You can get started with passive investments almost immediately.
Leaving all your money in a savings account would be a waste. It is a wise decision to tuck cash in your savings account for a rainy day, but you can put excess funds to better use by investing.
If you have a full-time job, you might be hesitating to invest, as you believe it will take too much time. Luckily, there are sound investments that need only a little involvement on your part. These investments are called passive investments, and they can work extraordinarily well when you start as early as your 30s.
Today, I am going to give you a rundown of everything you need to know to get started with passive income investments. Read on below to learn more.
What Are the Most Common Types of Passive Income Investments?
Although housing prices have been fluctuating recently, real estate is still a fantastic choice for investors hoping to generate long-term returns. If you are in your 30s, time is on your side.
First, you have the option to rent out properties for regular income. You can quickly get a rental property for a 20% down payment, then keep the money flowing by renting out to reliable and stable tenants.
If renting out properties sounds like a bit much, you can instead invest in real estate investment trusts (REITs). These REITS pay out 90% of their taxable income to you and fellow investors in the form of dividends.
Another simple way to earn passive income is by investing in dividend stocks. When publicly listed companies generate profits, part of their earnings are paid out to you in the form of dividends. You can then choose to spend the cash or funnel it back in to buy more shares.
A less traditional but highly effective form of earning passive income is peer-to-peer lending. With peer-to-peer lending, you lend money directly to other people through online platforms like Lending Club and Prosper.
The gold standard of passive income investing is the index fund. These funds track and mirror the performance of a stock index. With index funds, you earn whatever the market earns, depending on what index your fund tracks. This index tracking means you can fully take part in the gains of a market upturn, but you are also affected when the market declines.
Unlike the other investments listed above, index funds give payouts less regularly, as you will want to have a buy-and-hold attitude; however, index funds are fantastic passive investments that can generate excellent returns for you in your later years.
Again, as you have a lengthier time horizon, investing in index funds can generate significant returns for you over time.
Why Should I Invest in Index Funds?
To understand why you should invest in index funds if you are looking to invest passively, we’re going to need to compare active investing to passive investing.
What Is Active Investing?
In the world of stocks, active investing requires you to take a hands-on approach. A hands-on approach may not be workable for you if you are already preoccupied with a full-time job; you'll need to spend time analyzing each asset and picking the right stocks or bonds for your portfolio.
Although it is better to invest in index funds rather than pick individual stocks when pursuing passive investments, it’s only fair to provide a rundown of the benefits of both active and passive investing, so you can reach your own well-informed decision.
So, what are the advantages of active investing?
- With actively investing, you are not limited to the stocks and bonds found in index funds; thus, you'll have a broader range of choices.
- Risk Management. If you have the time and knowledge, you can avoid risk by selling or holding stocks in certain industries as new developments arise. You can also use short sales and other strategies to lessen risk.
- Tax Management. If you would like to maximize your earnings through tax efficiency, you can use specific actively managed strategies to do so. For example, you can harvest tax losses by letting go of underperforming assets to offset the capital gains tax on well-performing investments.
What Is Passive Investing?
If you're a passive investor, you're investing for the long-term in something like an index fund. You'll need to adopt a buy-and-hold mentality to invest passively properly. Luckily, you have many years ahead of you, so you can hold stocks even when they're down and wait for them to bounce back up.
So, what are some of the key advantages of passively investing in an index fund?
- Low Fees. First, you are going to be paying much less when investing in passively managed index funds. Fees are lower because you are paying less overhead. Think about it -- you are not paying anyone to actively pick investments, and there's no need to analyze benchmark holdings.
- You, of course, get transparency when picking your own stocks and bonds to invest in. With actively managed funds, however, you do not pick and choose. Fortunately, with passively managed funds, such as index funds, you will know which bonds and stocks are being held.
- Tax Efficiency. By passively investing in index funds rather than taking an active approach to investing, you cut the taxes you need to pay. This is because index funds do not trigger a hefty annual capital gains tax as they do not trade often.
One of the drawbacks of investing in passively managed index funds is that you have less control over your investments. This means you won’t be able to make adjustments to your portfolio if certain sectors or specific companies become too risky for your taste or are underperforming.
You can simplify your investments by choosing to invest passively. Ideally, you will want to invest in a mix of the four passive income investment options listed above (real estate, dividend stocks, peer-to-peer lending, and index funds).
All four investing options need little-to-no effort on your part. Real estate, dividend stocks, and peer-to-peer lending can give you regular payouts, while index funds allow you to build your wealth for the future.
As with any investment, it is crucial to weigh the expected returns against the potential losses.
Knowledge is power. And if you would like to become more knowledgeable about passive income investments and other related topics, check out the other articles we have here on The Cash Queen. Or sign up for The Cash Queen weekly newsletter to receive content via email.
Remember -- it does not matter how much you make. Financial freedom is waiting for you.
Tracie Breaux is the founder of The Cash Queen and she is passionate about empowering women to achieve financial independence.