How to Retire Early by Building Passive Income (2024)

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Co-authored byMichael R. Lewis

Last Updated: June 6, 2021References

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   Discover what you’re good at. Reflect on your strengths. Some people are good at investing, while others may be intimidated by the market or afraid of the risks. Other people are talented artists or writers. Still, others possess a skill or knowledge for which people would be willing to pay. Think about how you can combine your interests and skills to make money.^[1]

   • For example, a writer can sell books, a musician can sell songs and a finance buff may be able to clean up in the market.
   • Don’t be afraid to try a combination of things. You don’t have to stick to one area of expertise. For example, you might earn some income selling e-books, and then turn around and invest some of those earnings.
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   Set a financial goal. Determine the income level at which you want to live. Think about where you want to live, what living expenses you will have, and how much it will cost to live a lifestyle that will make you happy. This will tell you how much money you need to be earning per year in passive income. Depending on that nature of your passive income revenue stream, you may need to work a certain number of hours per week.^[2]

   • For example, you may decide that you need to earn $200,000 per year in residual income to be able to retire at 40 and live the way you want. If you are writing and investing to earn that income, you may need to work a few hours each day to maintain your revenue stream.

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   Make a commitment. Building reliable streams of residual income requires discipline and commitment. You need to control spending and save as much money as possible to have a nest egg to get you started. Also, you have to promise yourself that you will not spend your savings. Investing as much of your savings as possible and making it harder to liquidate will help you with this. Finally, you must devote time every day, more in the beginning than in later years, to keeping your income stream viable.^[3]

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   Purchase dividend stocks. Dividend stocks are shares that you own in a company. The company pays you your share of the profit in dividends. Some companies pay a fixed amount per accounting period, and many pay either quarterly or annually. Once you are paid your dividends, you can either cash them out or choose to reinvest them, allowing you to own more shares and therefore earn more dividends.^[4]

   • A common way to choose dividend stocks is to invest in them through mutual funds or exchange-traded funds (ETF’s).
   • You want to research the companies in which you invest. Purchase dividend stocks that have a history of paying high yields. But also consider market trends and think about investing in companies that may pay high yields in the future.
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   Participate in peer to peer (P2P) lending. Peer to peer lending means lending money to borrowers who don’t typically qualify for traditional loans. Popular P2P lending platforms include Prosper and Lending Club. These platforms act as a middleman between you and the borrower. They vet the borrower to make sure that they are borrowing money for legitimate reasons. Then, you can choose the borrowers to whom you want to lend. You can hedge your risks by lending small loans to many different borrowers with different credit backgrounds.^[5]

   • With Prosper, the interest rate you can earn ranges from 5.48 percent for low-risk loans to 10.78 percent for high-risk loans.^[6]
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   Purchase fixed income securities. Consider buying into certificate of deposit (CD) ladders and/or a variety of corporate or government bonds. This would involve buying into bonds or CDs that mature at different years in the future, maybe some in 5 or 10 years and others in 20 or 30. This strategy protects your principal because the risk from fluctuations in the interest rate is spread out over time.

   • A CD ladder is an investment strategy in which you divide the amount you want to invest into equal amounts and you purchase several CD’s with different maturity dates. It provides you with a steady income as the CD’s mature at different times.^[7]
   • The maturity date is the date on which the interest payments stop and the principal plus interest is paid back to you.^[8]
   • For example, you can have CD’s that mature in 6 months, one year, two years, etc.
   • For more on bonds, see how to invest in bonds.
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   Invest in an annuity. The goal of an annuity is to give yourself a reliable stream of income during your retirement. To set up an annuity, you can purchase them from an insurance company. You can make a lump-sum payment or a series of payments. Then the insurance company repays you in regular disbursem*nts that can begin immediately or at some point in the future.^[9]

   • Your gains on your contributions (the growth portion of your investment) is tax-deferred, meaning you don’t pay income tax on it until you receive disbursem*nts during retirement.
   • Your contributions may be pre-tax as well if your annuity is an IRA or 401(k). However, you will pay a penalty for withdrawing from this type of annuity before the age of 59.5.
   • You can receive disbursem*nts for a fixed amount of time, or you can choose to receive them until your death.
   • Fixed annuities earn a modest amount of interest. The amount of your disbursem*nt is a guaranteed fixed amount based on the balance in your annuity.
   • Variable annuities are higher-risk. Your contributions are invested in a mix of mutual funds, and your disbursem*nts are based on the performance of your investment.
   • Indexed annuities are a hybrid of fixed and variable annuities. You receive a guaranteed minimum payment. But a portion of your disbursem*nt is linked to the performance of the market.

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   Write an e-book. You can write and self-publish an e-book on a variety of platforms. Do some market research to find a topic that will sell. Browse through the Kindle Bestseller’s list to identify what people are buying. Read reviews and look for gaps in the market. You can write the book yourself, or you can hire a ghostwriter to write the book for you. Invest in a graphic artist to create a compelling cover for your book.

   • You can hire a ghostwriter from sites like Upwork and pay between $.02 and $.04 per word.
   • Use an app like Scrivener to format your document for Kindle and other platforms.
   • Check for plagiarism with a site like Copyscape.
   • Popular e-book publishing platforms include Amazon Kindle Direct Publishing (KDP), Smashwords, BookBaby, Barnes and Noble’s PubIt, Lulu, Booktango, iBooks Author, and Scribd.^[10]
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   Sell stock images. You can make money from your digital photos by selling them on microstock websites. These websites charge customers for using the images, and then they pass a portion of the payment back to you. The typical payment for an image starts at $1 for small images and increases for larger images. Popular sites are iStockphoto.com and Shutterstock.com.^[11]

   • In the beginning, you make approximately 15 percent of the sale, but the percentage you earn may increase over time and as you sell more images. Plan to build a diverse portfolio of images.
   • The key to being successful is to sell a large number of images. You make a small amount per image. But the more images you sell, those tiny amounts start to add up.
   • Invest in a digital SLR camera for sharp images.
   • Remember not to include any recognizable brands in your photos. Also, if you are using people, you must have a signed release to use their image.
3. See Also

   1 Stock Down 88% to Buy and Hold for 10 Years | The Motley Fool

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   Create a course on Udemy. Udemy is a platform that allows you to create an online course that you can sell. Course prices typically range from $47 to $197. The length of the course can be as short as 30 minutes or run from two to three hours. The average instructor earns as much as $7,000 from a course. However, the amount you can earn varies, and it depends largely on how you market the course. Those with a large social media following can market to a large audience and can, therefore, generate more income.^[12]

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   License music. If you can compose your own music, then you can license it and sell it. The first step is copyrighting the music. This is called a song copyright, which protects the composition. If the music has been recorded, then you also need a master copyright, which protects the recording. Register your copyrights with the Library of Congress, which costs $35. Once you have copyrights to protect you from unauthorized use of your music, you can pursue different avenues for generating money from your music.^[13]

   • A television show may use your music for an episode. This is called a television synch license. The music supervisor of the television show would need to pay for the use of the song copyright and the master copyright. A separate fee would be negotiated for each.^[14]
   • A recording artist may purchase your music to record and perform it. This is called a mechanical license, and it gives the artist permission to record and release your song. You would earn royalties on albums or singles sold.^[15]
   • Sell your music to a Production Music Library. These are collections of instrumental music that are used as background music on television, in film, on the radio, in documentaries or as music that is played when someone is waiting on hold on the phone.^[16]
   • You can earn micro-sync fees when someone uses your music to sync to a YouTube video, a video game, television, commercials or film. CD Baby has a free sync licensing program.^[17]

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   Purchase shares in real estate investment trust (REIT). A REIT is a company that owns and operates commercial real estate such as apartment buildings, malls, office buildings, hotels, and warehouses. Investing in a REIT allows you to earn a share of the income produced by these commercial buildings. You can purchase shares in a REIT from a stockbroker. To avoid fraud, stick with publicly-traded shares, listed on a major stock exchange and regulated by the Securities and Exchange Commission (SEC).^[18]

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   Become a landlord. Purchase rental properties that generate revenue for you every month. You can manage the properties yourself, or you can use a real estate team to fill vacancies and hire a property manager to take care of the property. You can purchase fixer-uppers, hire a contractor to repair them, and then find tenants. Alternatively, you can purchase turn-key properties that are already repaired and already rented.

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   Lend private money to other investors. You can lend money to other investors who need capital to purchase or repair property. Secure the loan with a Deed of Trust. This means that legal title of the property is transferred to trustee, or a neutral third party, who holds the property in as security for the loan.^[19] You can earn as much as 15 percent interest on these loans.

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   Invest in loans or notes. Mortgage companies sell mortgage notes to investors, usually as mortgage-backed securities. They can be performing or non-performing notes. Performing notes are those on which the borrowers are making payments. If the borrower is behind on payments it becomes a non-performing note. If you buy non-performing notes, you can usually purchase the loan for a fraction of its original value. Then, you have the option of offering a loan modification, allowing a short sale, which means selling the property for less than debts still owed on it, or foreclosing on the loan. Whichever option you choose, you stand to make money because of the discount you got when you purchased the note.

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