month. If P2P continues to work out well, then perhaps I’ll increase it even more. I think you need at least 100 loans to be diversified so if you have $2,500 lying around, give prosper.com a try. I would only invest money that you can afford to lose here because the return is NOT guaranteed in anyway. If we have another recession, you can bet that the default rate will go through the roof. Sign up to lend and get 10.69% Returns With Prosper.
*Update September 2012* I increased my Prosper investment to $10,000 and my current ROI is 12.32%. The ROI will probably decrease to around 10% after about a year due to defaults, but that is still 10x better than most saving accounts.

So you see, it’s not difficult to start your passive income rolling, but it does take a lot of time. Your interest payment from the bank maybe $3-4/month now, but if you keep working on it you can get to $5,000/month in time.

Readers, do you have any plan to make passive income?

There is a great new website to help you manage your investments – Personal Capital. You can keep track of your income, expenses, and investments, all in one place. Personal Capital is geared for investors and have many great tools. See my review of Personal Capital and how they helped me reduce my investment fees.

make passive income

Still making passive income

 

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{ 78 comments… read them below or add one }

Cherleen @ My Personal Finance Journey April 13, 2012 at 1:11 am

After paying off our debts, we started with our retirement and emergency savings. Investment will follow next. You listed good suggestions for us. Thank you!

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retirebyforty April 13, 2012 at 9:46 am

You got the priority straight. Good luck!

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Terry Pratt April 13, 2012 at 3:29 am

No, I am a rent slave who earns a poverty-level income and student loan payments get in the way of spending less than I earn.

So I am providing passive income to my landlord but none for myself..

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retirebyforty April 13, 2012 at 9:47 am

I’m sorry to hear that, but don’t give up. You will be making more money soon and I’m sure you will be able to pay off that student loan before you know it. Keep your eyes open for a better job opportunity. Good luck!

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WorkSaveLive April 13, 2012 at 3:58 am

The only other one I’ve considered is starting a business and eventually having people that can manage it for you. It’s pretty nice to be the owner of a company and not have to work very hard on it.

Other than that my primary source will be from rental properties.

Thanks for sharing – $1400 is a pretty awesome passive income stream!

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Miss T @ Prairie Eco-Thrifter April 13, 2012 at 8:23 am

I would really like to get a rental property. Real estate investing really appeals to me and I have seen a lot of people make it a success. We just need to save up a bit more first. Hopefully in the next few years we can make this a reality.

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retirebyforty April 13, 2012 at 9:51 am

Keep saving and investing in the stock market and be ready to take the opportunity when it arise. I hear the housing situation in CA is similar to the US bubble 5 years ago. Good luck!

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Financial Samurai April 13, 2012 at 10:13 am

Good to see that P2P you won from #YakChat is starting you off on a new income stream! If only P2P was guaranteed at at least 8%.. I would dump ALL my money there!

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retirebyforty April 13, 2012 at 10:39 am

Thanks for the reminder. I forgot the hash tag and updated the post. Yeah, I would only invest what you can afford to lose. If we have another recession, I’m sure the default rate would go through the roof.

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investlike1percent May 28, 2012 at 1:31 am

FS,

why dont you do hard money loans at 50% FMV to real estate. they are available all day long yielding >8%

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The Happy Homeowner April 13, 2012 at 10:32 am

I’m also currently saving for my first investment property. My plan is to purchase it within the next 2 years, then continue to acquire properties after that!

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retirebyforty April 15, 2012 at 10:00 pm

Sounds like a plan!

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krantcents April 13, 2012 at 12:36 pm

I think you want a variety of passive income so it keeps up with inflation. Stay tuned, next week I introduce a different investment strategy.

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retirebyforty April 13, 2012 at 3:22 pm

I’ll look forward to that.

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Christa April 13, 2012 at 1:07 pm

Great info for those starting out (like me). My passive income is relatively low at this point, but as I continue to invest, it should increase.

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retirebyforty April 13, 2012 at 3:25 pm

Keep working at it and you’ll get there! It’s a long game.

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Darrell @ Debt and Buried April 13, 2012 at 1:30 pm

I am a huge fan of Prosper and P2P lending in general. I’ve made over 60 loans and even playing it safe I’ve managed about a 8% annual yield. Better yet, it makes me happy to think about costing the credit card companies money when people can refinance at a lower rate and pay off their bills sooner.

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retirebyforty April 13, 2012 at 3:26 pm

How long have you been lending? Did you lend during the recession? I want to know if your yield took a big hit.
I think P2P is good during the good times, but will probably more risky during any economic downturn.
I think it’s a win win for lender and borrowers too.

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kevin December 12, 2012 at 4:50 pm

Yes I was lending on p2p sites before and after the recent recession. I was investing a little over 30k at the peak of my portfolio when it started going down hill. Prior to the recession my return was averaging around 10-15%. When things got bad around 30-40% of the loans defaulted, went into collections, or no payments over 4 months from what i remember. Yet at the end i came out lucky without any loss but a slight gain of around 3%. This is from investing in mostly AA-B credit scores. Id recommend you guys understand the risks involved.

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Peter August 17, 2013 at 9:01 pm

I’m a big believer of P2P lending and have been invested in Prosper over 6 years now with over 1015 active notes. Last October 2012 my ROI was 14.94% now yielding 11.08% through July 2013. It’s still above 10% but I’ve seen more defaults last 12 months than I did the previous 24 months. I feel more people are borrowing money then they should and/or losing jobs or seeing less of job income. It’s getting harder to invest in better loans as Prosper has open up the site to institutional investors.

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retirebyforty August 18, 2013 at 2:31 pm

I feel like there are less loans too. Maybe the good ones are snapped up very quickly by the institutional investors…

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Forest Parks April 13, 2012 at 1:45 pm

$1400 a month is impressive! I’m quite interested in p2p lending as feel it’s fairer than big bank lending but I don’t yet have the spare income to give it a shot.

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retirebyforty April 13, 2012 at 3:27 pm

I started P2P lending last year. $1,000 is not a bad start and you can keep adding to it.

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Invest It Wisely April 13, 2012 at 1:47 pm

You’re doing really well on the passive income front, Joe! Keep going…

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retirebyforty April 13, 2012 at 3:27 pm

Thanks Kevin. It will be much more difficult to increase after I quit my job, but who knows what will happen.

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Jeff @ Sustainable Life Blog April 13, 2012 at 1:51 pm

Thanks for the breakdown joe – I think some people just thought you ‘fell into’ 1400/mo passive income, when you didnt. Glad to share, and once I pay off my debt I’d like to get something like that started.

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retirebyforty April 13, 2012 at 3:30 pm

I should have made it clear that I don’t have a trust fund. :)
I started at 0 after college and the $1,400 took 15 years to build up. Luckily I didn’t have student loan. I’m sure you will get it rolling pretty quickly especially with a hand from your soon to be wife.

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Invest It Wisely April 13, 2012 at 3:55 pm

On a more philosophical level, there is really no such thing as “passive” income. Income is just a function of deployed capital, and capital only comes from deferred savings. You can only build up those savings by saving income during your working years or starting a business and making money that way.

When looked at that way, passive income is really sequestered wealth, and it certainly takes some activity to get to that point. ;)

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Michelle April 13, 2012 at 7:37 pm

Money for nothin! Woot! Who doesn’t love that? We’ve got some passive income ideas up our sleeves and I can’t wait til it starts rolling in and we get to see the fruits of our labor.

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retirebyforty April 14, 2012 at 11:22 am

Good luck! It takes a long time.

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BusyExecutiveMoneyBlog April 13, 2012 at 7:55 pm

RB40, well written and well done. Your income streams are impressive.

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The First Million is the Hardest April 14, 2012 at 2:11 pm

Having a few large passive income streams certainly is the “dream”. Right now I’m working on building a dividend portfolio and hopefully picking up a rental property or two over the next 5 years or so.

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retirebyforty April 15, 2012 at 10:01 pm

Good luck! It took me a very long time to build my dividend portfolio, but I’m sure you can do it.

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Kevin@OutOfYourRut April 14, 2012 at 2:18 pm

Wow $1400 a month is a really good start! I’m thinking for a lot of people starting some sort of business that’s passive in nature could be a way to go too. With rental property (which is never completely passive!), equities and lending you have to start with a fairly large nest egg, but with a business you can start with very little capital, grow the business, then invest the profits in other investments. That can also create a mutliplier affect with income sources. That’ll be a solid retirement plan!

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retirebyforty April 15, 2012 at 10:03 pm

I like starting a business too, but I think that’s not really passive income. I guess once you can hire people to run the business and still have positive cash flow, then it would be a great passive income source.

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Roshawn @ Watson Inc April 14, 2012 at 5:37 pm

Great post RB40! I am very excited about the rental income possibilities. Once we decide where we are going to settle long-term, we definitely intend to buy more. Currently, we mind our portfolio

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retirebyforty April 15, 2012 at 10:04 pm

Some people doesn’t mind owning out of state properties, but I like to be local. It’s much easier for me. Hope you guys figure out where you want to live soon.

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SB @ One Cent At A Time April 15, 2012 at 9:16 am

Dividend stocks and prosper are my only two ways of passive income for now, apart from a few bucks from bank interest. you are doing good with $1400 in passive income.

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Chuck April 15, 2012 at 10:44 am

RB40,

Passive income is certainly key to an early retirement. You just won’t get there dutifully maxing out your 401k and ROTH IRA. For my wife and I we did not start until we were around 35-37. We won’t make 40, but 50 is achievable.

For us it is rental properties that will get us there. Whatever it is, you must have a passion for it – then all the work that goes into it will not feel like work. I must warn you rentals are not as passive as some make them out to be.

Good luck,
Chuck

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retirebyforty April 15, 2012 at 10:05 pm

I think maxing out 401k and Roth IRA as soon as you start working will get your to early retirement. I’m sure there are many 401k millionaire out there.
I agree about the rentals. Something always come up every month…

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Kurt @ Money Counselor April 15, 2012 at 11:29 am

My plans are a start-up personal finance blog biz, royalty trusts, high-dividend stocks, a short-term rental apartment, and select hi-yield bonds.

I tried peer-to-peer lending through Prosper and experienced a negative return. However, I think my timing was exquisitely poor: I completed lending out the chunk of money I had set aside for Prosper in the spring of 2008. Then the economy went ka-boom! I’d like to try it again, but I’m a bit gun shy now.

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retirebyforty April 15, 2012 at 10:07 pm

I heard about 2008 from a few P2P lenders. Hopefully we’ll have smooth sailing for a few years, but we still have to be prepared for a downturn like that too.
Good luck with your plan!

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Aloysa @My Broken Coin April 15, 2012 at 4:39 pm

What was your initial investment in P2p? I am thinking to look into it and see what it is all about. I know a little but not enough to make me comfortable. Yet. :)

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retirebyforty April 15, 2012 at 10:08 pm

My initial investment was $1,000. It went well for 6 months so I’m increasing it. I think $1,000 is the minimal to be able to lend enough to be a little diverse.

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101 Centavos April 15, 2012 at 6:24 pm

Great stream of cash, RB40. I’ll be following your progress on P2P with interest.

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My University Money April 15, 2012 at 8:49 pm

I’m hoping that building up passive income sources when I’m young will build self-propelled momentum over time. The more money I earn in passive income and re-invest, the quicker that snowball can begin rolling right? Great examples of ways for people to start.

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retirebyforty April 15, 2012 at 10:09 pm

That’s right! I wish I started with rental properties even earlier. Well, we did rent our extra room out once in a while so I guess that counts.

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Melissa@PersonalFinanceJourney April 16, 2012 at 3:57 pm

We don’t make any passive income yet, but I am interested in beginning to develop passive income streams. I am also interested in P2P investing, but I want to get our debt paid off first.

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retirebyforty April 17, 2012 at 9:49 am

Paying off high interest debt is the #1 priority. I’m sure you can do it!

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Roger the Amateur Financier April 16, 2012 at 7:26 pm

Not too shabby; you’re already making more in passive income than I’m currently earning in active income. I’m definitely working to build my passive and side income, although it’s quite a long slog. Still, to be able to retire on time (or even early) with less worry about exhausting my savings would be a wonderful help to building a good life.

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retirebyforty April 17, 2012 at 9:51 am

It is a long process to build passive income. You should check out Financial Samurai’s post on multiple streams. He is making great passive income.

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Jennifer from Credit Karma April 18, 2012 at 3:56 pm

Great post, RB40! I’m in my early 20’s and have a good amount of money saved up in my checking account but you’ve definitely inspired me to stop letting it sit in the bank and instead invest it to start generating some passive income.

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retirebyforty April 18, 2012 at 9:49 pm

Thanks! You definitely need to invest the money instead of keeping it in the bank. Start off with something easy like the Vanguard index funds and you can diversify as you learn more.

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Shilpan May 4, 2012 at 4:02 pm

With my hotel investment income( avg. $9500) and a small strip center income($1500), I have $11,000 in the passive income. It’s not completely passive as I spend close to 5 hours per month to monitor and manage these investments.

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retirebyforty May 5, 2012 at 10:13 pm

That’s really impressive. Great job!

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Kim May 15, 2012 at 6:26 am

My husband and I started a modest dividend fund for ourselves back in 2008 when the market crashed and were more conservative about how much capital we put into it than we wish we had in retrospect! Of course at the time it wasn’t clear how long it would take for the markets to go up again, whether the global financial system wasn’t going to collapse further. But if we’d known then what we know now… the old story!

Re: rental properties, we’ve discovered we actually really dislike home ownership, after 14 years of giving it a try, so rental properties are definitely NOT a good choice for us! It’s quite important to know that about yourself. Trying to do something you really dislike isn’t the answer, so we will have to find another way.

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retirebyforty May 16, 2012 at 9:41 am

I hear you about home ownership. It is a lot of work. I manage our rental home, but the renters are very good and doesn’t cause any problems. We hire a property manager for our 4 plex. It cost money, but that’s the only way we can do it.

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Drew June 17, 2012 at 10:35 am

I would also say continue to make small, possibly tiny, incremental increases in your regular contributions while you’re investing You’ll find them far easier to adjust to than big changes, and over time they will add up to a really significant extra contribution, hopefully leading to more passive income.

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DaveL June 21, 2012 at 3:54 pm

I have started the more basic step of spending less than I make and putting the rest into savings. I hope to increase this amount as my career progresses.

I would love to get to the point where I can buy a duplex to rent out. A friend of mine in college, his dad has been doing this for awhile now and I think it has become addicting for him haha, but he loves it and it generates quite a bit of passive income now.

A lot of great ideas to think about!

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retirebyforty June 26, 2012 at 7:26 am

I’m encouraging my brothers to look into a duplex instead of a house too. I think it’s a great way to get started with real estate investing.

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Mike June 21, 2012 at 8:16 pm

I am planning to build a passive income stream solely to reduce my credit card debts from my first failed business. Then I’ll be working on finding ways to have other sources to be able to start building up savings and IRAs and then I’ll have one that I solely use towards doing the activities that I find meaningful.

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retirebyforty June 26, 2012 at 7:32 am

Good luck! You probably should concentrate on paying off the credit card balance first. The interest rate is so high that it’s tough for passive income to overcome. Passive income usually take a while to get going.

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Mike June 26, 2012 at 8:02 am

Yep. It’s not that bad (only $6000 and they have offered a decent payment schedule on it) so I’ll probably use my job at first to pay it down then use the passive income streams to pay down the rest of it.

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Joshua Lindsey July 1, 2012 at 11:36 am

Great post I have been thinking about starting rentals and love to build passive income. Thanks for the link to Financial Samurai as well I will check it out.

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retirebyforty July 1, 2012 at 10:50 pm

Good luck! It takes a lot of time, but if you start now, you’ll be better off in the future.

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Parthibanb November 2, 2012 at 11:26 pm

Good points to consider. But do you have any suggestions to follow in a high inflation and high interest rates country to achieve steady passive income? Tnx

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retirebyforty November 3, 2012 at 8:16 am

I’m sorry, I don’t know enough to give good advice there. If your government is stable, then long term bond is good in that situation. Rental properties are probably good too because you can raise the rent.

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Bernard Z. November 25, 2012 at 9:29 am

Great tips, making money from your savings account is a great first step that almost anyone do. Like you said it wont be much at first but its a start. One of my passive incomes comes from candy machines and the income from it pays for my other businesses. Just have to play it smart and it will grow. Thanks for sharing this, I will also be sharing this info with my readers.

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kamen November 30, 2012 at 10:04 pm

hi your portfolio is so impressive.

i m a foreigner and i want to buy a property to general rental income like you in california. however, it is a very high capital gain tax for a foreigner in california. Can you give me some advice?

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retirebyforty December 3, 2012 at 8:28 am

Sorry, I don’t know much about capital gain tax for foreigner. How about REIT? It will be much easier than rental properties for you.

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James Kimani April 24, 2013 at 4:58 pm

Kudos Retirebyforty,

Thanx for sharing such gems with readers. l am almost 40 but l hadn’t set a goal to retire by 40 earlier coz simply l didn’t know anything about the concept of passive income. But since l came across the concept some 8 or so years ago, it kinda swallowed all of me and l basically became obssessed. 6 years ago, l landed on these shores (from Africa) and foremost in ma mind was how l could amass a small fortune which could earn me some nice passive income and make ma life a lil bit ezier. Through sheer hard physical labor bordering on insanity-double jobs + OT, and playing the financial markets, l have been able to accumulate $100 000+ which is currently giving me a tidy amount of passive income (am the typical immigrant, warts and all – heavy/thick accent, professional qualifications from Africa but useless in the US) l am not writing this for show-off, but rather to inspire and give courage to those eager to try. l believe l have faced some of the toughest challenges a man can endure in life and am proud of what l have achieved. There is a reason the rich keep getting richer and retirebyforty has let you guys into a very big secret of the wealthy. This wisdom he shares here is gold to those who dare try. lts not ez, but ts certainly do-able. l am not yet done, my journey continues. Thanx a bunch Mr Retirebyforty!

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TWade August 22, 2013 at 3:14 am

Passive income is a lot of work. I know a few people out there that make it sound so easy. Passive income does take a lot of time and effort and one thing to remember that passive income is not an overnight success.

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Dilpreet Bhatia August 26, 2013 at 3:06 am

I think creating some intellectual property and selling it is the best way. It may be photos, music, videos, books, patents. I am also reading Rich Dad Poor Dad these days. Awesome book for finance dummies like me!!

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Sammy February 12, 2014 at 4:03 pm

You can save lot of money if you cut down on buying soda drinks at a restaurant, get water and save $1 to $2 every time you eat out. It adds up

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TD June 16, 2014 at 11:10 am

I have focused on generating passive income for the past several years. If you are willing to work at it, you can be successful. Here is what I have done.
1) aggressively save more than you earn. prepare a budget and look for ways to reduce expenses. people fail because they don’t manage their expenses. what you save is much more important than what you make
2) invest a portion of your $ in MLP’s (master limited partnerships) which spin off quarterly or monthly income. They also can be tax deferred and have high yields. Reinvest the dividends until you need the cashflow. I make thousands/month this way. Learn about this on seekingalpha.com which is a good resource for stocks
3) consider investing in income producing real estate focused on crops. Newer vehicles have been developed where you purchase the land, and an operator manages the plantation. Crops can include timber, coconuts, row crops, coffee, etc. You will need min. of $50-100k for these types of investments, but the returns are in the double digits with zero correlation with the stock market. Land values should continue to go up over time as the population grows. More profitable than rentals. Pick your partner’s carefully.

good luck

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Nathan June 25, 2014 at 11:27 pm

I keep hearing people making a passive income with investing. But I never hear about the fact of paying the 10% penalty for withdrawing the money out. So you need to be gaining more than 10% on your money or this is information only for people that are at the age of 59 1/2. Could you please explain a little more in detail.

Thank you

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retirebyforty June 26, 2014 at 12:15 am

The 10% penalty only applies to retirement accounts like the 401k and IRA. If you invest your money in a taxable account at a brokerage, then there is no 10% early withdrawal penalty. When we talk about passive income, we generally do not include the retirement accounts like the 401k. Does that make sense?

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Kari October 22, 2014 at 4:50 am

There are many business opportunities for generating passive income that I think so many people overlook. Yes, it takes a bit of hard work in the beginning but the ability to generate 1000’s of dollars a month from a business is very doable. While we are investing in real estate in addition to traditional mutual funds, etc., we see business income as being the far biggest source of passive income, and the most secure. We decided to become a strategic partner with a global life science company that is heavily investing research in innovative science, developing game changing products that will help people live well and young a lot longer. This industry is growing rapidly so we have decided to leverage that, given that there is almost no barrier to entry yet if you work at it for a few years, the income is well beyond anything we,ve ever dreamed! How many others have a passive income generating business?

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