Passive income means income that requires little-to-no-effort to make. It's commonly associated with investments including bonds, dividend-paying stocks, and rental real estate. Certain side hustles can also bring in passive income.
"One of my goals in life is to generate enough passive income to cover my expenses," says Dr. Shaan Patel, the CEO and founder of Prep Expert SAT & ACT Courses. "If I can do that, I just figure I don't need to work. I just can work if I want to."
Patel has spent the last 10 years running Prep Expert, one of the nation's fastest growing SAT and ACT test preparation companies — all while attending college, earning his MBA at Yale and his medical degree at the University of Southern California, and completing his medical residency in dermatology. He even pitched Prep Expert on the ABC show "Shark Tank" in 2016 and closed a $250,000 deal with Mark Cuban.
Patel still finds creative ways to earn passive income. And while he hasn't reached his goal of covering his expenses yet, he says he's "making progress."
Here are some of the ways Patel recommends generating passive income, based on what works for him.
Dedicating a portion of your stock portfolio to dividend-paying stocks is a great way to earn passive income, Patel says. A dividend is a periodic payout of earnings that some companies and funds share with investors just for being a shareholder.
Last year, the average dividend payment made to investors in the S&P 500 hit a record high of $58.28 per share, according to S&P Global. "A lot of stocks pay 2, 3, 4, or even 5% dividends, and you know, I consider that a pretty safe source of income," Patel says.
Typically, stocks that pay dividends are more established companies, like Coca-Cola, which is more than a century old and currently pays a dividend yield of 3%. The beverage company also happens to be a stock pick of the legendary investor Warren Buffett.
Experts recommend having a mix of stocks and funds in your portfolio. That way you get steady income from a dividend stock with less volatility, while also owning stocks that don't pay dividends but have room to grow in value. Patel follows this advice and says for more than five years he's been automatically contributing a portion of his biweekly paycheck to index funds. "Getting started early and staying invested is essential," he says.
Video by Helen Zhao
Parking the money you need for emergency savings and short-term goals in a high-yield savings account is "very simple: Anyone can do it," Patel says. Prior to learning about high-yield savings accounts, Patel was using a traditional savings account, which "wasn't producing anything." That meant his money "was just sitting there," he says.
With a high-yield savings account, you can earn a lot more interest than with a traditional savings account.
The national average interest rate for savings accounts is just 0.06%, according to June data from Bankrate. Compare that with high-yield savings accounts, which have annual percentage yields of up to 0.73%, according to DepositAccounts.com.
Video by Stephen Parkhurst
To put that into perspective, let's say you have $5,000 stashed away in a traditional savings account in case an emergency pops up. Over a 12-month period, that account would pay you $3 on your initial deposit. Compare that with a high-yield savings account, which would pay you $36.50.
That may not sound like much, but it can add up over time as the money compounds. And earning some money is better than earning none, Patel says: "It's really been a game changer."
Patel is the author of numerous books from which he collects royalties. In addition to writing SAT and ACT prep books, he's also written his own book about entrepreneurship titled "Self Made Success: Ivy League Shark Tank Entrepreneur Reveals 48 Secret Strategies To Live Happier, Healthier, And Wealthier." Patel also co-wrote "How Any Kid Can Start a Business" with Mark Cuban and Ian McCue.
"Writing a book used to be a lot harder because you had to have a major publisher, but now it's as simple as going to Kindle Direct Publishing on Amazon and putting your book out," Patel says.
Another way Patel collects passive income is through YouTube royalties. "We have a lot of videos for Prep Expert on YouTube and they have hundreds of thousands if not millions of views, and that produces monthly passive income as well," he says.
All you have to do is activate the ads on the videos on YouTube to make passive income, he explains. On average, a YouTube publisher can receive $3 to $5 per 1,000 views, according to Influencer Marketing Hub.
While it takes work to produce a video and gain enough of a following to attract viewers, some videos will continue to produce royalties for years after they're published. For example, DIY tutorials and personal training videos stand the test of time.
"I always tell people if I can make passive income on SAT and ACT videos, I'm sure you can produce more interesting and entertaining videos," Patel says.
Like many younger investors, Patel, who is 31, invests some of his money in cryptocurrency. But he's taken it a step further by parking his cryptocurrency holdings in an interest-earning account, "so even if crypto is going down, I still feel like I'm earning 6% on whatever value is there."
When you open a cryptocurrency interest-earning account, cryptocurrency exchanges and service providers pay you a yield in exchange for borrowing your tokens.
It's important to note that these accounts don't protect you from the volatility in the crypto markets. "I think Mark Cuban said it best: Whatever you invest in crypto, you have to be OK if things do go to zero," Patel says. "I don't think they will ever, but you can't have your life depend on it."
Whether Patel is investing in crypto or in the S&P 500, his philosophy is the same: "I heard this quote and I think it's so true: 'It's not necessarily about timing the market, it's about time in the market,'" he says. "I take a long-term horizon on all of my investments where I don't plan on selling any of them for 10, 20, or 30 years."
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