What is passive cash? Simply put, it's cash earned with minimal ongoing effort. For those pursuing FIRE (Financial Independence, Retire Early), generating substantial passive cash flow is the primary goal.
While having significant capital upfront certainly helps accelerate passive cash generation, a common misconception is that you need large sums to begin with.
It’s helpful to break down your cash to the smallest value - a penny. From there, you can view every penny as an individual worker that you employ. Overtime, these “workers” can earn you passive cash even while you sleep.
This site explores various strategies and tools to help put your cash to work and get you one step closer to financial freedom. Explore the directory below to get started.
Dividend investing is a popular strategy for generating passive cash. When you own dividend stocks or funds, the company distributes a portion of its earnings directly to you, the shareholder. These payments typically arrive monthly, quarterly, or annually. A key concept to understand is DRIP (dividend reinvestment), where your earned dividends automatically purchase more shares. This accelerates growth because monthly dividends compound quicker, allowing your investment portfolio to accumulate shares faster. You can model the powerful compounding effect of reinvesting dividends using our compound interest calculator.
Please be cautious when looking at the dividend yield. Generally, the higher the yield, the more risky it may be for you as a shareholder. Stocks with dividend yields greater than 10% can be seen as risky investments. Here is a list of high dividend stocks by yield and high dividend exchange traded funds by yield.
ETFs that incorporate covered call strategies have recently become popular. These include JEPI, JEPQ, and DIVO to name a few of my favorites. Covered call strategies tend to have high yields usually at the expense of capital appreciation, however, offer a great opportunity for passive cash flow.
Understanding the difference between qualified and non-qualified dividends is crucial for tax optimization. Most regular dividends paid by U.S. corporations and certain foreign corporations fall into the qualified category. These are typically taxed at lower long-term capital gains rates. Conversely, non-qualified dividends, such as those often paid by Real Estate Investment Trusts (REITs) or from certain savings accounts, are taxed at your higher ordinary income tax rate. Minimizing your tax burden is a core principle of dividend investing, so knowing this distinction is key. Let's examine the 2024 tax brackets to see how these rates apply.
| Income Tax Bracket | Tax Rate |
|---|---|
| $0 - $11,600 | 10% |
| $11,600 – $47,150 | 12% |
| $47,150 – $100,525 | 22% |
| $100,525 – $191,950 | 24% |
| $191,950 – $243,725 | 32% |
| $243,725 – $609,350 | 35% |
| $609,350+ | 37% |
| Income Tax Bracket | Tax Rate |
|---|---|
| $0 – $23,200 | 10% |
| $23,200 – $94,300 | 12% |
| $94,300 – $201,050 | 22% |
| $201,050 – $383,900 | 24% |
| $383,900 – $487,450 | 32% |
| $487,450 – $731,200 | 35% |
| $731,200+ | 37% |
| Single Filer, Taxable Income Over | Joint Filer, Taxable Income Over | Capital Gains Rate |
|---|---|---|
| $0 | $0 | 0% |
| $47,025 | $94,050 | 15% |
| $518,900 | $583,750 | 20% |
From this, you can see that individuals making <=$47,025 and joint couples making <=$94,050 are tax-exempt from qualified dividends. It’s important to note as of 2024, individuals making <= $14,600 and joint married couples making <= $29,200 will pay 0 federal taxes. This is the standard deduction that reduces your taxable income. Therefore if you were to make less than or equal to the standard deduction in total income, regardless of whether the dividends were qualified, the tax rate would be 0%.
If you want to avoid dividend taxes altogether, investing dividend-paying stocks in a retirement account is the way to go. Retirement accounts such as a 401(k) and a Roth IRA are two such examples. Within these accounts, your dividends will grow tax-free. If you were interested in investing in REIT funds, holding these in a retirement account may be ideal. However, there are some advantages to holding REIT in a taxable account.
There are some exceptions. Municipal bonds are typically exempt from federal taxation regardless of income. Some examples include iShares National Muni Bond ETF (MUB), VanEck Vectors High-Yield Municipal Index ETF (HYD), and Vanguard Tax-Exempt Bond ETF (VTEB).
Finally, if you’re ready to earn dividends; Webull offers users a platform to invest in stocks, ETFs, options, and cryptocurrencies, all commission-free, right from your phone or desktop. In addition, Webull also offers fractional shares, cash management (earn interest on your uninvested cash), DRIP (dividend reinvestment), and an IRA. Sign up at Webull-Referral and get up to 20 FREE stocks.
High-yield savings accounts (HYSAs) are typically online accounts offering significantly higher interest rates than traditional brick-and-mortar savings accounts. Consider this: depositing $100 into a standard account at an average rate of 0.06% yields just $100.06 after a year. However, placing that same $100 in an HYSA offering 4.75% (a common rate when comparing high-yield savings account rates at the time of writing) results in $104.75. That's nearly 80 times the interest earned, showcasing the potential for calculating substantial savings growth with HYSA interest.
Let’s scale things up and say you wanted to make $500/month passively.
| Expected Return | Investment Required |
|---|---|
| $500/month | (500 * 12)/.0006 = $10,000,000 |
| Expected Return | Investment Required |
|---|---|
| $500/month | (500 * 12)/.0475 = $126,315.79 |
The difference in investment required for expected return is significant.
Note: The simple calculations above don't include the powerful effect of compounding interest, where earned interest starts earning its own interest. HYSA interest typically compounds daily or monthly, further accelerating your savings growth. For comparing current high-yield savings account rates and features, check this updated list: Best High-Yield Savings Accounts.
CDs or certificates of deposits offers another great way to earn interest on cash for a fixed period. Contrary to high-yield savings accounts, as discussed previously, cash is locked until the certificate matures.
For example, a 3-month CD with a fixed rate of 3% APY will have a term length of 3 months, and upon maturity, you can withdraw your cash penalty-free.
There are two types of CDs, callable and non-callable. A callable CD can be redeemed by the issuer before the mature date, whereas a non-callable CD can not. So let’s say you expect falling interest rates in the near future, causing banks to drop their rates. It may be wise to purchase a non-callable CD that guarantees you a fixed rate APY that will be higher than newly issued CDs.
CDs can be purchased through banks, credit unions, and brokerage firms. Bank CD’s interest rates are compounded, while brokerage CDs are not. In my opinion, it’s best to purchase CDs through brokerage firms due to the greater flexibily they provide. If you should encounter an emergency, you can access your cash by selling the CD on the market without paying an early withdraw fee. However, the value of the CD is subject to change dependending on interest rates if you sell before the certificate matures.
People generally purchase CDs as a safer investment than stocks. They provide a guaranteed return on investment at the expense of growth that stocks may provide. It’s important to note that CDs are FDIC insured up to $250,000.
An annuity is an insurance contract that can be purchased from a financial institution. Investments can be made in one large payment or period payments. You can expect to receive a guaranteed cash flow for a fixed period or the rest of your life, dependent on the structure of the annuity.
There are two types of annuities, immediate and deferred.
Let’s say that you were to win the lottery and wanted to create an immediate cash flow. Purchasing an immediate annuity would be appropriate in this case. Deferred annuities are best purchased when you predict you may need future cash flow such as retirement. Perhaps social security won’t be enough, and you suspect you may need additional cash flow.
Annuities can be structured as either fixed or variable. Fixed, being more stable, provides regular periodic payments, while variable is less stable, depending on the performance of the annuity’s investments.
Important to note that annuities are illiquid and subject to withdrawal penalties.
You can estimate potential cash flow using Schwab’s Income Annuity Calculator.
I savings bonds are a great option if you are looking for a safe place to protect your cash from inflation.
Treasury Bills (T-Bills) are short-term U.S. government securities. From my understanding, you are essentially loaning money to the government that they then use to fund public projects. The government promises to pay you back your loan plus interest earned. T-Bills are backed by the U.S. government. Interest is not a fixed interest rate. T-bills are purhcased at a discount rate and upon maturity, interest paid is the difference between the face value of the T-Bill and the discount rate; unlike CDs, interest is tax-exempt from state and local income taxes. During a recession, T-Bills are a safe option for parking your cash.
Treasury Notes are short-intermediate-term U.S. government securities that pay a fixed rate of interest.
Treasury Bonds are long-term U.S. government securities that pay a fixed rate of interest.
Treasury Inflation-Protected Securities (TIPS) are designed to protect against inflation. Their principal value adjusts based on changes in the Consumer Price Index (CPI), ensuring that the investment keeps pace with inflation.
All these treasury marketable securities can be purchased at TreasuryDirect.
If you are unsure which security is right for you, a Total Bond Market ETF (Exchange Traded Fund) such as BND might be a good choice. TIPS are not included in a total market bond fund, however, there are TIPS ETFs such as SCHP. Bond ETFs are not the same as bonds. These funds track the performance of the underlying bond indexes they represent and typically hold bonds with a mix of maturities. Unlike individual bonds, bond ETFs offer greater diversification and broader market exposure but can be less predictable in price due to their trading on exchanges.
Bond ETFs can be purchased at Webull-Referral.
Resource on stock/bond allocation.
Note: David Swensen, the renowned investment manager of Yale University’s endowment, popularized a diversified portfolio strategy called The David Swensen Portfolio. Swensen recommended a 50/50 split between Treasury bonds and Treasury Inflation-Protected Securities (TIPS). By combining Treasury bonds and TIPS, investors can benefit from the stability of Treasury bonds while safeguarding their investments against inflation with TIPS.
Earning yield on cryptocurrency offers potentially higher returns than traditional bank interest, but it's an evolving landscape with unique risks. If you hold crypto like Bitcoin or ETH, or seek crypto-related yield, several approaches exist for generating cash flow: CeFi, DeFi, and TradFi. Centralized Finance (CeFi) resembles traditional banking, requiring trust in a central company. Decentralized Finance (DeFi) uses automated protocols on blockchains, requiring trust in the code. Traditional Finance (TradFi) uses familiar structures like ETFs within regulated brokerages. Understanding the CeFi vs DeFi yield generation risks (e.g., counterparty risk vs. smart contract risk) is crucial before choosing a path.
Platforms like Coinbase-Referral provide CeFi services, including options for staking Ethereum through Coinbase, along with other assets like ADA, ATOM, SOL, and XTZ. Staking involves locking up your crypto to help secure the network, and in return, you receive rewards, often paid out as more cryptocurrency. You can view current staking yield rates directly on the platform.
Note: Exercise caution with CeFi services. You are putting your trust into these companies and they may or may not have your best interest when lending out your money. Remember, “Not your keys, not your crypto.”
Compound Finance is a DeFi service. Compound finance is an algorithmic, autonomous interest rate protocol that allows developers to build financial applications. To start earning, you can use Coinbase wallet. You will need to fund your Coinbase wallet with ETH to cover mining fees and the coin you wish to earn interest on. Next, select the coin and amount you want to lend. Your crypto will then be sent directly to the smart contract to start earning interest. You can find the current interest rates under Supply APY view current Compound Finance APYs.
Rocket Pool is a decentralized Ethereum staking protocol offering ~2.62% APR. RocketPool has been the first pool to be granted all green checks by the ethereum.org staking pools page.
As another option, you can stake ETH, SOL, ATOM, and DOT on a Ledger. This offers greater security than holding your coins on an exchange like Coinbase. With a hardware wallet like the Ledger, you own your private keys. Of course, if you decide to, you can always move your cryptocurrency from Coinbase to your hardware wallet and vice versa. You can read about Ledger staking.
Helpful guide to help get you started in the world of DeFi.
Resource to help you find the best vaults and APY on DeFi.
Resource to view the total value locked on all chains.
Note: At the moment, due to network conjestion, fees on the ETH mainnet are too high to invest in DeFi with low capital. However, there are alternative networks that offers a lower cost to entry. These networks include side chains and layer 2 solutions. Side chains increase scalability at the expense of security (not fully decentralized) while layer 2 solutions increase scalability and maintain security (decentralized). In my opinion, layer 2 will be the ultimate scaling solution to Ethereum. You can read more about Ethereum layer 2 solutions.
DeFi comes with it’s own risk. It’s important to understand that smart contracts are only as secure as the code. Protocols can suffer from vulnerabilities and result in loss of funds. Aave and Curve DeFi protocols are relatively safe as they have been around a long time and have been battle-tested.
TradFi provides crypto exposure through familiar, regulated products like ETFs. The NEOS Bitcoin Strategy ETF (BTCI), for example, aims to provide monthly distributions by employing a covered call strategy on Bitcoin futures ETFs. This generates potential cash flow from option premiums, offering a different risk/reward profile than directly holding Bitcoin. While distinct from CeFi/DeFi staking or lending, these TradFi products allow crypto-linked yield generation within standard brokerage accounts like Webull-Referral (sign up for up to 20 FREE stocks).
Note: As with any investment, especially those involving options strategies, it's crucial to understand the risks involved, including potential limitations on upside participation and the possibility of losses.
While direct property ownership often requires active management, several passive real estate income strategies exist. Investing in Real Estate Investment Trusts (REITs) is perhaps the most hands-off approach. REITs are companies that own, operate, or finance income-producing real estate, allowing you to invest in large-scale properties without direct involvement. You can invest in individual REITs, like the well-known dividend aristocrat Reality Income (O), or gain broader diversification through index funds. Understanding the benefits of investing in REIT index funds like VNQ (which holds numerous companies) includes instant diversification across property types and geographic locations with a single investment.
To even further your income potential, you could sell covered call options on the underlying fund. Say you own 100 shares of VNQ, you could sell a covered call with a strike price out of the money insuring a high probably of the option expiring worthless. Expiring worthless insures that you get to keep your 100 shares and collect the premium.
Now, you may be wondering what happens if the option does not expire worthless. Well, in that case, the strike price is lower than the current trading price. The buyer can exercise the option and buy your 100 shares at the discounted price.
With a covered call strategy on REITs, you miss out on large price increases while gaining some downside protection from the premium received. Dependent on your financial goals, this options strategy can be ideal for generating additional passive cash flow from your real estate holdings at the expense of potential capital appreciation.
REITs can be purchased at Webull-Referral.
Selling options presents another strategy for generating passive cash, though it involves a different risk profile compared to simply holding assets. Two common approaches are selling cash-secured puts and covered calls.
Selling a cash-secured put allows you to generate cash by selling someone the right (but not the obligation) to sell you 100 shares of a stock at a specific strike price by the expiration date. You receive an upfront premium for taking on this obligation. It's "cash-secured" because you must have sufficient funds to buy the shares if assigned. If the stock stays above the strike, the option expires worthless, and you keep the premium. If the stock falls below the strike, you are assigned the shares at the strike price (your cost basis is effectively lowered by the premium received). While this can be a way to acquire desired stocks at a discount, it's important to understand the risks of selling cash-secured puts, primarily the risk of being forced to buy a stock whose price has fallen significantly below the strike.
Another popular approach involves using covered calls to generate cash on stocks you already own (in blocks of 100 shares). You sell someone the right to buy your shares at a specific strike price by the expiration date, collecting a premium for doing so. It's "covered" because your owned shares secure the potential obligation. If the stock stays below the strike, the option expires worthless, you keep the premium and your shares. If the stock rises above the strike and the option is exercised, you sell your shares at the strike price, keeping the premium as additional profit. As mentioned in the Real Estate section, this strategy generates cash flow but caps your upside potential if the stock price surges past the strike. It's often employed to enhance returns on holdings you don't anticipate rising sharply in the near term.
Combining these strategies, some traders employ the "Wheel Strategy," which involves repeatedly selling cash-secured puts on a desired stock until assigned shares, then selling covered calls against those shares until they are called away, aiming to continuously generate cash from premiums.
Options trading involves significant risk and is not suitable for all investors. Platforms like Webull-Referral offer options trading capabilities, often with educational resources to help understand the mechanics and risks involved.
In high-interest rate environments, leveraging introductory 0% Annual Percentage Rate (APR) offers on credit cards for arbitrage becomes theoretically more attractive. The strategy involves borrowing funds at 0% interest (either via specific balance transfer methods or purchases) and placing that cash into a High-Yield Savings Account (HYSA) or CD to earn interest. The potential profit is the difference between the interest earned and the borrowing costs (including any fees). Warning: This is an advanced strategy requiring meticulous planning, discipline, and carries significant financial risks if mismanaged. It is not suitable for everyone, especially those who struggle with debt.
Promotional 0% APR offers change frequently. It's essential to consult reputable resources that track current offers and *always* verify the terms on the issuer's official application page before applying. Look for long introductory periods and carefully check the fees and conditions for purchases and balance transfers (especially deposit-to-bank options). A helpful resource for finding current offers is: Doctor of Credit (List of 0% APR Offers).
Note: This information is for educational purposes only and does not constitute financial advice. Credit card arbitrage involves significant risks. Carefully consider your financial situation, risk tolerance, and ability to manage debt before attempting this strategy. Consult with a qualified financial advisor if needed.
I have listed ways to earn passive cash and demonstrated one last way you may have noticed while reading this article. That is a static website such as this one utilizing affiliate links to generate passive cash. Affiliate marketing involves connecting people to products and services, and in return, receiving compensation for each conversion. Once you find a product or service you like, search to see if that product or service offers an affiliate program. Affiliate marketing is a great way to make passive cash and the earning potential is limitless.
If you’re interested in creating a static website like the one you are currently reading, GitHub offers a way to host your website directly from your GitHub repository. You can read more about GitHub Pages.
To wrap up, remember that earning passive cash can be a slow process if starting with low capital. Also, any service or product that sounds too good to be true probably is. However, don’t let this discourage you as you have to start somewhere. I hope this list serves useful and is a viable resource for your next step toward financial freedom.
“If you don’t find a way to make money while you sleep, you will work until you die.” - Warren Buffett