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I have put together a list of passive income ideas that I plan to focus on over the next couple of years.
Some of these income streams I have been working on for years. For example, our dividend stock portfolio is over a decade old.
Other ideas are new to me.
These passive income ideas are not the only ways that we plan to earn income this year. We also have several active income streams too.
But the cool thing about the passive income streams is that they don’t take as much work, time, or money once they get started.
The goal is to let any of our excess cash flow filter down to grow our passive income. This should help grow our wealth and build our cash flow even further.
Before I share my list of ideas, let’s take a look at the definition of passive income.
What is Passive Income?
Many people seem to misunderstand what passive income really is and the term is used in a variety of ways.
The IRS has a definition of it. Technically, it is income earned from one of the following – “rental property or a business in which one does not actively participate”.
According to Investopedia – “Passive income is earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved. As with active income, passive income is usually taxable, but it is often treated differently by the IRS.”
For more information – check out What is Passive Income.
Some people think passive income does not require any work or money … which is generally not the case.
For example, you will need to invest at least one of the following upfront to build sustainable passive income –
- invest money
- invest time
It is very possible that you may need to invest both time and money upfront before you will ever earn income down the road.
Then after the initial time or money commitment, a source of passive income is likely not completely “hands off”.
In reality, there is likely no source of income that is 100% passive. But the ability to invest time and/or money upfront and one day in the future earn recurring income with very limited effort is huge.
So let me share my strategy for how I am using passive income to grow my family’s wealth.
My Passive Income Strategy
Regardless of what passive income means to you … my personal feeling is that everyone should be working to build and grow multiple sources.
The great thing about earning this type of income is that once you do the upfront investment (money and/or time) … there shouldn’t be a huge commitment moving forward. That’s not to say there is no required time or money investment to keep it going … but it should be minimal.
So what is our passive income strategy?
Our strategy is to build multiple sources of income … with the focus on making each of them as hand off as we can. However, we also realize that there is no such thing as a 100% passive source of income.
Multiple Streams of Passive Income
We are a single income household with one W2 job that currently earns active income. This income is actively earned by me working in return for spending 40 hours or more per week at my job.
And while I actually enjoy my full-time job … one day I may not, which is why we are building other sources of income. Some of those other sources earn active income as well … while some earn more passive income.
Some of the active income we earn (from multiple sources) is combined with work (or time) and a passive income stream is built.
For example, we invest some of our active income each month into companies that pay us a dividend. We spend some time on research and some money on this income stream that will pay us over and over and over in the future.
We also use 100% of the passive income earned (as of today) and reinvest it into earning more income. An easy illustration here is that we take our dividend income we earn each month and use it to buy more stocks.
This is how we grow our passive income.
So in reality … we use the following to get passive income –
active income + passive income + work = compounding passive income
Any side income earned, passive income earned, and as much active income that we can spare is recycled back into earning more and more passive income.
Add in a lot of hours of work … and we are slowly building wealth that will compound using this strategy.
5 Passive Income Ideas to Build Wealth in 2021
We currently earn income from 3 separate passive income sources (listed below) – dividend stocks, REITs, and high yield savings accounts.
In the past, we have also earned income from online websites (#4 on the list) … although the majority of that has dried up for the time being.
Then there are a few other sources of passive income that we hope to begin this year or at the latest next year.
The following is a growing list of passive income ideas that we are working on for 2021.
1. Dividend Income
Earning dividends has been our most successful passive income source for the past decade.
My wife and I have been earning dividend income in a taxable brokerage account since 2008. That first year we earned an extra $29.46 in dividends by owning a single stock.
Since that time, we have slowly grown this income stream. Just last year in 2020, we earned $3,272.21 in dividends by owning almost 50 stocks.
In 2021, we set a goal to earn at least $4,000 in dividend income.
2021 Dividend Income Goal – $4,000
Based on current tax laws, the majority of the income earned here is not taxed because of qualified dividends. I won’t get into the details, but dividend income can be very tax friendly to an investor.
Whether you prefer to own individual stocks (like we do) or choose to own a passive index fund (as others do) … I think everyone should be working to build passive income through dividend stocks.
A few things to note here – this income is earned in a taxable brokerage and is separate from other investments we have in retirement accounts. Also, I usually combine dividend income with our REIT income for our results … but have broken them out for the purposes of this passive income ideas article.
2. Investing in REITs (Real Estate Investment Trusts)
Again, for the purposes of different passive income ideas … I have separated this out on it’s own.
Most of the time I calculate REIT income (similar to dividends) along with our dividend income. However, they are technically taxed differently than normal dividends and have some other differences to normal dividend stocks.
So this would be the second type of passive income that we currently earn and have plans to continue next year.
In 2020, we earned a total of $614.76 of REIT income paid mostly from 2 separate companies – Realty Income (O) and Omega Healthcare (OHI).
While our focus this coming year is to invest in high dividend growth stocks, that doesn’t mean we won’t focus on earning REIT income. We would like to earn at least $625 of income this year from REITs.
2021 Dividend Income Goal – $625
Real Estate Investment Trusts offer another option to invest in real estate (see #5), without having to be a landlord and buy actual property.
3. Earn Interest from a High Yield Savings Account
I hesitate to even add this to the list of passive income ideas. Interest rates are currently very low and don’t offer much opportunity to build wealth.
However, I don’t recommended putting 100% of your extra funds into dividend stocks … you still need a solid emergency fund.
For my wife and I, we need a spot to put our down payment for our next home … and our Ally Savings account is the place. At the time of this writing, current interest rates were paying us 0.5% … which isn’t much.
Just for a quick backstory here – after owning our home for 13 years, we decided to take advantage of the hot housing market and sell our home. We plan to rent for the next 12 to 24 months as we look to build our next home.
We were able to pull out a bunch of equity in our last home based on – appreciation (over 13 years) and paying down our debt (mortgage principal).
Since most of these funds will be needed for our next down payment on a home (in 2 years or less), we are not putting all of it into the stock market.
We are letting most of it sit in our savings account earning a little bit of interest.
We plan to earn around $750 in passive income this year from our high yield savings account income stream.
2021 High Yield Savings Income Goal – $750
Depending on the market and when we start building our next home, we may decide to put a bit more into the stock market which could lower this total.
4. Build Online Income from Websites
I have owned a variety of websites over the past decade.
Most of these sites haven’t amounted to much. Several of them I shut down as they were not earning enough income to pay for the hosting and domain renewals.
But despite a lack of success in earning online income from websites, I still feel that this could be a great source of income.
In 2021 … I plan to have a renewed focus on building out this passive income idea.
Last year I earned about $250 in total from a few sites. This year, my goal is to hit $1,000 of income.
2021 Online Income Goal – $1,000
I set this goal low on purpose. I’ve been neglecting my sites … so it will take some time getting them back up to speed on earning a decent income for the year.
Most of the income I expect to come towards the end of the year … with a goal to head into 2022 with a bunch of momentum.
Building websites that earn income is a great passive income strategy. Invest the time now (a lot of it) and in 9 to 12 months (or more) I should start to see the reward.
My longer term goal is to one day replace my W2 income just from online income … which would be $5,000 per month!
5. Rental Income
This might be a long shot for 2021 … but I want to add rental income to my list of passive income ideas.
Over the past couple of months, I have been reading up a lot on the BiggerPockets forums and website and feel a bit more comfortable about purchasing a rental.
Honestly, I have been wanting to take the plunge into real estate for some time now but have always been too nervous. But I feel that I have a better understanding of how to search for a quality rental from a numbers standpoint.
Plus, my oldest son is very interested in earning rental income … so I think we may end up heading down this path together.
We may not find a quality rental this year (the housing market is insane right now), but we will continue to look for the following criteria –
- single family home
- 2-3 bedrooms
- 2 bathrooms
- local neighborhood
I don’t have much interest in owning long distance real estate at this point. Nor do I want to manage a property on my own … we would prefer to hire a management company.
2021 Rental Income – $0
For now, I don’t want to set any unrealistic expectations on rental income for the year. So I set our goal to $0 for now. That’s not really a goal but an estimate I guess.
I’d prefer spending more time building up our online income this year. Then when our online income starts to produce, the plan is to start using some of that extra income to put into real estate.
Invest in Income Producing Assets
This is the year for me to get serious and start focusing on building online passive income.
Putting in a bunch of time and a little bit of money this year, will lead to awesome income results in months and years to come.
My plan is to invest (time) in income producing assets like websites now. Then use the income generated from those sites to invest (money) into my other passive income stream … our dividend stock portfolio.
Then if all goes to plan, my son and I can start our real estate income stream over the next few years to keep the income machine rolling!
And in the meantime, we will continue to earn a bit of interest from our savings account as we wait to build our next home.
What are your passive income ideas and goals for 2021?