You’ll read stories on the internet about ways to earn $1,000 a month in passive income. What those headlines don’t tell you — at least not clearly — is that it takes quite a bit of money to earn $12,000 a year that way.
Say you were to open a 5% CD. Based on current CD rates, 5% is more than doable. But to earn $1,000 a month in passive income from a 12-month CD with that rate, you’d need to put a whopping $240,000 into it. Yes, really. And for most of us, that’s not realistic.
Here’s the truth about earning passive income: It can be done with much smaller amounts of money, but if you want to earn a substantial sum, you need to give it time.
That’s why I’d encourage you to start investing your money as soon as possible. You may find that you’re able to earn a nice amount of passive income through the years, even if it’s not a ton of money every month.
A $500 investment can go a long way
The more money you have, the more passive income you have the possibility of earning. But that doesn’t mean a smaller sum can’t do you a world of good.
Let’s say you have $500 to invest today. The stock market’s average annual return over the past 50 years has been 10%, accounting for good and bad years. If you were to invest $500 at that same return over 25 years, you’d end up with a little over $5,400. So that means you’re looking at almost $5,000 in passive income when we take out the money you put in.
When we break that down on a monthly basis, it’s not a lot. A $5,000 gain divided by 300 months is only about $17 per month, which doesn’t sound too impressive.
But your goal in generating passive income doesn’t have to be to earn tons of money each month. Rather, it should be to earn a large amount over time.
In fact, if you’re going to invest your money, you pretty much have to think long-term. Unlike CDs, which guarantee you a certain interest rate, there are no guarantees with stocks. Based on historical data, the market has a tendency to do well over time. But you need to give yourself a lengthy window to ideally ride out market downturns and come out ahead.
If you’re going to turn to stocks for passive income, don’t expect quick results. You need to be patient for several years if not decades.
Start investing as soon as you can
You don’t need a lot of money to earn passive income in the stock market. But what you should do is start investing as soon as you’re able to — even if you only have a few hundred dollars to build a portfolio.
We just saw that investing $500 over 25 years could lead to a $5,400 balance at a 10% annual return. If you wait three years to invest that sum, you’ll only be looking at about $4,000, or a $3,500 gain.
So if you’re sitting on even a little bit of money, consider opening a brokerage account or IRA as soon as you can. You’ll be thankful you did.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
