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Passive Income – What Is It and Why Should You Use It to Diversify Your Portfolio?

Generating passive income is an easy way to make the most out of the capital you already have. Instead of taking on a second job to increase your wealth, let your money work for you. At CARL, we help you do exactly that by offering a simple solution for managing your investments, finding a fitting strategy and growing your income. But before you start investing in hedge funds with CARL, it's important to know what passive income is and to understand different types of revenue as well as their respective benefits. That will give you an idea of how to increase your personal wealth without lifting a finger.

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Three Types of Income: Passive, Active and Portfolio Income

Cash is cash – that much is always true. But income generally refers only to capital that a business or person acquires by providing a service or which is gained from an investment. There are different types of income that can grow your personal wealth. Broadly, we can distinguish between three forms of income: active, passive, and portfolio. Colloquially, this is referred to as "you working for your money", "your money working for you" and "building your net worth with investment assets" – i.e., bonds, cash, and stocks. But more distinct definitions for the three types are necessary to understand how passive income works.

Portfolio Income – Investing in Dividend-Paying Assets

You set up a financial portfolio to grow your wealth. Investments in stocks, hedge fund investments, and stock investments all have one goal in mind: paying dividends to increase the amount of money in your savings account. Another way to expand your portfolio revenue is to give out loans that are paid back with interest. But getting into those ways of investing usually comes with an exceptionally high barrier of entry – the stock market, and that is a messy place for new investors.

Revenue from your portfolio is taxed at a relatively low level as you don't need to pay Medicare or Social Security taxes on it.

Accruing dividend-paying assets can be relatively easy; you just have to look in the right direction. And, to put it simply: You have already looked in the right direction: CARL is an easily accessible, reliable service for getting into the hedge fund investment game – allowing your money to grow all on its own. Whether you are an entrepreneur looking for a new investment opportunity or a stock market veteran – CARL provides you with the tools you need to choose a quantitative investment strategy that fits your wealth-building goals, giving you the freedom to pick long-term as well as short-term solutions.

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Tearing Down Barriers to the Alternative Investment Universe

CARL provides you with a selection of thrilling alternative investment opportunities you might never have heard of before. Build your wealth and diversify your portfolio with alternative investments – anywhere, anytime, with one easy-to-use mobile app.

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Passive Income, Or: Get Rich Sleeping

Passive income is defined as earnings from a rental property that is maintained by an external contractor, as well as earnings that come from being a limited partner in a business or other passive involvements. Guidelines set up by the IRS specify whether a specific taxpayer is a recipient of active or passive income. The degree of material participation is crucial in determining which type is at play. It's also important to know that a passive loss can be claimed against passive income when doing your taxes.

Colloquially, the term "passive income" describes regular earnings that don't require any (or only a small amount of) active effort by the recipient of that income. To be on the safe side, confer with a professional tax expert before submitting your taxes.

CARL: Your investment head start

For most passively earning revenue sources, you have to put in some initial expenditure or effort, which will redeem itself over time as the cash starts coming in. A classic example of this type of revenue is earning interest on capital sitting in a savings account. How you earned that initial investment is up to you, but it will start to grow on its own once you have it. Investing with CARL is a great way to start building future passive income. Use dividends from quant investment to diversify your portfolio with an additional savings account, for example.

Virtual or digital currencies like Bitcoin, Etherum, Litecoin, or Dogecoin are exciting new ways of investing and increasing your wealth by mining or selling currency at a profit. But as per their definition, they are neither dividend-paying assets nor can they be defined as passive income. Instead, they fall into a kind of in-between category as you invest into one or more currencies with the expectation that the currency will become stronger before you sell it again. That's why cryptocurrencies are typically classified as active income, as you have to actively trade them to make a profit.

Active Income Means Putting in the Work

Any income-producing activity involving material participation is defined as active income. This means you are actively engaged in performing a service that generates revenue for you – be it tips, a fixed salary, commissions, or salaries. Receiving a paycheck is the most common example of this type of income. For self-employed people and (part) owners of businesses, a certain set of criteria have to be met for their income to be considered active and thereby subject to different taxation rules.

The IRS has drawn up fixed criteria with which a taxpayer can determine how their income may be classified. Confer with a financial advisor before submitting your taxes.

To qualify as an active income stream, at least one of the following criteria must be met. If a taxpayer

  • works 500+ hours for the business within the span of a year,
  • handles the most significant share of work for the business or
  • works 100+ hours over a year and is the main work hour contributor of their household,

their income is active by definition. Passive participation – i.e., being a silent partner who only has a financial stake in the business – is considered to constitute passive income

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The Benefits of Earning via Passive Income

Financial stability is critical for every aspect of your life, and it is an important milestone on your way to accruing wealth. Passively earning and having a steady, regular cash flow plays a particularly important role in achieving financial stability.

Personal finance thrives on passive and portfolio income as you don't have to put in hours and hours of your time to accrue wealth.

Two of the most significant benefits of passively earning funds from investments are having more time and experiencing lower stress. You can rely on your income streams to provide you with reliable, budgetable resources. Once the amount of money you make via a passive income is enough to finance your personal lifestyle and your fixed monthly and quarterly expenses (like a mortgage or insurance costs), you're golden! It allows you to spend your time on the things you enjoy without worrying about making enough money for a living. Being financially stable in this way also helps to cushion any sudden costs that may crop up due to things like unexpected healthcare expenses.

Additionally, diversified portfolio that combines more than one investment strategy (such as investing with CARL with other income streams, i.e., from passive earnings) factors in different levels of risk to build a safety net. Should one investment fail to achieve its financial goals, you still have other active, portfolio, and passive incomes to support you.

Two Kinds of Passive Incomes

One of the classics of passive income investments is putting money into a savings account. But while savings accounts may be reliable, they also generally don't have the potential to grow your personal wealth significantly. High-yield savings accounts are a rarity these days as interest rates on savings accounts have been low for years. People looking into investing money should keep their eyes open for different options that offer higher interest rates.

Another passive activity that usually requires a larger upfront investment is real estate investing. Investing in rental property is one of the most effective ways to grow your passively incoming revenue. However, you need to fulfill the IRS's criteria for this type of earning to be qualified as passive, and you need to find a property that yields a high enough return in the first place. Additionally, investments into property are not without risk, as the 2008 financial crisis has shown. Another risk factor is unreliable tenants. When they're unable to pay their monthly rent, your mortgage rate still has to be met, posing potential difficulties for you to resolve the conflict with the tenant.

Passive Income Ideas – Diversify Your Portfolio

Peer-To-Peer (p2p) Lending

"Crowd lending" and "social lending" are other terms for this type of passive income. Any individual can loan sums to another individual via this method. It cuts out banks from the equation as you mostly use specialized websites to find borrowers. The website provider usually sets terms and interest rates and determines the risk category as well. The market for peer-to-peer lending has gone through many changes over the past years, offering niche sites and providers for a plethora of possible borrowers.


REIT is the abbreviation for "real estate investment trust" and describes companies that buy and manage real estate. Due to their particular legal structure, corporate income tax on these businesses is comparatively lower – but only if the most considerable portion of their revenue is passed along to shareholders. For entrepreneurs looking to diversify their portfolio, they are a great way to achieve precisely that. However, you have to identify good REITs to fully benefit from this passive income idea. This requires analyzing different businesses before putting in your investment.


Bonds are older than most other passive income ideas. Bond ladders, in particular, are popular passive income investments for people nearing retirement. Using the earned proceeds continues your passive activity and helps to grow your upfront investment. However, a certain risk is involved in bonds as you can lose your principal if the company from which you bought bonds has to default. Choosing bonds that the federal government backs minimizes that risk, though. A less risky alternative is investing in bond ETFs to diversify your fund and diminish the financial damages of one particular bond falling through.

Affiliate Marketing

Social media has changed the marketing world forever, offering individuals the opportunity to earn passive income via marketing products and make money off every sale. But generating a steady cash flow via affiliate marketing usually requires building a following of people on social media platforms like Instagram or TikTok, which can rapidly grow into a full-time job. Other avenues to generate dividend payments are more lucrative while requiring less effort, like investing with CARL.

A success story from start to finish: Invest with CARL to diversify your portfolio, multiply your income streams and increase your wealth.

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3 Easy Steps to Start Investing With CARL

Investing in quants is as easy as pie if you've got CARL on your side. Investors can set up an CARL account quickly and easily.

Set Up Your Account

Quickly and securely create your account, verify your investor status and become a member of our community.

Analyze Investments

Using the tools within the CARL app, determine which strategies at what allocations are right for your investment goals.

Fund Your Investment

Simply save your portfolio settings and on the next strategy funding cycle your investment will be live!

Not Technically Passive but Lucrative Nonetheless: Invest With CARL

Accumulating wealth and growing your net worth is a surefire way to financial independence. To achieve that goal, a diverse portfolio is a must. Incoming money from only one revenue stream lacks a safety net for unexpected events – and we all know life is filled with those. Balancing various efforts is no easy task, though. At CARL, you'll find a plethora of investment strategies controlled comfortably via your phone. Look into our long-term and short-term investment opportunities, grow your wealth and prepare for a bright financial future.

Invest in hedge funds today – with CARL!

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