Passive income is income that is derived from something that you are not actively involved in. Things like rental properties and investments that generate revenue or earnings are generally considered passive income.
However, not all passive income is considered equal. Some things sold as passive income actually require a substantial amount of work or are fraudulent schemes. Anything that seems “too good to be true” or promises that you will “get rich quick” may be a scam and should be thoroughly investigated before any money is committed.
To sort all of this out, we asked Jordan Patrick, a certified financial planner (CFP) and senior financial advisor with Commas , how his wealthy clients generate passive income and whether these methods might work for the average person.
The financial planner has over a decade of experience in the field and is well-versed in the topic. Here are his insights and recommendations on how wealthy clients generate passive income and whether the strategy is worth following, no matter your income.
Patrick recommended sticking with the tried-and-true method of generating passive income.
He said, “One of the only ways I know of to generate truly passive income is through investing in the stock market. This approach allows you to participate in the profits of the world’s greatest companies without having to participate in their operations.
Patrick continued, “By holding a diversified portfolio of stocks, you can earn dividends and benefit from capital appreciation, all while taking a hands-off approach.”
Before implementing an investment strategy or changing your investment methods, it’s strongly recommended that you work with a financial planner to ensure that the opportunity is compatible with your goals and risk tolerance.
A certified financial planner can review your goals and determine how to use your resources to help you best meet those objectives. They can work with you to develop a plan that makes your money work for you and keeps you on track for financial stability now and in the future.
Financial planners are not only for the rich and famous. Individuals of all income levels should consider speaking to a professional to ensure they are on the way to financial freedom.
Generating passive income through investing in the stock market is not limited to the wealthy and ultra-rich. People from all income levels can take advantage of this easy way to increase the money they are bringing in each month without putting in the blood, sweat and tears of a 9 to 5.
As Patrick explained, “The barrier to entry to begin investing in the stock market and earning passive income is extremely low. You can start with any amount of money, making it accessible for everyone.”
He encourages people to start wherever they can, even if it’s only a small amount each month. “Over time, these small investments can grow significantly through the power of compounding,” he added.
As described by the Consumer Financial Protection Bureau , compound interest is the interest you earn on “the money you’ve saved and on the interest you earn along the way.” In other words, the interest you earn from investing goes back into your account to generate even greater gains.
Compounding can help you build your wealth, even if you do not have a lot of money to invest initially. The earlier you start, the longer you will be able to take advantage of the magic of compounding. This method can be used by people regardless of their income status.
Not All Passive Income Streams Are Equal
Unfortunately, not all passive income strategies are suitable for everyone and/or they may not quite be what they seem. Some methods that are sold as requiring little to no effort actually require substantial amounts of time and resources.
It is imperative that you fully understand any passive income opportunity before investing. A complicated investment strategy can cost you more than you bargained for (and may not be as passive as you think).
“Many ideas touted as passive income, such as real estate investing, often require significant time and effort,” said Patrick. “I’ve heard many stories from real estate investors who anticipated passive income but ended up spending substantial time managing their properties.”
He continued, “Investing in assets like real estate can be profitable, but it’s important to understand that it often requires active management and should be approached like running a business.”
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