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Building Passive Income Streams
As time goes on, the value of having multiple income streams becomes more and more apparent to me. The more income streams you have, the less trouble your life will have if one of those income streams goes defunct or experiences a downturn. Thus, I’ve been thinking a great deal about developing more income streams for myself.
So, let’s back up. An income stream just refers to any source of regular financial income in your life. Your job is one. Your pension is another. Rent from an apartment building you own is yet another.
Of course, I don’t have the regular time to invest in another job or another high-content website at this time, so, for me, the best route to look for new income streams is to evaluate passive income streams.
What’s a passive income stream? A passive income stream is one where, once you’ve done the initial investment, there’s little or no upkeep to that investment required to maintain the income stream. Writing a book is a passive income stream, for example – once that book is complete and on its way to the publisher, you just sit back and wait for the proceeds.
Most passive income streams require some sort of significant investment up front. Generally, that investment breaks down into two distinct groups: an investment of money or an investment of time.
I’m going to stick with discussing the types of passive income streams that I’m interested in developing.
Most time investment usually pairs with an investment of ideas and energy as well. Generally, you’re turning spare time into some sort of item that will provide a steady stream of income over time.
Books, electronic and otherwise I’ve already written two books – 365 Ways to Live Cheap and The Simple Dollar. Both are working for me as passive income streams, but the stream from each book is quite small. Unless you’re J.K. Rowling or John Grisham, the passive income stream from writing books is not going to sustain you. The solution, of course, is to write several books so that the streams add up to something significant.
Another factor when it comes to writing books is that the options for self-publishing just get better and better. Self-publishing is a double-edged sword. When you self-publish, you tend to retain a much greater percentage of the proceeds for yourself, but your distribution tends to become more of a problem, as it’s hard to get your book on the shelf at Barnes and Noble. The growth of great self-publishing platforms and the rise of e-readers like the Kindle have mitigated these worries somewhat. If I write another book, I will most likely self-publish it.
Static websites Another approach is to simply develop a static website that provides information on a specific topic, then add some sort of revenue-generating mechanism to it – affiliate links to Amazon, a portal to buy a product of some kind, direct advertisements, or something else. Once that’s in place, spend some time developing links to it so that Google can find it. After that, you’ll keep generating a steady trickle of advertisement and referral revenue.
At some point, this is the route that The Simple Dollar will take if I ever choose not to keep writing it. I’ll turn off comments, make the site static, and go on with my life. It’ll still earn some revenue for a very long time.
On the other hand, one can simply invest money with the purpose of generating a passive income stream. This, of course, requires a chunk of money up front and an expectation that each year will only return a small portion of that initial investment. Usually, though, some significant portion of that initial investment can be recouped through selling the investment or waiting for it to fully mature.
Dividend-bearing stocks If you bought $10,000 worth of Coca-Cola stock one year ago, you would have bought in at roughly 53.60 a share, which means you would have purchased 186.5 shares of KO. You would have received four dividend payments of $0.44 per share during that period, so each dividend payment would have been $82.09, for a total of $328.36 over that year. It’s a 3.28% return, plus you still have the 186.5 shares of KO stock.
If you choose a very stable company that pays out a very steady dividend, this type of approach can earn a very reliable income for you. On the other hand, you are invested in a single stock, so you would probably want (over time) to invest in a variety of dividend-bearing stocks. You might also want to invest in an index fund that spreads out your investment over a lot of stocks (less risk), but also waters down your dividend (less return).
Treasury inflation-protected securities TIPS are bonds that you can purchase from the government that return at a fairly low rate, but their face value adjusts according to the rate of interest, so that when the TIPS matures, you will be able to sell it for more than the initial purchase price.
TIPS return at a very low rate, of course, but they have the advantage of being rock-solid investments that will match inflation growth when you sell them.
Savings accounts and CDs This is a similar rock-solid investment that is also very liquid (meaning you can pull out the money whenever you need it), and interest rates (right now) are beginning to rise again. There are times when a savings account or CD is a very solid investment and times when they are not. We are beginning to see a case for turning to these investment vehicles again. Check out our thoughts on CDs here: CD Rates
Annuities Annuities are investments you can purchase, typically from an insurance company, that will pay you a certain amount each year for the rest of your life. The younger you are, the smaller that amount is, of course.
Let’s say, for example, that you purchase a $10,000 annuity, one that the insurance house quotes at 4%. That would mean you would receive $400 each year for the rest of your life from that company.
The risk here, of course, is that the insurance company may eventually become insolvent, leaving you with nothing at all. If I were to purchase this, I would seek out an insurance company with a long history of stability and a great bond rating, and even then, I’d diversify across multiple insurance houses.
What approaches am I considering? I’m still investigating several of these approaches, but I can say that I am moving in a direction where more passive income is a part of my life. As I actually begin to make moves in these directions, I’ll post about the moves on The Simple Dollar.