- Oh, this is the life.

- Julia, what are you doing?

- I'm just sitting on a beach.

While money gets handed to me (cash register dings) on a silver platter.

Thank you.

- How is that possible?

- It's called passive income, babe.

Deal with it.

- Oh yeah, I've heard of that.

But is that really possible outside of daydreams?

- Daydreams?

(screen chiming) Oh, dang it.

You just have to ruin everything, don't you?

- Passive income is technically a real thing, but that's not how it works.

(upbeat music) (pen rustling) (footsteps tinkling) (graphics whooshing) (graphic rustles) - If I had a nickel for every time a person or client asked me to tell them how to create passive income, well, I'd have a lot of passive income.

Passive income, AKA, mailbox money or unearned income is the ultimate dream of every investor.

Investopedia defines it as, "Money earned from an enterprise with little or no ongoing effort."

- It's important to separate this from having an investment grow in value.

Let's say you buy a single stock, and three days later it's worth $100 more.

That is an unrealized gain.

If you sell the stock, pay the tax, and pocket the difference in cash, that is income.

Thankfully, there are options to create a stream of income that don't require you to directly trade your time and effort.

- Some people with specialized skills, talents, or training can create content such as an online course, a book, a piece of music, or intellectual property.

Believe it or not, we actually already made a Webby-nominated episode detailing how much content creators really make.

Spoiler alert, the majority of normal, non-celebrity creators are making pennies on the hour.

Plus, it's a ton of work, even for those who won the influencer lottery.

How often do you see even the most successful make a video about how burned out they are?

So income, possibly, (graphics boings) passive, no.

(buzzer buzzes) - You could also start your own business that eventually runs itself.

But there are a lot of steps to get there.

First, it has to be successful enough to create consistent profit.

(money rattling) Unfortunately, if you ask anyone who has a profitable business, they'll tell you that it is the opposite of effortless.

Secondly, you need to have the skill to make great hires, and eventually step back from your role while maintaining some sort of payout structure.

So, this too needs to be kicked off the passive list.

- So what does fit the definition of passive income?

Let's start with a shout out to Defined Benefit Plans, AKA, the pension.

I know they may seem like a thing of a bygone era, but they're not completely off the map yet.

Pensions are, for the most part, paid for and managed by the employer, or an employee organization like a Union.

The amount the person gets paid out is a function of how long they've worked and how much they were earning over that period of time.

Many of them can last no matter how long you live, and sometimes be transferred to a remaining immediate family member upon your death.

- Unfortunately, pensions within the private sector are pretty much toast.

Some unionized employees like the United Auto Workers and the Teamsters have fought to keep some version of pensions around, although not often for newer, younger employees.

Public school teachers, (graphic pops) active duty military members, (graphic pops) and federal state (graphic pops) and municipal government employees also tend to have access to them.

But in order for you to get enough money to live off of, you need to work in the same sector for a long period of time, and you can't access them until retirement age.

- Between the ages of 25 to 34, the average worker is going to hold four-and-a-half different jobs.

So if you do happen to gain a relatively small one during your time in the workforce, you can deal with it in a couple ways.

You could roll it out into an IRA and pick the investments yourself.

You could accept a lump payment and take the substantial tax hit, or just leave it alone, especially if you think you might go back to that job again at some point.

Ideally, you should talk to a professional about which approach is right for you, as there are a lot of factors to consider.

- Let's say you want a steady passive income stream, but you don't have access to a pension.

You could purchase an annuity.

An annuity is simply a guaranteed payout over a period of time.

Sounds great, right?

But this is serious buyer beware territory.

For one, the fees on these are super high due to the fact that the commission payout is massive.

Sales reps in the disguise of financial advisors push these hard, especially if you're within a certain age bracket.

Secondly, you gotta have 20 to 25 times more of what you want in an annual income before you start to take from it.

So if you put a million dollars in upfront, that will equate to a $40,000 to $50,000 annual income.

And yet again, these are usually only paying out in your golden years.

- So wait, I already have to be a millionaire and old to get paid decently on these things?

Well, where can I make money I can use in my younger years, like, rental properties?

- Well, more bad news is coming your way.

First off, unless you can buy a house in cash with no mortgage or a very small one, you're going to have plenty of overhead.

There's repairs, lawn upkeep, property taxes, HOA dues, insurance.

And if you do have to get a mortgage, the cost to borrow money for real estate just went up significantly.

Thanks to the Fed raising rates.

Many experts consider $100 to $200 a month net cash flow to be a good return.

- To be clear, rental properties aren't necessarily a bad investment, but they're best used to play a long-term game, focused on building equity.

That way down the road, you'll have a paid off house that can create a decent amount of cash flow.

We've talked in a previous episode about watching out for people online trying to convince you that rental properties are effortless cash cows.

Believe me, they're not making most of their money on their own properties.

They're making their money selling you the promise that you possibly could.

- Finally, there are securities that pay income.

For example, there are stocks that pay dividends.

This is when a company basically pays the stockholder's cash, which you can then choose to pocket or reinvest.

It is taxed, of course, but it is accessible outside of locked up retirement accounts.

Big, very established company stocks like Exxon and McDonald's are classic examples.

If you're curious about what they typically yield, you can look up their dividend yield online.

Bonds and mutual funds that are a combo of both can also pay interest or dividends.

- But here, again, you have to think about percentages.

Most options in this space that you can rely on will consistently yield somewhere between 2% and 5%.

You might think $100,000 is a lot of money and it is, but if you try to create consistent passive income from it now, you'd realistically be looking at $2,000 to $5,000 a year.

- Now, the options we've talked about so far are the most universally accessible ones.

There are others, of course.

The easiest one is just make sure any savings you have is in a high-yield savings account, which are paying more than ever, thanks to high interest rates.

It's still not much, but it's better than nothing.

You could get your car wrapped in advertising.

You could get a roommate.

But those aren't going to be enough to do anything close to quitting your day job, which is what most people are after when they start Googling this type of thing.

- Realistically, creating significant passive income between the ages of 30 and 50, requires a substantial amount of luck and effort.

You could luck into a job that pays you in equity, ends up going public and cash out at the right time.

- [Philip] You could also finagle getting a high-paying job with minimal debt, live on very little of it for like a decade and retire early.

These things do happen.

I mean, some people win the lottery too.

- [Julia] Think of passive income like a water well.

If you wanna be able to take a large amount of water for a long time, it has to be dug very deep.

- Creating it always requires time, muscle, specialized equipment, and most importantly, patience.