Passive cash is cash that requires little to no effort to earn and maintain. If you are someone who wants to achieve FIRE(financial independence and early retirement), passive cash is what you want to focus on.
In general, making passive cash is primarily dependent on having cash to start with. A common misconception is thinking that you must have large amounts of cash to get started. I understand the more cash you have available to invest, the more you can potentially make; But 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 little “workers” can earn you passive cash even while you sleep. I have compiled a list of ways to getting you one step closer to financial freedom.
Dividends are a great way to earn passive cash. A dividend is the distribution of a part of a company’s earnings that is paid to its shareholders. Dividends are typically paid monthly, quarterly, or annually. Remember to take into consideration DRIP(dividend reinvestment). Monthly dividends compound quicker, and therefore, your shares accumulate at a faster rate if you were to reinvest the dividends. You can see for yourself using a 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 that have a dividend yield 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.
A user on reddit put together a portfolio he calls “Quad-fecta.” It consists of 4 ETFs that incorporates a covered call strategy combined with capital appreciation which generates ~8% APY. This is one great example to creating a passive cash stream. More information can be read here.
There are two types of dividends, qualified and non-qualified. Most regular dividends from corporations are qualified. One example of non-qualified dividends are dividends paid out by REIT(real estate investment trusts). The main takeaway between the two are that qualified dividends are taxed at capital gains rate, and non-qualified dividends are taxed at a person’s regular income tax rate. One core fundamental of investing in dividend paying funds is minimizing taxes. Lets take a look at Tax Brackets for 2022 to get a better understanding.
2022 Single Filer Tax Brackets
|Income Tax Bracket||Tax Rate|
|$0 - $10,275||10%|
|$10,275 – $41,775||12%|
|$41,775 – $89,075||22%|
|$89,075 – $170,050||24%|
|$170,050 – $215,950||32%|
|$215,950 – $539,900||35%|
2022 Joint Filer Tax Brackets
|Income Tax Bracket||Tax Rate|
|$0 – $20,550||10%|
|$20,550 – $83,550||12%|
|$83,550 – $178,150||12%|
|$178,150 – $340,100||24%|
|$340,100 – $431,900||32%|
|$431,900 – $647,850||35%|
2022 Capital Gains Tax Brackets
|Single Filer, Taxable Income Over||Joint Filer, Taxable Income Over||Capital Gains Rate|
From this, you can see that individuals making <=$41,675 and joint couples making <=$83,350 are tax exempt from qualified dividends. It’s important to note as of 2022, invdividuals making <= $12,950 and joint married couples making <= $25,900 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 or not, 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, it may be ideal to hold these in a retirement account. However, there are some advantages to holding REIT in a taxable account.
There are some exceptions. For example, Municipal bonds are typically exempt from federal taxation regardless of income. iShares National Muni Bond ETF(MUB) is one such ETF that has a yield of ~2.44% and pays monthly. VanEck Vectors High-Yield Municipal Index ETF(HYD) is another ETF that has a yield of ~4.66% and pays monthly.
Finally, if you’re ready to get started in earning dividends; Robinhood offers users a platform to invest in stocks, ETFs, options, and cryptocurrencies, all commission-free, right from your phone or desktop. In addition, Robinhood also offers fractional shares(ability to purchase a share like Amazon for as low as $1), cash management(earn interest on your uninvested cash), and DRIP(dividend reinvestment). Sign up at Robinhood and we each receive a free stock valued between $3 and $150 - average is $10.
An annuity is an insurance contract that can be purchased from a financial institution. Investments can be made in lump sum or period payments. You can expect to receive a guaranteed cash flow for a fixed period or for the rest of your life dependent upon the structure of the annuity.
There are two types of annuities, immediate and deferred.
Lets say for example 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 cash flow in the future 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 providing regular periodic payments while variable being less stable providing payments that are dependent upon the performance of the annuitie’s investments.
Important to note that annuities are illiquid and subject to withdrawal penalties. Therefore, annuities are not recommended for younger investors.
You can estimate cash flow using Schwab’s Income Annuity Calculator.
High Yield Savings Accounts
High yield savings accounts are online accounts that pay multitudes more than a standard savings account. Lets say you have $100 dollars that you would like to deposit to a traditional savings account. On average, a traditional savings account may offer a .06% interest rate. This means that in 12 months, your $100 would be (100 * .0006) + 100 = $100.06. Now lets say you invest this same $100 in a high yield savings account. At the time of writing this article, the best interest rate offered is ~1.75%. This is ~29 times the average interest rate offered at a traditional savings account. In 12 months, your $100 would be (100 * .0175) + 100 = $101.75.
Lets scale things up and say you wanted to make $500/month passively.
Traditional Savings Account
|Expected Return||Investment Required|
|$500/month||(500 * 12)/.0006 = $10,000,000|
High Yield Savings Account
|Expected Return||Investment Required|
|$500/month||(500 * 12)/.0175 = $342,857.14|
The difference in investment required for expected return is significant.
Please note, for simplicity, these calculations do not take into account compounding interest. Compounding interest is essentially interest on interest, or rather, the result of reinvesting the interest earned. Compounding interest can be compounded daily, monthly, quarterly, or annually. Here is an updated list of the best high yield savings accounts.
Earn Interest on Crypto
Earning interest on cryptocurrency is a fairly new opportunity that can be compared to earning interest in a traditional bank. If you currently hold cryptocurrency like Bitcoin or Ethereum, you could be taking advantage of services that offer to pay you interest on your holdings. There are two types of services called DeFi and CeFi. DeFi or decentralized finance is a new type of financial service that works autonomously. Users are putting their trust in technology when using a DeFi service. CeFi or centralized finance is a type of financial service that is comparable to a traditional bank. Users are putting their trust in the business offering the financial service.
MyConstant is a CeFi service. MyConstant lets you put your crypto to work and earn monthly interest payments in the cryptocurrency that you deposit with MyConstant. Most importantly, this interest is compounded. You can earn 12.5% APY on stable coins USDC and USDT. Click here to see all crypto interest rates.
Compound Finance is a DeFi service. Compound finance is an algorithmic, autonomous interest rate protocol that allows 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 the coin and amount you wish 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 here.
Note: At the moment, due to network conjestion, fees on the ETH mainnet are too high to invest in Compound Finance 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 layer 2 solutions here.
Helpful guide to help get you started in the world of DeFi.
Coinbase offers ETH staking. While staking, your ETH will be locked and unavailable to sell or send until ETH2 network is fully launched or trading is otherwise offered. During this time, your ETH2 will earn up to 4.5% APR.
Crypto.com offers ETH staking earning 6.50% P.A.
Coinbase offers rewards up to 4% APY when you hold ALGO.
Holding NEO in a wallet generates GAS. GAS is used to pay for smart contracts on the network. These fees are distributed to NEO holders as rewards for their activity on the network. You can view the current Neo-to-Gas rates here.
Tezos offers staking rewards. Staking is the process of holding funds in a crypto wallet to support the network. In return, holders are rewarded for their activity on the network. An easy way to start earning rewards with Tezos is by visiting Coinbase. Get free Bitcoin worth $10 when you sign up which you can then convert to Tezos to start earning passive cash. After registering, you can earn an additional $6 worth of Tezos by learning about Tezos at Coinbase Earn Tezos. In total, that’s $16 worth of Tezos to get you started. You can read more about staking on Coinbase here.
As another option, you can stake Tezos on a Ledger Nano X - The Best Crypto Hardware Wallet. This offers greater security as opposed to 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 Tezos from Coinbase to your hardware wallet and vice versa. You can read more about staking Tezos with Ledger here.
Rental properties are another way to earn passive cash but require a large initial investment. If you have the capital, all you need is minimal time commitment. First, you’ll want to look for a home that will require little to no repair cost that is ideally in the same city as you’re located in. After purchasing, you’ll need to market your home to find a tenant. The best way to market your home is to hire a property management company. This will typically cost you between 8% - 10% of the monthly rent in addition to other fees that may be involved. However, in my opinion, hiring a property management company is necessary as it will greatly reduce the amount of work required by you. After all, we are looking for a way to earn passive cash.
Also, remember that this home is your responsibility. If the air condition breaks, or the roof needs to be repaired, these are expenses that you’ll have to pay. This is why it’s important to have cash reserves in case of these unexpected costs.
Lastly, I recommend learning your rights and the rights of your tenants by reading the Fair Housing Amendments(FHA) Act.
Honeygain is an easy way to make passive cash. You can simply install honeygain on your preferred device(currently android, windows, macos are supported), and connect the device to the internet. Honeygain’s network is used by businesses clients for web intelligence and content delivery. Honeygain manages the connections and payments while sharing your unused internet traffic with data scientist. In return, you get paid.
Is it safe? Honeygain claims their app to be safe as they screen their partners to ensure your connection isn’t being used for illegal activities. Also, the only data they keep is what will be necessary for the service. This includes your email address, your IP address, how much traffic you make per month, and your chosen payment method.
I would still exercise caution as according to their terms, “While we do put reasonable effort to prevent any detrimental consequences to our users, it is the user who is responsible for its ability to share internet traffic and his compliance with local laws, regulations, and agreements with third parties.”
If you understand the risks involved and are still interested in using honeygain, you can sign up at honeygain and receive $5 to help get you started. Payouts are done with paypal and the minimum payout threshold is $20.
I have listed ways to earn passive cash as well as having demonstrated one last way that 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 consist of connecting people to products and/or 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. In my opinion, affiliate marketing is the best 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 that here.
To wrap things 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 towards your next step to financial freedom.
“If you don’t find a way to make money while you sleep, you will work until you die.” - Warren Buffett
Need help getting started or have any questions? Contact me at email@example.com or @passivecashxyz
I am a programmer, investor, and cryptocurrency enthusiast. I hold a B.S. in Computer Science with minors in Math and Organizational Leadership.
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