As a college student, I don’t think I have enough savings to begin investing in the stock market, but I’d like to start generating passive income before I graduate. What is the best way to go about doing this?
Passive income typically comes from one of three sources: (1) Real estate, (2) A business with a recurring/automatic sales cycle, or (3) Investment income.
As to which one is “best”–it’s just like that classic beer commercial where people are arguing “less filling” vs. “tastes great” about Bud Light beer. There’s not an absolute answer. But becoming a real estate investor requires some degree of upfront capital.
So then we move on to options two and three. While it is possible to come up with a business idea from which you could generate recurring sales with very little upfront cost… it’s not easy. If you have a great idea for some sort of product or service, by all means give it a go.
But to me, I’d encourage you to think about option three. While you may think you need tons of money to start “investing,” the truth is you can start purchasing dividend paying mutual funds and ETF in fairly small increments. Even investing in an S&P 500 index fund or ETF right now will generate a roughly 2% dividend yield. That may not sound like a lot, but held over the long run, that annual dividend will grow over time. If you do this by investing in your Roth IRA while you are young–meaning, start now!–you are positioning yourself to have a nice passive stream of dividend income down the road on a tax-advantaged basis to boot.
Also, if you have credit card debt, paying off that debt, in a sense, is a hybrid form of generating passive income in that by paying off that debt you are guaranteeing that you aren’t paying that interest rate either.
So while I wish I could give you a magic prescription for creating passive income out of thin air, in the vast majority of cases, it is done through one of these three pathways.