A Multi-Family Home

Want To Retire Early? 5 Steps To Setting Up Passive Income

by Arnold Gomez

If you're looking to retire early, having multiple sources of passive income is one key to making it work. Passive income is money that comes in on a regular basis but that you don't actively work on an hour-for-hour basis to receive. It comes in different forms, and some are more passive than others. Here is a handy guide to get you going.

Save and Start Small. You can't usually create a passive income stream with nothing invested. You will need to accept that some time and money is required to get things started. Begin your efforts by saving up some money to invest in a new income source — either put in all at once or a little on a regular basis. This may require some adjustments to your living style so that you can have extra money to save toward your long-term goal. Interest earned is your first passive income.

Invest in Equities. Investing in after-tax accounts is a good way to begin using that nest egg you've saved. Dividend paying stocks usually generate money once every quarter or annually. You should use these dividends for reinvestment until your portfolio grows sufficiently that you can shave off some of the dividend money for your own purposes. You may even be able to find a dividend portfolio pre-made for inexperienced investors. 

Peer to Peer Lending. A relatively new way to invest your money and gain a decent return is called "peer to peer lending." This type of lending consolidates the investments of many small investors and uses it to loan money to borrowers. The upside is that you will almost always get a much higher rate of return than with bank accounts and you aren't subject to the ups-and-downs of stock investments. The downside is that this is a risky business and you should never invest more than you can afford to lose. 

Purchase Rentals. Once you've accumulated enough through other means, it's time to go bigger in order to get bigger returns. Real estate is one of the best ways to do this. Look at the homes for sale in your area and consider what areas are likely candidates to attract renters regularly. This may include university areas, convenient suburban neighborhoods, and places with downtown access. If you can't afford an entire single family home separate from your own living expenses, you may want to look for a duplex — one in which you live in one half and rent out the other half. A duplex reduces overall costs because it's one building rather than separate ones — meaning less maintenance and lower buying costs. 

Be Patient. As you build your passive income generator, it's vital to have patience with the process. Small investments may only net you a few dollars per month until they grow larger. Rental real estate may require your own time and effort — and may not show a profit at first. Keep reinvesting any profits into the project and don't take money out until you are very secure. Start the search for new income sources as early as you can in order to be ready to live on the money when you hit your target retirement date. 

By following these steps, you can successfully build a steady — and growing — income that will help carry you through the decades to come.