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How to Build Passive Income
You can create your own passive income stream through investing. You can begin immediately if you have some savings. If not, you can start small and build up your investment.
How do you do this? By saving a little each week. A few examples can demonstrate how this works. First let's assume you can save $25 a week. So in a month you will have $100. You could invest that $100 in a United States Treasury note through TreasuryDirect. Twice a year you would receive your interest payment. For this example, let's assume that this note is paying 3% interest. You would receive $1.50 every six months. ($100X3%=$3.00, $3.00 divided into two payments is $1.50 each.)
Okay. So that doesn't seem like much money. However, the income gets bigger the more money you invest. Plus, you can reinvest the interest to take more income in the future. Keep in mind that a higher rate of return will generate more income. One caveat: the above example doesn't factor in inflation or taxes which can really cut the purchasing power of your income.
So let's take the above example a little farther. Twenty-five dollars a week translates into about $1200 a year. Investing that amount at 7% for twenty years will make you a little over $52,000. You could then begin to draw income off this amount. You could withdraw $249 a month when continuing to invest at 4% interest. That is equal to $2988. Again, this does not factor in inflation. This may not seem like much but remember that you started with no money and contributed only $25 a week for twenty years.
Now let's look at a higher example. Let's assume you have $50,000. You want to invest it for ten years and then take the income yearly. You invest at 7% while adding $3000 a year in contributions. You will have $142,000 at the end of ten years. The income you can generate depends on your interest rate. Let's again choose 4% as a conservative number. This will generate income of $675 a month (without inflation or taxes considered). That would be $8100 a year in income.
You need to consider your goals and income needs when planning an income stream. Can you wait and build up to more money first? Do you need income now? What are the possible rates of return you can achieve? Are these returns stable? It can take many years to build an income stream to replace all or a large part of work income.
On the other hand, you can fairly quickly generate small income streams. $100 at 3% will generate $3 for the year. Save $100 the next month and you have $6 for the year. Continue saving each month and you will have $36 for the year. Do the same the second year and now you have $72 in passive income coming in.
You can invest for small amounts of income or reinvest for larger amounts in the future. Plus, you can use other sources of passive income to invest to make even more passive income. It becomes a spiral of increasing income. Either way, it can be a benefit to you.
Note: The rates of return used are averages. I used Bankrate.comís Income Calculator to do the calculations. Depending on when you invest, the above rates of return may seem too high or too low. You will have to adjust your calculations accordingly. Higher returns usually involve investing in stocks and the lower return percentages will usually be in more bonds.
May I recommend my ebook, Investing $10K in 2013
Content copyright © 2014 by Sandra Baublitz. All rights reserved.
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