Give Me That Passive Income

Passive income is when you generate income continuously without doing something. Our military retirement is a “defined pension” plan and after 20 years or more of service, we collect passive income for the rest of our lives. This is one of the ways rich people stay rich—by generating more passive income. The goal is to establish multiple streams of passive income before you retire.  Here are examples of the most common types of passive income.

·         Interest – The most common type of passive income is generated by interest.  Your bank accounts, emergency cash account and brokerage accounts all should be generating interest. Take a quick look at all your accounts and make sure they are generating interest. If not, start searching for banks that offer an interest-bearing checkings or savings account. If all your accounts already have interest rates, then make sure you are generating the highest possible interest rate.  Go to www.bankrate.com and search around for the highest interest-rate accounts or ask your bank if you qualify for different types of accounts that may generate more interest. I have USAA for my checkings account, CapitolOne 360 (e-mail me for a referral link so we can both make money) for my emergency savings account, and my Fidelity brokerage accounts (IRA and taxable) both pay interest.

·         Dividends – Most rich people earn a majority of their money through dividends from dividend-paying stocks. In 2003 the tax rates were changed and dividends were only taxed at 15% versus just being added to your income, potentially bumping you up a tax bracket. Even the behemoth Microsoft (MSFT) and Apple (AAPL) started paying dividends after the favorable tax law change. When investing in stocks, make sure that your overall portfolio yield is more than a 30-year treasury bond, or else you may be taking on more risk for less reward.  You can go to Yahoo! Finance home page and see the yield for a 30-year treasury bond and then check your portfolio. If you invest in mutual funds, then find some mutual funds that pay a higher yield. Do the same with stocks. Dividend stocks tend to be less volatile too. If you are a riskier investor you can look at phone companies *AT&T (T) or *Verizon (VZ), utility companies *SunGas (SGU) and Real Estate Investment Trusts (REITs) Annaly Capital *(NLY) for the highest yields. You should also find companies that regularly raise their dividend payout rate too *Johnson & Johnson (JNJ). If the stock market scares you, you can seek interest rates from Certificates of Deposit (a.k.a. CDs [you can check those rates on www.bankrate.com too]) or Treasury Bonds, from 6 months to 30 years.

·         Real Estate – I put this one under “passive” cautiously. Anyone who’s owned a house knows it’s anything but passive. But after the maintenance is done, you’ve found a good property manager and the house is rented out, it becomes passive income. If you purchase homes while you’re young with 30-year mortgages and some homes while you’re older with a 15-year mortgage, then these homes could be paid off by the time you retire (59 ½ or older). The mortgage you’d be collecting would be passive income. For over 4 years, I was paying $1,500 every month to live in a house that had been paid off for over 20 years when I was stationed at Vandenberg AFB, CA. The house was in “decent” condition so my landlord was basically earning $18K a year just from the one house. At the end of the four years the house started needing some major repairs [not caused by us], but even after those repairs, he earned $50K+ from me in passive income. Imagine if you had one to five rentals. Our frequent PCSing in the military gives us the potential to purchase new homes each PCS and I’ve met many successful military landlords who did just that.

·         Rewards – I’m a big fan of Bitcoin (read more about Bitcoin with this post I did: Bitcoin). A lot of people complain that Bitcoin is unregulated, not-easily used and purely digital, not backed my anything. But a lot of us already using a form of digital currency with our credit card Rewards. We receive a different type of interest called Rewards when we use our credit cards. Some cards offer airline miles, gift cards or actual cash. I use my credit card to purchase everything and then pay it off every paycheck so I get all the rewards without paying any finance charges. I’m basically earning Rewards for free. Depending on how much you spend, you can look at getting a reward card with an annual fee and get all types of awards. It’s important to compare the annual worth of your rewards and compare it to your annual fee and make sure you are making money. These Rewards are unregulated, can only be used on the products your credit card allows and purely digital. During the 2008 financial crisis, many banks went under and the Rewards were lost. Only some of the banks honored the previous banks’ rewards system.

BL: If you’re not earning interest or rewards on any of your normal banks accounts, then you should switch now. Continue to grow your passive income. This blog and my YouTube channel are attempts on earning passive income. At the end of a 20+ year military commitment, you can supplement your military retirement with all kinds of different types of passive income.

* These stocks are used as examples and not recommendations to buy. Of the stocks mentioned, I only own NLY.