May
26
2023
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5 Smart Ways to Handle Supplemental Income

By | Budgeting & Goals, Growing Wealth, invest, Investing | Comments Off on 5 Smart Ways to Handle Supplemental Income

Supplemental income is money that is earned above and beyond a person’s “regular” income, which, for most people, is earned through working a job.

Supplemental income could include income earned through a side hustle, or it could include money from a regular job that is extra: bonuses, overtime pay, tips, commissions, and so forth.

For many people, supplemental income can amount to “extra” money beyond what’s needed to cover their regular expenses. And there are some smart ways to handle that extra income, which may help people reach their financial goals sooner.

What Is Supplemental Income

As noted, supplemental income is money that is earned or otherwise accumulated beyond a typical income stream, like a paycheck. That can include bonuses or tips earned while working a job, too.

Supplemental income can also be earned in the form of a commission, by accumulating dividends on investments, or even by working a second job or side hustle.

There are numerous ways to tap into supplemental income streams, though that doesn’t mean that it’s necessarily easy. You should also know that there are generally two types of supplemental income: Active, and passive.

•   Active income: This is often defined as trading time for money. The person puts in time, whether that’s through taking photographs for websites or walking dogs, and is paid for their services in exchange. It’s a typical job, in other words.

•   Passive income: This kind of work involves little to no active investment in time once the gig is established. It could involve selling an uploaded ebook or affiliate marketing, as two examples.

For many people, a side hustle or second job is likely the quickest route to earning supplemental income. But there are government programs out there, too, that can help those in need, like the Supplemental Security Income program (SSI).

A Note About Supplemental Security Income

Supplemental Security Income (SSI) is a program administered by the Social Security Administration. SSI provides payments to people over the age of 65 who have a disability, including being blind or deaf. To qualify for Supplemental Security Income, people must also have limited financial resources, in addition to meeting the age and disability requirements. The purpose of the program is to help people meet their basic needs.

As the program is designed to help people meet their basic needs, some of the suggestions for handling supplemental income may not be applicable to those earning SSI benefits.That’s because those who do receive those benefits likely won’t have much room in their budget for additional spending, or the need to find ways to deploy that additional income — they’ll need it to cover their basic expenses.

Launching a Side Hustle

When choosing a side hustle or second job, it makes sense to pick one of interest to you; or, even better, one that inspires passion. This can help to prevent boredom and make it more likely that time and energy will continue to be invested in this income-generating activity. What hobbies, for example, can be monetized? Blogging? Making crafts or designing websites?

Ask yourself further questions: How much time can be invested in this side hustle? Can the required time ebb and flow as demands at the main job fluctuate? What resources are available to get started? And, perhaps most importantly, what’s the estimated earning potential?

Having a second job or side hustle isn’t terribly uncommon these days, as many people either need the extra money to make ends meet, or are looking for ways to pad their earnings to add to their savings or investment accounts.

One benefit of side hustles that are based on passive income is that, although work typically needs done up front to establish the side hustle, it shouldn’t need ongoing active involvement. And whether you’re renting out a room in your house, monetizing a blog, or writing ebooks to earn supplemental income, it’s important to keep some things in mind as you start to see that income roll in.

Tips for Using Your Extra Income

1. First, Manage Your Income Taxes

When working for an employer, relevant income taxes are typically withdrawn from each paycheck but, with a side hustle (one that doesn’t involve working for an employer and receiving a paycheck, that is), the worker is responsible for paying federal taxes, FICA, Medicare tax, and any state and local taxes on net income.

That’s because a “hustle” or “gig” is typically a form of self-employment. To help, the IRS has created a Gig Economy Tax Center with plenty of resources and pieces of important information, including that income taxes must be paid on side gig income of $400 or more annually.

Those earning money from a side gig may also need to pay estimated quarterly taxes. The deadline for these payments are:

•   April 15 for payment period January 1–March 31

•   June 15 for payment period April 1–May 31

•   September 15 for payment period June 1–August 31

•   January 15 for payment period September 1–December 31

At the tax-filing deadline, (typically mid-April), a Schedule C usually needs to be filed for people earning money in a self-employed side gig — and, when earning supplemental income, it’s important to deposit enough in a bank account so that funds don’t fall short when tax returns need to be filed. What’s left over after taxes are planned for can be spent in a variety of ways, some ideas might include:

•   Paying off “bad” debt.

•   Establishing an emergency savings account.

•   Saving and investing.

•   Enjoying some discretionary spending.

2. Paying Off “Bad” Debt

Bad debt can be defined, in general, as debt you acquire that results in a net loss. For example, going into debt for a vacation, a big party, clothes and/or gadgets doesn’t add to your net worth. Going into debt for your education or home may gradually add to your net worth in the future.

Bad debt can also refer to loan or lines of credit with higher interest rates, and which are harder to pay off as a result. Supplemental income can be used to pay this debt down or off.

Debt management plans to pay off debt include the snowball or avalanche methods — and a combo of the two, the fireball method. Different strategies work better for different people, so it can be worth experimenting with them to make the best choice.

With the snowball method, list bad debts by the amount owed, from the smallest to the highest. Include credit card debts, personal loans, and so forth. Then, make the minimum payment on each but put extra funds on the one with the smallest balance to get it paid off. Once that balance is zero, home in on the debt with the second smallest balance and keep using this strategy until all bad debt is paid off. Avoid using credit cards during this time.

With the avalanche method, list bad debt in order of its interest rate, from highest to lowest. Make minimum payments on all of them and put extra funds on the one with the highest rate. Pay it off and then move to the next highest rate, and so forth.

With the fireball method, take “bad” debt with interest rates of 7% or more and then list them from smallest to largest. Make the minimum payment on all and then put excess on the smallest of the “bad” debts. Rinse and repeat.

3. Establishing an Emergency Savings Account

Another smart idea is to put supplemental income into an emergency savings account. This can be accomplished in conjunction with a debt payment plan (put half of the excess funds into an emergency account and use the other half to pay down bad debt, for example) or as a single focused goal.

Funds in this account are intended for use if a financial emergency occurs. This can be a leaky roof that requires immediate attention, a significant car repair, or unexpected medical bills. Having a robust emergency fund can help to prevent the need to rely on credit cards to address unanticipated expenses.

It is commonly suggested that emergency savings accounts should contain 3-6 months’ worth of expenses. So, add those monthly bills up and multiply by three — and also by four, five, and six. This gives a range of the rainy-day fund’s goal.

4. Saving and Investing

You could save or invest your extra money! This can include saving for personal goals, from a down payment on a house to a vacation fund, and or for retirement. What’s important is to prioritize how it makes sense to use extra money being earned and then save and invest to help meet those goals. How you save or invest that money would be up to you, but you could look at some common investment choices including stocks, bonds, mutual funds, and alternative investments, and more.

5. Enjoy Some Discretionary Spending

Once the financial “need-to” items are checked off the list, it can be okay to use some supplemental income to have fun. You could update your wardrobe, buy a new video game, take in a movie, or even go out to a nice dinner. If it’s within your budget parameters, treating yourself every now and then can be a nice thing to do.

Plus, getting a taste of the finer things may help keep you motivated to make sure your spending stays in check and that you stick to your budget going forward.

The Takeaway

Supplemental income is extra income earned beyond your primary income stream, and finding ways to drive supplemental or secondary income can help you reach your financial goals sooner. It can also help you free up some room in your budget to potentially treat yourself every now and then.

You can also put that extra money to work, by saving it and earning interest, or investing it for the future.

Ready to use extra funds to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Apr
18
2023
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39 Passive Income Ideas to Build Wealth in 2023

By | Budgeting & Goals, Life & Career | No Comments

With inflation and interest rates rising, many people are looking for ways to generate additional income these days — and finding reliable sources of passive income, which require less effort than most jobs — has become particularly desirable.

Creating and managing passive income streams isn’t a truly passive activity, however. Generating passive income usually requires upfront work, or sometimes a substantial investment to get the ball rolling. And depending on what your passive income source is, whether you’re renting out property or selling a product via online platforms, you’ll likely have ongoing tasks to keep the money coming in.

That said, passive income can in some cases deliver more income with less effort than a traditional job that requires a fixed number of hours per week.

What Is Passive Income?

Passive income is money that you earn without active involvement. In other words, it is income that isn’t attached to an hourly wage or annual salary. Passive income streams could include things like cash flow from rental properties, dividend-yielding stocks, sales of a product (that requires little or no effort), royalties, and more.

Essentially, these side hustles can help you earn money without contributing much, if any, active effort. If you are paid for a service you perform, that’s active income — you have to put in time and energy in order to get paid. If you can continue making money while staying mostly hands-off, that can be a form of passive income. That doesn’t mean you won’t have to put work in up front to get started — you probably will. But besides some maintenance, passive income shouldn’t require your active involvement.

There are obvious benefits to these low-effort side hustles. Earning more money without putting in more hours offers the opportunity to make extra cash without burning yourself out. If you’re successful enough, it might even give you the freedom and flexibility to quit your day job and do whatever you want instead, whether that’s going to school, traveling, writing, or making art.

39 Passive Income Ideas to Help You Make Money

There are a number of ways to earn passive income. Some options, like the following types of passive income, take relatively little active supervision.

1. Open a High-Yield Savings Account

High-interest savings accounts are an alternative to traditional accounts, and they’re attracting more attention these days thanks to higher interest payments that might be 2% or more. By simply putting your money in the bank, you may be able to start to earn passive income on it. If you invest in an FDIC-insured account, the first $250,000 of your money is protected. There are both banks and online platforms which offer high-yield savings accounts.

Savings accounts are generally appealing because they are a separate place to store money you don’t necessarily want to use on day-to-day expenses. For example, it could be a good place to save for emergencies, or even to save for a vacation or a move across the country.

When you find a high-interest savings account, take a look at the fine print. What conditions are attached for you to get that rate? The financial institution may require you to have a certain amount of money deposited into that account each month, maintain a certain balance or have your bills automatically deducted from it. You may need to use your debit card a predetermined number of times, as yet another example — or be limited in the number of transactions that can take place each month.

2. Invest In a Business

Although this may take an up-front investment, buying into a business and becoming a silent partner can be another passive income source.

Even if the company you are thinking of investing in seems solid, it’s important to have an understanding of the challenges the organization may face. There are some red flags to look out for, such as a company whose revenue is earned from just a couple of clients — or just one client — as opposed to several.

It’s also important to lay out the exact terms of your investment and compensation.

3. Become a Peer-to-Peer (P2P) Lender

Peer-to-peer (P2P) lending is another type of crowdfunding that allows people to borrow money from individual investors. Through these sites, you can be matched with an individual seeking a loan, and lend your money at a rate that could be higher than the usual bank rates.

That’s because investors taking part in peer-to-peer lending tend to bear the bulk of any risk. It is possible that borrowers will default on their loans, leading to a higher risk if an investor were to lend with a lower credit rating, for example. Returns are never guaranteed and while investors will receive a return on the money they invest, they could also lose some or all of it in the long run.

💡 Learn more: Understanding How P2P Lending Works

4. Buy a Rental Property

Another popular passive income source is rental property. You might want to purchase a home to rent out to an ongoing tenant to earn rental income or list a property on a short-term rental site. Hiring a property management company lessens your day-to-day involvement, thereby making this venture a more passive income strategy than active.

Obviously, setting up this type of income requires a pretty big outlay, and it may be a while before your rental property generates a profit over and above the many expenses required to run it. In addition, there are always risks in the rental markets to keep in mind.

💡 Learn more: Investment Property Guide for Beginners

5. Invest in Crowdfunded Real Estate

If you don’t have thousands of dollars to spend on a piece of property, you can always check out your options on crowdfunded real estate sites. These may require a smaller initial investment, and likewise the costs are also shared.

Crowdfunded real estate investments can be complex, however, and you’ll want to balance the risks and rewards.

6. Invest in Index Funds or Dividend-Paying Stocks

Dividends are a part of many company’s profits that get passed on to shareholders. Company dividend payments can be quarterly, monthly or semi-annually, and are usually fixed in terms of the number of shares an investor has.

There is no guarantee that investing in dividend-paying stocks will continue to earn you passive income.

💡 Learn more: A Beginner’s Guide to Investing in Index Funds

7. Invest with an Automated Advisor

If you’re just getting started with investing, you may want to use automated investing tools to help you choose the appropriate allocation of assets for your goals.
Typically, an automated platform — also called a robo-advisor — is a digital investing service that provides you with a questionnaire so you can establish your financial goals, risk preferences, and time horizon.

On the backend, a sophisticated algorithm then recommends a pre-set, automated portfolio that aligns with your responses. These portfolios often have lower account minimums compared with traditional brokers, and the portfolios themselves are typically comprised of low-cost exchange-traded funds (ETFs) — which adds to the cost efficiency of some robo products.

You can use a robo investing as you would any account — for retirement, as a taxable investment account, or even for your emergency fund — and you typically invest using automatic deposits or contributions. The allocation in each portfolio is usually pre-determined, and investors cannot change the investments.

Tools such as SoFi’s Automated Investing allow you to automatically invest each month and potentially grow your portfolio over time.

8. Start a Retirement Account

When you open your retirement account, you can choose to invest it however you want. For example, you could open an individual retirement arrangement or IRA.

One way to earn income in a retirement account is by investing in mutual funds. You can choose the level of risk you want to take with your money by finding a mutual fund that is higher or lower risk.

💡 Learn more: 3 Easy Steps to Starting a Retirement Fund

9. Join an Affiliate Program

When you join a company’s affiliate program, you earn a commission from every product that someone purchases from that company. All you have to do is post the link on your blog, website, or social media pages. Amazon Associates is a great place to start.

10. Rent Out Your Car

Another one of the best passive income opportunities is renting out your car on a site like Turo. It’s basically the Airbnb of cars, and, according to Turo, the average annual income for one car on the site is $10,516.

If you have a clean driving record as well as a newer car, consider getting in touch with a car advertising agency. You simply drive around town with ads on your car and easily generate passive income.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning up to 4.20% APY on your cash!

12. Rent Your Parking Space

Do you have space in your driveway that you aren’t using? Then rent it out on platforms like Stow It, where you can find people who will pay to rent out the space.

13. Rent Storage Space

If you have extra space in your garage, shed, or storage unit, then you could start earning passive income by using a peer-to-peer storage site like Stashii to find people who need your space.

14. Invest in Storage Space

You may not have space to store other people’s things, but you might consider investing in a real estate investment trust (REIT) that focuses on storage units. For example, one option is Public Storage, which has ownership or interest in 2,548 properties located in 38 states.

15. Rent Your Bike

Perhaps you don’t have a car, but you do have a bike that’s just sitting around. Your bike could be a lucrative passive income source, especially if you live in a high-traffic area. List your bike on Spinlister to get started.

16. Airbnb or Rent Out a Room

Even if you don’t own a rental property, with your landlord’s permission, you may be able to rent out a room in your apartment or list it on Airbnb and start adding to your passive income streams.

17. Pet Sit in Your Home

If you love pets, you can earn passive income by welcoming pets into your home while their owners are on vacation. For instance, you could charge $30 to $80 per day just for running a doggy daycare. You can gain clients through word of mouth or use a site like Rover to find customers.

18. House Sit for Someone

When your friends go out of town, they may need someone to stay in their home and do simple things like water their plants and collect their mail. You can easily make money and have somewhere new to stay for a little bit. Along with making yourself available to friends, you can sign up to be a house sitter on HouseSitter.com.

19. Buy and Sell Domain Names

Some domain names are cheap, while others cost a lot of money because they are in high demand. One thing you could do to start another passive income stream is to purchase domain names you think will be popular. Purchase low for around $10 to $100 and then sell them for a much higher price later on.

20. Rent Your Tools

Have you ever done a home improvement project that required you to purchase tools? You may never need to use those tools again. Thankfully, now you can rent tools, and rent out your tools, on peer-to-peer platforms such as Sparetoolz to earn passive income.

21. Invest in Royalties

Let’s say you don’t have any songwriting ability, but you would like to make money on other artists’ work. You can invest in royalties through Royalty Exchange and earn passive income on the intellectual property.

22. Purchase a Billboard

You can make thousands of dollars per month if you own a billboard where companies can advertise their products and services. Do your research and make sure you get the right permits before committing to a billboard.

23. Purchase a Blog

If you don’t have the time or energy to create content for your own blog, then look into ones that are already successful and see if the owners are willing to sell. You could also hire someone to manage your blog so that you’re truly earning in a passive way.

24. Create an Online Course

If you have a special skill or knowledge about a certain topic, you may be able to create a video course where you teach people about that topic and charge them to take the course.

25. Sell Digital Products

You may want to research online platforms where you can sell everything from digital art to e-books. Whether you’re an artist, graphic designer, or writer, you can create digital products to sell online.

26. License Your Photos

Many companies, bloggers, and individuals use stock photos on a regular basis. You may be able to upload your best photos to stock photo sites and earn passive income on them.

27. Create a Mobile App

If you’ve been dreaming about an amazing phone app that you think a lot of other people would use, you may want to look into hiring a development team to create it.

28. Sell a Product

You may be able to earn passive income through sales of a product that you create. This could be a book that you write or a physical product that you design and make. You might also list items you already own on sites like eBay and earn extra income through those sales.

29. License Your Music

Do you love to write songs? Then you could license your music and start earning passive income. You’ll just have to team up with a music licensing company to get started.

30. Self-Publish a Book

Through platforms like Amazon’s KDP, you can self-publish a book and earn a royalty on it every time someone makes a purchase. You will be able to set the price of your book and be in full control of your book’s Amazon page, where you can list pictures of the book, reviews, and videos promoting it.

31. Sell Blank Books

You can start selling books online without having to write anything. How? By focusing on blank books, such as journals, sketchbooks, and planners. Simply find a design you believe will appeal to people and begin collecting royalties when people buy your books.

32. Create Greeting Cards

Another artistic endeavor that could be a good passive income stream is creating greeting cards that you sell to a wholesale or retail stationery company that accepts independent artist submissions.

33. Sign Up for Dropshipping

If you want to sell products online but don’t want to store any of the goods, you could always look into dropshipping to create passive income. With dropshipping, you don’t have to have much money to start since you don’t need inventory to fulfill orders for customers.

34. Start a Blog

Blogging seems like a pretty cool space to operate in and gives you a lot of creative freedom. You can make your blog all about crafts, share tutorials, ideas, and more. It’s up to you how your space operates.

Blogging might seem like too much work to many people, but it doesn’t have to be a full-time job for everyone. For some people, blogging can be fun after a day at the office — and, with time and effort, it could turn into something more lucrative.

Here are a few ideas on how you can make passive income from blogging:

•   Affiliate marketing

•   Google AdSense: Cost Per Click and Cost Per Impression

•   Sponsored posts

•   Selling products

35. Start a YouTube Channel

If you enjoy creating videos more than writing, then consider starting your own YouTube channel. Once you get enough viewers, you can begin to generate passive income through YouTube advertising.

36. Publish an Ebook

Like an online course, an ebook is a way to share your expertise with the world. Anyone can self-publish a book online through services like Amazon’s Kindle Direct Publishing, iBooks Author, or Kobo Writing Life.

The percentage of royalties you earn varies depending on the publisher. Of course, the more marketing you do, the more copies you’re likely to sell — and there’s no shortage of online marketing strategies to investigate. But once you write and publish the e-book, it’s out there ready to generate passive income for you.

37. Create a Podcast

Podcasts are still popular, and they can generate some passive income streams for you. If you start a podcast that resonates with people, then you can grow your audience and monetize your show by sponsoring with ad partners. If you get enough listeners, you may be able to sign up for podcast advertising networks.

38. Start an ATM Business

When people are out at a bar or nightclub or they’re frequenting a cash-only business, they may need cash right away. If you own an ATM business and you place your ATM in high-traffic locations, you could start to generate passive income through surcharge fees. Typically, you could earn around $3 per withdrawal.

39. Start a Vending Machine Business

Similar to an ATM business, a vending machine business allows you to use your creativity and determine high-traffic areas where you could make a lot of money. If you buy in bulk, you’ll be able to save on the snacks and drinks you purchase for your machines.

Potential Benefits of Earning Passive Income

There are only 24 hours in a day. If you go to a job each day that pays you a set amount of money, that is the maximum amount that you’ll ever make in a 24-hour period. That is called earned income.

By investing some of that earned income and creating sources of passive income, you may be able to increase your earnings. Diversifying your income stream may also improve your financial security. Some benefits of passive income are:

•   More Free Time: By earning money through passive income sources, you might be able to free time in your schedule. You may choose to spend more time with your family, pursue a creative project or new business idea, or travel the world.

•   Financial Security: Even if you still plan to keep your 9-to-5 job, having multiple sources of income could help increase your financial security. If you lose your job, become sick, or get injured, you may still have money coming in to cover expenses. This is especially important if you are supporting a family.

•   Tax Benefits: You may want certain legal protections for your personal assets or to qualify for tax breaks. Consulting with an attorney and/or tax advisor to explore setting up a formal business structure like a sole proprietorship, a limited liability company (LLC), or a corporation, for example, might help you decide if this is a good route for your particular situation.

•   Location Flexibility: If you don’t have to go into an office each day, you’ll be free to move around and, possibly, live anywhere in the world. Many passive income streams can be managed from your phone or laptop.

•   Achieve Financial Independence: The definition of financial independence is having enough income to cover your expenses without having to actively work in order to cover living expenses. This could allow you to retire early and have more freedom to live your life the way you choose. Whether you’re interested in retiring early or not, passive income can be one way to help you reach financial independence.

•   Pay Off Debt: Passive income may help you to supplement your income so that you will have the opportunity to pay off any debts more quickly.

Potential Downsides of Earning Passive Income

Although it might sound like a dream come true to quit your job and travel the world, earning through passive income is not quite that simple.

•   Earning Passive Income Is Not a Passive Activity: Whether you’re generating passive income through a rental property, running a blog, or in another way, you will still need to put in some time and effort. It takes time to get these income sources up and running, and they don’t always work out as planned.

If, for example, you run an Airbnb, you have to maintain the property, ensure a high-quality experience for guests, and address any issues or concerns guests may have to secure positive reviews.

•   Passive Income Requires Diversity: In order to earn enough passive income to quit your job and cover all your expenses, you would most likely need more than one source of income. Although you may no longer need to clock into a 9-to-5 job, you will likely still need to spend time managing multiple income streams.

•   It’s Lonely at the Top: It might sound great to never have to go to the office again and to have the freedom to travel, but earning money through passive income can become lonely.

Not having anyone to talk to during the day might make you feel lonely, and if you aren’t self-motivated, you may find it difficult to stay on task if you need to manage your passive income streams.

•   Getting Started May Require Investment: Depending on how you plan to create passive income, it may require an initial financial investment. You may need money for a down payment on a rental property, the development of a product you plan to sell, or for investment into dividend-yielding stocks.

Managing Passive Income Streams

No matter which type of passive income you choose to pursue, it’s important to keep track of your finances and both your short-term and long-term financial goals.

Tracking multiple sources of income in a monthly budget can be a complex task. To be profitable, it’s important to pay attention to how much money you put into the maintenance of your passive income stream(s), such as property upkeep or monthly online services.

SoFi Relay is one option to simplify how you manage your income streams because it allows you to see all of your financial information in one place. In the app, you can keep track of your monthly income and create goals for your passive income, such as a home, vacation, or retirement, and automate your finances.

Other Types of Income

In addition to passive income, there are other types of income you can earn.

Earned Income: This is the most common type of income — money you make from a job. With earned income you are trading your time for money.

Profit Income: Profit income comes from the sale of a product after expenses have been deducted.

Interest Income: This can be money earned from one entity lending to another entity, such as a person, company, or bank. This can also be referred to as interest from accounts such as savings accounts and certificates of deposit (CDs) in which you receive a 1099-INT at the end of the year.

Dividend Income: Most dividend income is earned by the distribution of income from companies to shareholders owning stocks that pay dividends.

Rental Income: Rental income is earned when you rent or lease a house, car, or other property you own to someone else.

Capital Gains: This generally refers to profit (or gain) that is subject to taxation when you sell an asset such as stock or real estate. There are both long- and short-term capital-gains tax rates depending upon how long you held the asset before sale.

Royalty Income: Royalty income is generated when you own the rights to a piece of art, music, literature, or another asset licensed for other people to use, or from the extraction of oil, gas, or minerals.

The Takeaway

Establishing a passive income stream is one way to diversify your income and can help you build wealth and achieve financial freedom in the long term. There are a variety of ways to earn passive income, such as through investing, rental properties, and automated investing.

Some passive income sources require a financial commitment or upfront investment, such as purchasing a rental property, and others may require a time commitment. And passive income, of course, is rarely 100% passive. Often there is considerable time and effort that goes into setting up a passive income stream. And some sources of passive income (from investing, real estate, running a business or creative endeavor) require ongoing maintenance.

Once you’re earning passive income, you can think about where to put that money. Whether you’re able to generate a passive income stream from your investments, or that’s a goal of yours, consider opening an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds, and SoFi also offers an automated portfolio.

For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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Mar
31
2022
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17 Ways to Make Financial Freedom a Reality

By | Budgeting & Goals, Financial Independence, Growing Wealth, Investing, Terminology | No Comments

Ever dream of walking out of your job, free to pursue a project you’ve always dreamed of starting? Or going back to school without taking out student loans? Or having the financial freedom to leave an unhealthy relationship or location?

What about the option to retire at age 45 or 50 instead of at age 65 (or 80)? And upon retiring, dedicating your life to humanitarian work, raising your family, or tucking yourself away in your mountain cabin with hundreds of books?

Each of these opportunities could be afforded with financial freedom. Just as it sounds, financial freedom is typically defined as having the resources to do exactly as you please.

Below we highlight 17 ways to make financial freedom a reality.

What Is Financial Freedom?

While everyone’s financial freedom definition will be slightly different, it’s generally understood as being in the financial position to step away from traditional work. This is usually done by creating income streams from investments or a business.

Essentially, the notion of having financial freedom implies you’ve achieved financial independence to live for the rest of your life without traditional income.

Currently, there is a movement that is gaining in popularity called FIRE, which stands for “financial independence, retire early.” Self-proclaimed members of the FIRE movement often dedicate a great deal of energy to creating the terms of their financial freedom.

Whether or not you associate with the FIRE movement, the idea of financial freedom is useful for anyone who is curious about ditching the traditional 9-5 work schedule, who wants to stop living paycheck-to-paycheck, or who wants to step up their money game.

Even those who simply want a traditional retirement will probably want to become familiar with the concepts of financial freedom, as most people will be investing for their retirements themselves.

Financial freedom is generally achieved through amassing income-producing assets or creating income streams to cover your cost of living expenses. Another word for this is “passive income,” or income that is generated without you having to exchange your time for that dollar. The goal is to stop trading your time for money.

While it is feasible to save enough money simply to live off that cash into perpetuity, this means saving an incredible amount of money — and not running out. While you can aim for this, you may feel more comfortable building out one or more income streams, especially as you take into consideration the erosive powers of inflation.

17 Ways to Achieve Financial Independence

Achieving financial freedom will not happen overnight. It is certainly possible and it is within your capability, but it requires putting together a financial freedom plan and budgeting with financial literacy.

1. Determine Your Needs

A good first step toward financial freedom is determining how much money you’ll likely need to cover your costs once you achieve financial independence. Determining what you need can feel like a moving target, but this is important for planning the next steps in your journey.

2. Explore New Income Streams

You can explore opportunities to create new streams of income. Any property you own, including real estate, cars, tools, and appliances, can serve as money-making assets. You may sell these items, or you may explore opportunities to rent them out for a steady source of new income.

3. Consider Stocks

Whether you own individual stocks or diversified stock funds (mutual funds or exchange-traded funds), the stock market can be used to generate income. It helps to understand that a stock can make money in two ways.

First, through price appreciation, which is a stock growing in value over time. Second is through dividend payments, which are cash payments made by some (but not all) stocks and funds.

Though stocks have experienced a high historical rate of return, stock market returns are notoriously volatile, so you may want to gain some comfort before diving in headfirst as a strategy for financial freedom — whether through your own research or by consulting a licensed financial advisor.

4. Consider Bonds

You can consider investing in bonds as a strategy for growing wealth. Bonds are investments in the debt of a corporation or government, whether federal or local. You are essentially loaning them your money, and they pay you a stated rate of return, called interest, to use that money.

How much you earn in a bond will likely depend on interest rates in the prevailing economy. Bonds generally pay interest at regular intervals, such as twice a year, which can provide investors with a steady stream of income.

5. Consider Real Estate Leasing

Investing in rental real estate — such as single-family homes and multi-family units — is another way to create a stream of income. Generally, the goal with rental property investing is to collect rent payments that create cash flow beyond what is needed to cover all of the costs of owning a home, like a mortgage, property taxes and maintenance of the property.

This method of generating passive income often relies on leveraging your financial position — taking on debt in order to generate a profit on borrowed money. Paying cash for rental properties may give added peace of mind if you experience a period without renters in your property.

In this way, rental properties can be a risky endeavor and require plenty of research into the process, best practices, and into finding the right properties.

6. Generate Passive Business Income

Though passive income has become a catchall for all sorts of different income streams, it can also be used specifically to describe wealth you may generate as a silent partner in a business venture. For example, you can earn passive income by providing private financing to a private company in exchange for an equity stake in the venture and a share of its profits. This leaves you invested in a company without having to oversee or manage its day-to-day operations.

You may invest in private companies while still engaging in active work elsewhere. Active businesses could fall into side gigs, which we’ll highlight below as a way to bolster your income in the journey toward financial freedom.

7. Understand Financial Literacy

Financial literacy is having competence or knowledge in personal finance. This involves understanding debt and knowing how to budget. The path to financial freedom goes through financial literacy, and this runs the gamut of how you save, spend, earn, borrow, invest, and protect your money.

8. Conquer Mental Barriers

If you can’t envision yourself untethered from traditional employment, you certainly aren’t alone. This is not something that we are taught in schools or even by our parents by and large.

One of the first steps in your journey toward financial freedom may be to explore your beliefs about money and work. This may mean digging deep and learning about your relationship with concepts like worth, scarcity, and abundance. Such an exercise may help you conquer any mental barriers holding you back.

9. Reduce Bad Debt

A bunch of debt can make it very hard to become financially free. Debt not only reduces your overall net worth by the amount you’ve got in loans or lines of credit outstanding but also increases your monthly expenses.

To reduce debt, you may want to focus on expediting your payment of high-interest sources like credit cards and student loans. To make the process move faster, you might try to get a lower interest rate on your debts.

It’s worth noting that, typically, a lower interest rate may mean that your loan term will be extended. With student loans or a home loan, you could look into options like refinancing. For instance, with credit card debt, it may be possible to lower your interest rate by calling your credit card company and negotiating better terms.

Additionally, you’ll likely want to take on any new debt strategically. Debt can certainly be a useful tool for a future goal of building wealth, like using loans to finance an education in order to get a higher paying job or as an outlay on a business. But debt can also be misused, so be careful not to take out more debt than you absolutely need.

10. Seek Higher Wages

You can clip coupons all you want, but if you’re not earning enough to cover your bills, you aren’t going to be able to save enough to retire early and pursue your passions. For many people, figuring out how to earn more money in order to increase savings will be a crucial step in the journey toward financial freedom.

There are many ways to increase your income. First, you might want to think about ways to get paid more for the job that you’re already doing.

Many ask for a raise or more responsibility at work, or have a conversation with managers about establishing a path toward a higher salary. Earning more now can help you save more for your future needs.

11. Consider Side Gigs

As mentioned earlier, active businesses could fall into side gigs — small work endeavors that may help you on the journey toward financial freedom. You can consider picking up a “side hustle” or another way to earn money outside of full-time work. You can explore the gig economy as an independent contractor and generate supplemental income to your bread-and-butter job. This can help you build up savings for retirement or extra earnings to invest in stocks, bonds, and other securities.

12. Start Your Own Business

You could create your own full-time job by starting a business. Going into business has its fair share of risks, but a successful enterprise can generate wealth and pave the way toward financial freedom. Business owners can step aside at any moment and recruit new managers to run their business. Building and selling a successful small business can also catapult you into financial freedom.

13. Track Your Cash Flow

Using cash-flow management to monitor your income and avoid late payments on bills can build wealth. Borrowing money and having the available cash on hand to make any required interest and principal payments is known as debt service. You could implement a cash-flow management plan to pay off loan obligations early, which can move you closer to financial freedom.

Tracking your cash flow is critical to establishing a healthy budget. You can’t set a budget that you can reasonably expect to stick to if you don’t even know how much you’re spending in each category.

14. Minimize Costs

Buying things you don’t need can deplete your savings and make it harder to achieve financial freedom. You can maximize your savings by minimizing your costs. This doesn’t mean sacrificing your right to “life, liberty, and the pursuit of happiness,” but it does mean embracing frugality where sensible.

15. Live Within Your Means

One of the teachings of financial literacy is to live within your means. As mentioned earlier, having a bunch of debt can make it very hard to become financially free. Borrowing money makes sense when it advances your goals, but buying things you cannot afford is generally a recipe for disaster.

16. Consider a Savings Account

Achieving financial freedom means you have sufficient wealth or savings to live comfortably to your satisfaction. Opening and maintaining a savings account can get you accustomed to saving and introduce you to the concept of earning money on top of your money.

Depositing money into a savings account earns you interest, and a high-interest savings account can help you in the journey to financial freedom.

💡 Learn more about how high-interest savings accounts work.

17. Consider 401(k) Retirement Contributions

Employees can consider making contributions to a 401(k) retirement plan. A 401k is a type of tax-deferred retirement account sponsored by your employer, and you can begin withdrawing these funds without penalty once you turn 59 ½. Building a 401k nest egg can help you plan a future with financial freedom as your reality.

The Takeaway

Living life to your fullest satisfaction may require a degree of financial literacy. Paying bills, covering general expenses, and constantly managing a budget can feel like a burden, but saving money and generating wealth can provide much-needed relief.

If you are thinking about early retirement and achieving financial freedom, SoFi Invest® could help. This investment app allows you to trade stocks with no commissions and offers other tools that can help you build a savings nest egg.

Become a SoFi Invest member today and get complimentary access to our credentialed financial planners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
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