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 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 get up to $200 in free stock.
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. Interest can be compounded daily, weekly, monthly, quarterly, or annually. Here is an updated list of the best high yield savings accounts.
CDs or certificate of deposits offer another great way to earn interest on cash for a fixed period of time. 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 withdrawl your cash penalty free.
There are two types of CDs, callable and non-callable. A callable CD can be redeemed by the issuer prior to the mature date whereas a non-callable CD can not. So lets 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 will guarantee you with a fixed rate APY that will be higher than newly issued CDs.
CDs can be purchased through banks, credit unions, and brokerage firms. Bank CDs 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 withdrawl fee. However, the value of the CD is subject to change dependent on interest rates if you were to 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 for the rest of your life dependent on 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 in 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 on the performance of the annuitie’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.
If you are looking for a safe place to protect your cash from inflation, I savings bonds are a great option. I bonds pay a fixed rate of interest that changes with inflation. You can find more information and purchase I bonds at TreasuryDirect.
Treasury Bills(T-Bills) are U.S. goverment securities that can be purchased through either a broker/bank or directly from TreasuryDirect. 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 payed upon maturity and 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.
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 ETH, you could be taking advantage of services that offer to pay you interest on your holdings. There are two types of services called CeFi and DeFi. 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. 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.
Coinbase offers ETH, ADA, ATOM, SOL, and XTZ staking. 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. Get free Bitcoin worth $10 when you sign up. While staking ETH, 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. You can click here to view current yield rates.
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 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.
As another option, you can stake ETH, SOL, ATOM, and DOT on a Ledger Nano S Plus - 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 cryptocurrency from Coinbase to your hardware wallet and vice versa. You can read more about staking through Ledger here.
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 layer 2 solutions here.
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.
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 out of pocket. This is why it’s important to have cash reserves in the event of potential property expenses.
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. 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 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 firstname.lastname@example.org 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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