In my last post I looked at how much passive income I would need to be generating monthly in order to retire early. That number, as it turns out, is somewhere in the vicinity of $15,000-$17,000 per month.

In my case the income would need to support a family of three. My wife is not currently employed as we just recently had a baby boy. Now I need to come up with a plan for increasing our passive income which is currently only $120 per month. This is especially important if I want to successfully achieve my retirement target date of 2026 at age 42.

Building thousands of dollars of additional passive income would require more than just a side hustle. Thinking about what my options are for adding to the passive income I currently earn, I have compiled a list of applicable opportunities as it pertains to my skills and abilities. I’m also going to try to rank these based on what I think will bring the most passive income for the least amount of time and money invested, i.e. what would generate the highest return on investment (ROI).

Top passive income choices to earn thousands of dollars per month

I’m going to focus and prioritize opportunities that could earn not just tens or hundreds but thousands of dollars per month. This includes income generators that could start with less but could very easily be scaled up. Below, I have listed my top 9 ways to generate passive income. There could be a hundred ways to earn more, but these are the ones that I believe are a good fit and I’m personally comfortable with.

Luxury real estate investment provides amazing passive income.

Luxury real estate rental properties are an excellent source of passive income

1. REITs (Real Estate Investment Trusts)

At this point, I think that investing in REITs is probably the quickest and easiest way to get started in real estate. It requires literally no involvement on my part after the initial investment.

REITs are essentially companies that own and manage real estate. They buy, sell, renovate, and rent out properties. Then they pay dividends to their investors monthly or quarterly. The dividends can be withdrawn or alternatively can usually be automatically reinvested to generate additional earnings over time resulting in compounding growth.

One way to invest in a REIT is through a brokerage. I’ve been looking into the Vanguard REIT Index ETF (VNQ) where I plan on allocating about 20% of my overall stocks portfolio.

Another way is through a crowdfunding platform such as Fundrise. I plan on investing in a few of their eREITs, which will be my first big move of cash out of the savings accounts and into a passive income investment.

2. Rental income

It’s well known that buying real estate and renting properties is an effective way to build wealth and earn what I would call semi-passive income. I put it in the semi-passive category because from time to time you have to do maintenance or find new tenants. To turn this into more of a passive income investment, you could hire a property management company, usually for a percentage of the monthly rent.

While this is ranked second on my list, it will likely take a little while before I can purchase a rental property. I don’t even own my primary residence yet and would like to get that sorted out first. That said, once it’s all set and done, this will likely be my top passive income generating asset. I like it best and will likely invest the most in it because of its relatively low risk and steady cash flow through monthly payments.

3. Dividend stocks

Another minimal to no effort way to generate passive income is through dividend stocks. Dividend stocks are like any other stock, except they usually have a higher dividend yield and their price doesn’t grow as fast as stocks that pay no dividends. Earning a passive income through investing in dividend stocks works by simply purchasing and holding a publicly traded company or fund’s stock. Then at regular intervals throughout the year the company pays dividends to its shareholders.

My plan is to invest in low expense ratio Exchange Traded Funds (ETFs) with a high dividend yield. My research points to Vanguard’s ETFs being the best for this. This way I don’t have to pick the stocks myself and can truly kick back and collect a passive income.

If I were to pick my own dividend stocks, then I would look for stocks with high dividend yield, high dividend growth (with a great track record of increasing the yield every year), and high quality companies (AA or AAA credit rating). I’ve been using Market Chameleon for this sort of research, but please do let me know if you know of a better site.

4. Index funds and ETFs

I’m adding a separate category for index funds, such as ETFs following the S&P 500 Index. These would include funds that have a dividend yield albeit rather small. Earning passive income under this category works exactly the same as it does with the dividend stocks I mention above except the dividends being paid out are much smaller.

I am adding it here, though, because I do plan to invest a portion of my stock portfolio in the Vanguard Total Stock Market Index ETF (VTI), Vanguard S&P 500 ETF (VOO), and Vanguard Total International Stock Index ETF (VXUS) funds which should provide a small amount of passive income on a regular basis.

5. High-yield CDs and Savings or Money Market Accounts

Investing in a high-yield certificate of deposit (CD) or keeping money in a savings or money market account at an online bank generates a small amount of passive income. In 2021 with the interest rates at an all time low, and inflation creeping up, keeping money in these accounts is less than ideal.

This is also one of the main reasons why I began reading up on personal finance and started this blog. Almost all my savings are currently sitting in savings accounts. The plan is to leave some there for a down payment on my primary residence and for emergency cash, and invest the rest so it can generate a better return on investment.

6. Write an ebook

In the last twenty years, selling digital products has become an increasingly popular way to earn a living. Writing an ebook could be a great way to increase my monthly passive income. That said, it is a lot of work upfront and there’s no guarantee anyone would buy it.

I actually started writing an ebook five years ago after I landed my last job. Unfortunately, life happened and I never finished it. But if I can manage to find the time to finish it and market it well, I could see it being able to generate a respectable amount of passive income.

7. Create an online course

Nowadays it’s fairly easy to teach an online class thanks to platforms like YouTube, Udemy, Coursera, and SkillShare. The initial amount of time and effort is significant and somewhat similar to writing an ebook, but once a course is published it’s just a matter of keeping it updated.

8. Create an app

Creating an app could be an incredibly lucrative source of income, but depending on the app, it may or may not fall under passive income. This is because there could be quite a bit of maintenance involved due to iOS/Android version upgrades, software bugs, and feature requests from users.

Don’t get me wrong. I would love to create an app. Currently, however, I don’t have a good idea for one that people would actually buy. I like the idea of building most of my passive income through other sources first. Then I could work on building and maintaining an app as one of my projects in retirement.

9. Start a blog

They say that starting a blog is a good way to generate passive income. If you have a subject you are knowledgeable and passionate about, it could be an easy way to build a following of subscribers who appreciate the content you provide.

The way I look at this site is as a way to market any and all of the above mentioned passive income generators. For instance if I ever write an ebook I would probably use the blog to promote and sell it.

I’m not a fan of ads so as of right now I don’t plan on adding any to the site. I’m however going to see if I can recommend any tools I personally use on my journey to financial independence. If they have an affiliate program I’ll probably just add an affiliate link to their site.

Honestly, I’ll link to them either way if I believe in the software/site/tool. For example, doesn’t have an affiliate program but I would definitely recommend you automate your budget and spending tracking as I have. If it helps me, it could help you, too!

This is the goal of the blog after all. We can learn together and help each other by sharing what works and what doesn’t!

Looking at current asset allocation

So far I’ve identified the potential ways I could build a passive income portfolio. Now I need to execute the strategy. First however, let’s take a look at what my asset allocation looks like currently. I know it’s cash-heavy and I want to send that cash to make money instead of just sitting in a savings account.

The table below shows what the portfolio looks like at the start of my personal finance journey to retirement a few weeks ago. I am no finance expert (yet) but I imagine that this table is a classic financial advisor’s nightmare.

Allocation of my assets at the start of my journey to retirement and financial independence through passive income.

Allocation of my assets at the start of my journey to retirement

Knowing the majority of my assets were in cash is one thing. But I didn’t really think about it much until I actually saw these numbers. All eggs are indeed in one basket.

Diversifying the portfolio for passive income

Now it’s time to make the actual diversified portfolio. I should be able to easily rebalance my assets among the first 5 of the 9 passive income generators listed above. This includes: REITs, Rental property, Dividend stocks, Index funds, and High-yield CDs/Savings Accounts.

After giving it some thought I came up with the following table.

Asset allocation future plan to generate more passive income.

Asset allocation future plan

I suppose it doesn’t come as a surprise that I’m going heavy into real estate and REITs. From my research so far, it appears that they are the top performers when it comes to generating passive income. Sure it’s not as fun as picking your own dividend stocks, but my goal is a truly hands off approach. Trying to consistently outperform the market is not my cup of tea.

One obvious catch here is that until I close a deal on a primary residence, there is still cash sitting around ready to be used as a down payment. Once I’ve purchased a primary residence, however, I intend to quickly invest any remaining cash in another rental property.

Since I had already been doing a lot of research on Fundrise, I went ahead and shifted some of the cash into eREIT funds on the platform. I already feel better knowing that I invested in some real estate that’s completely hands off for me.

I’ll be getting some dividend stocks this week and maybe I’ll start posting quarterly updates as I ramp up the passive income. For now though I am going back to doing more research and trying to decide whether I want to get a few dividend stocks to hold long-term.

— Finance Squirrel


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