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.
