The nice thing about having money is that you can put it to work for you, whether by earning interest in the bank or generating returns from investments. If you’re interested in generating passive income, you should know that it doesn’t have to be complicated, nor does it have to require a lot of knowledge. Here are three easy ways to earn passive income.
1. Open a CD
On a long-term basis, CDs aren’t the best place for your money. Even with CD rates being as high as they are today, they pale in comparison to the returns you might get in a stock portfolio.
But if you’re not sure what plans you have for your money and you want to set yourself up with passive income on a fairly short-term basis — say, the next few years — then CDs are a good bet. You can either open a single CD, or set up a CD ladder that consists of various CDs with different maturity dates.
Based on today’s rates, if you put $10,000 into a 24-month CD with a 4.5% APY, you’re looking at earning $920.25 in interest over the next two years. That’s about $38 per month, which isn’t a life-changing sum, but it’s extra money nonetheless.
2. Invest in an S&P 500 ETF
Putting together a portfolio of stocks is a great way to generate passive income. But that requires you to know how to research stocks.
If that’s not in your wheelhouse, putting your money into an S&P 500 ETF is a great fallback option. This allows you to invest in the market without knowing a ton about stocks or having to do a lot of work.
With an S&P 500 ETF (exchange-traded fund), you’re effectively investing in the 500 largest publicly traded companies. You get the benefit of instant diversification (since, well, we’re talking about 500 different businesses), which is an important part of managing your risk as an investor.
To get a sense of what sort of passive income an S&P 500 ETF might yield, over the past 50 years, the index’s average yearly return has been 10%, accounting for good years and bad. If you put $10,000 into an S&P 500 that provides that same return and leave your money alone for 25 years, you can grow your initial investment into about $108,000.
3. Choose a target date fund for your 401(k)
If you have a 401(k) plan through your job, you don’t want to just keep it in cash. You should invest your retirement savings so that money grows over time. And if you know little about investing and aren’t so eager to learn, then you may want to fall back on a target date fund.
A target date fund adjusts your risk allocation based on how close or far away you are from the milestone you’re saving for. In a 401(k), a target date fund will have you investing more aggressively for retirement in your 20s, 30s, and 40s, and less so as you inch closer to the date at which you expect to end your career. It’s truly a “set it and forget” type of investment.
Now, you may find that your return in a target date fund isn’t quite as high as with an S&P 500 ETF. But it might get pretty close.
However, your fees may be higher, too. It’s not unheard of to pay something in the 0.5% range for a target date fund, compared to as low as 0.03% to 0.15% for an S&P 500 ETF. These might seem like small numbers, but they can add up over time.
All told, you have plenty of options for earning passive income, even if you feel that you’re in the dark about investing. The key is to consider your timeline and financial goals when deciding which option is best for you.
