When we're talking about passive income, we use a very simple definition of the term: Any investment that can provide you with a regular income while requiring very little active participation from you is passive. The first thing you need to understand about this is that there is no passive income idea that provides you with an income that's 100 % regular, provides you with a consistent amount of cash every week or month, and doesn't require you to lift a finger. Most passive income streams may achieve one of these goals, but not all three combined. Even rental real estate, typically hailed as the most reliable way to make money passively, requires you to keep an eye on upkeep and maintenance – and you'll only receive a regular income at a consistent level if you can retain dependable tenants.
That being said, passive income is still a great way to supplement your lifestyle. If you're still working, investing in assets allows you to supplement your cash flow passively. You might not even mind the fact that your stock investments, for example, don't provide you with 100 % consistent income over the year – it's extra cash, one way or another.
If you're retired, passive income streams may help you supplement your individual retirement account by providing a monthly cash flow similar to your monthly paycheck back when you were working. In this way, things like real estate investing may be a long-term way to keep you in the black both before and after retirement – though because of the often inconsistent payouts of most assets you can invest in, you may not want to entirely rely on passive income once you're retired.
Passive Income vs. High-Yield Savings
Soon-to-be retirees in particular often wonder if they’re making the smartest move to secure their retirements financially: Should you invest your money to create an income stream, or is it better to put it in a savings account and withdraw your money as you need it?
Keep in mind that your money is subject to inflation – and the interest rate of your savings account may change over time as well. In other words: If you're putting money into your account, its value may decrease significantly over time, leaving you with much less purchasing power than you anticipated to have in your retirement. Investing money, however, means that your money has a chance of generating more money, effectively counteracting inflation better than the interest rate on your savings account ever could. Meanwhile, the income generated by passive investments may increase over time, depending on the value of the underlying assets.
In short, while passive income streams generated by investments may not always be entirely consistent in terms of the exact amount of money you receive, they do have a chance of generating an income that mitigates the losses incurred by inflation – or even outpaces them.
There are a number of ways for you to create income streams that require very little work. Many of these are available both to accredited investors as well as non-accredited ones, though some of the most promising passive income investments, such as CARL's quantitative hedge funds, require you to qualify as an accredited investor.
Put Your Money Into Rental Real Estate
Real estate has always been one of the most popular passive income strategies. After all, everyone needs a place to live, and most people can't afford to buy an apartment or a house, so rental apartments are always in demand. They also generate a regular and consistent income stream, providing your tenants are reliable. The value of your property will be affected mostly by large-scale events such as an overall economic downturn in the neighborhood or natural disasters. Thus, renting out real estate requires little work on your behalf, and much of it can be outsourced. Alternatively, you could also invest in a real estate investment trust (REIT), providing you with dividends while further limiting the amount of work you need to perform – the trust's employees will take care of everything for you.
Be aware, however, that how much money you can make on the rental real estate market depends on what your tenants are willing to pay. So while most non-premium apartments will get you enough to supplement your regular income or retirement money comfortably, they're not necessarily the best way to get rich quickly.
Invest in Index Funds
Index funds are investment funds that seek to replicate the performance of a specific market index. These are typically exchange-traded funds (ETFs) or mutual funds that track an index, investing in the same assets. Since the market index determines their choice of assets, they don't require a lot of active management. As long as the underlying index is doing well, your investment will be able to generate a regular income.
Funds following a specific market index are dependent on the index's performance to generate income. In other words: More so than with real estate, your monthly or annual income may shift depending on how well the underlying assets are doing.
Buy Dividend Stocks
Perhaps the most common way for ordinary people with a limited budget to make money with investments is by buying stock from publicly traded companies. These companies then pay out a portion of their earnings as dividends, allowing investors to create a passive income stream if the company does well.
However, whether you receive any dividends depends on how well the company does as well as on which type of shares you hold. Preferred stock allows you to receive dividends before investors with common stock receive dividends. Meanwhile, if you're holding common stock in a company, it's possible you won't receive dividends if company earnings are only large enough to pay dividends to preferred stock holders.
As you can see, relying on stocks paying dividends isn't the most consistent and reliable passive income investment you could make.
If you're looking to get the maximum out of a passive income, hedge funds are the way to go. Since few SEC regulations affect them directly, they can invest in a significantly greater variety of strategies compared to mutual funds or ETFs. Meanwhile, their ability to use hedging strategies to mitigate market risk can make them comparatively safe, depending on the structure of the individual fund. That being said, hedge funds typically have high minimum investment levels and long lock-up periods, which means the money you've invested is highly illiquid, making it difficult to react in time if you ever change your mind about investing with hedge funds.
If you're looking to further minimize risk and maximize potential returns, then CARL's quantitative hedge funds are the perfect investment for you. They use sophisticated computer algorithms to make investment decisions, allowing them to excel in high-volatility markets in particular. Meanwhile, they benefit from the same built-in risk management mechanisms as traditional hedge funds. That's why CARL's quants can offer you 15%+ targeted returns, a significant advantage over all other types of investment that can provide you with regular income. And since our quants make all of the important decisions themselves, you can take a hands-off approach with them. If you're ever unsure about your investment, you can simply withdraw your money on a monthly basis, as our quants have no lock-up periods.
Typically, generating large enough returns to grow your wealth and get rich quick requires some amount of active portfolio management. Getting rich with passive income alone isn't out of the question, but it requires you to choose your investments very carefully.
Passive income derived from mutual funds or index funds, in particular, isn't likely to make you rich overnight. Still, hedge funds and quants can quickly generate significant returns, depending on their strategy.
If you're looking for a straightforward, hands-off approach to supplementing your regular income or retirement income, CARL is an excellent way for you to take advantage of the power of quants. With 15%+ targeted returns, your income can be significantly higher compared to traditional investment models. And since our quants have no lock-up periods, your investment is liquid enough to allow you to react quickly if the need arises. All you need to do is set up your CARL account and prove that you qualify as an accredited investor. Once that's done, you can start investing wherever you are and whenever you like, thanks to our convenient CARL mobile app.