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Another way to earn passive income is through investing. I’ve already mentioned real estate investing, but of course you can also generate income from many other types of investments such as owning stock in a company or earning interest with a certificate of deposit.
Investments can pay off with interest, dividends, and capital gains. Depending on the current tax laws and how much you’re earning, your investment gains may also be subjected to lower taxes than other forms of income, partly because governments want to encourage more economic growth.
Here are some general assessments to make with regards to different investments:
Facts – What are the specific details of the investment? For businesses this is called fundamental analysis. Look at the current state of the business, including its physical property, technology, intellectual property, cash, cashflow, debt, and industry conditions. This helps you evaluate the investment relative to other potential investments.
Performance – If this is a pre-existing investment, you can look at its past performance. While past performance can’t predict the future accurately, it’s an indicator of where things are headed. Technical analysis is an approach to investing that looks at past performance metrics to assess the likelihood that an investment will increase in value.
Risk – How risky is the investment? Does it seem fairly stable, or has it been experiencing high volatility?
Return – What is the expected rate of return? Do you anticipate a reasonable payoff relative to your investment and the perceived risk?
Control – How much control do you personally wield over this investment? If you buy common stock in a company, you may be able to exert a small degree of influence as a stockholder. If you sit on the Board of Directors, you can exert more influence. And if you’re the CEO, you can exert even more influence. This is a mixed blessing. More control means you have more abilities to steer your investments, but it also means you bear more responsibility if things go south.
Impact – Are you investing to make as much money as possible, or are you responsibly contributing through your investments? Where you invest your money, time, and energy will impact how you feel about yourself as well as how you influence the overall economy. Will you invest in weapons, junk food, soda, drugs, oil drilling, cosmetics, banking, entertainment, gambling, pesticides, cigarettes, factory farming, etc? If you put money in an S&P 500 index fund, you’re supporting all of these things and more. See for yourself where your money is going.
I tend to put a lot of weight on that last factor when considering investments. For this reason I even regard charitable donations as a form of investment. I may not see a financial return from those outlays, but I can still contribute to the impact.
If you try to invest from a place that doesn’t align with your values, you’ll probably end up sabotaging yourself. In the past I owned some mutual funds, but I dumped them many years ago. I prefer not to directly support companies like Monsanto, McDonald’s, and Philip Morris in pursuing goals that seem so out of alignment with my values.
My favorite places to invest are: (1) in my own personal growth, and (2) in my own business. Investing in personal growth means paying for growth-inducing experiences like books, audio programs, courses, seminars, coaching, training, travel, and more — anything that helps you grow. See The Best Place to Invest Your Money for details. Investing in a business that you own can help make the business more stable, so you can enjoy passive income from it for years or decades to come.
Some people confuse trading with long-term investing. Trading is closer to active income, whereby you buy and sell quickly and repeatedly, making gains on these exchanges. Even if you do well with trading, your income stops when you aren’t actively working. Long-term investing is a more passive approach, whereby you do most of your work up front to select good investments, then (hopefully) watch them increase in value with minimal maintenance on your part. If you’re checking on a stock price every day, that isn’t particularly passive.
While the admonition “it takes money to make money” can apply to investing, there’s still plenty of room for people who can skillfully invest other people’s money, sharing in the gains. Whether you have money to invest or not, some degree of skill is important, either skill at picking investments or at picking investment advisors. These skills can of course be developed over time, regardless of your starting point.
I can’t personally advise you much on becoming a pro investor since it hasn’t been a serious interest of mine. I feel it’s important to mention it in this series for the sake of thoroughness, but if this is your preferred vehicle, you’ll need to seek out other resources for more specific help.
The main contribution I want to make here is to encourage you to think carefully about the long-term impact of your investments on the world as a whole. You’ll find it much easier to invest in alignment with your values since you won’t be fighting a part of yourself (i.e. less self-sabotage). The good news is that there’s still plenty of money to be made from intelligent investments that create positive ripples for others. There’s no need to settle for harmful investments that violate your values and leave you feeling conflicted and incongruent.