You can generate $500 per month in passive income through savings accounts, certificates of deposit, stocks, bonds, mutual funds and other investment vehicles. Each offers different returns, degrees of security, convenience and liquidity. And each requires a significant initial investment to generate the required amount of passive income.
A financial advisor can help you with your investment decisions.
How to Make $500 a Month in Passive Income
Passive income generally refers to money you receive automatically without having to do anything, such as work for pay. The most common way to generate passive income is to buy investments that pay you interest or dividends.
To generate passive income in this way, you have to invest money instead of making an effort. However, once you invest the money, you can cash checks or receive deposits into your bank account without any intervention on your part.
And there are many investments you can make to generate $500 monthly in passive income. Here are some of the most accessible and reliable:
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A savings account with a bank or credit union is as passive, safe and convenient as it gets. The best paying savings accounts yield about 4.5% annually. At that rate, depositing about $133,333 will net you $500 monthly.
Certificates of deposit (CDs) are relatively safe, pay out slightly better and are slightly less convenient than savings accounts. The best one-year bank certificates of deposits yield about 5% annually. So if you buy a $120,000 CD for 12 months, you’ll get about $500 in passive income each month.
Corporate bonds are riskier than bank deposits. But AAA-rated bonds are generally considered safe and have historically yielded just over 4%. If you buy $125,000 worth of AA-rated bonds, you can expect to pay the equivalent of $500 per month. That usually comes in quarterly, semi-annual or annual payments.
Shares of publicly traded companies that share profits with shareholders by paying cash dividends yield between 2% and 6% per annum. With that in mind, investing $250,000 in low-yield dividend stocks or $83,333 in high-yield stocks will net you $500 per month. Although most dividends are paid quarterly, semi-annually or annually.
Diversified securities portfolio
A diversified securities portfolio of 60% stocks and 40% bonds has averaged about 6.1% per year over the past decade, according to Vanguard. If future performance matches past performance, which is not guaranteed, $100,000 invested in a well-chosen 60/40 portfolio can grow by about $6,000 per year. Returns include both dividends and price increases, so you may need to sell some of your investments to receive $500 per month.
Exchange traded funds
Passively managed exchange-traded funds (ETFs) are cheap and easy to buy and produce returns that vary depending on whether they track stocks, bonds or other indices. For example, Vanguard’s High Dividend Yield ETF yields about 3%. You would need to invest about $167,000 to get $500 a month in passive income from that ETF.
Buying shares of a Real Estate Investment Trust (REIT) is a popular way to earn passive income from real estate. Listed REITs pay dividends at an average rate of about 3%. So you would need $167,000 to generate $500 in monthly passive income this way.
Other income options that are a little less passive can also provide a regular monthly income with varying degrees of effort. For example, dropshipping is a business model that involves setting up an online store and taking orders for products that go directly to a supplier, who fulfills them without you having to do anything other than accept payment.
Direct real estate investments, such as buying rental properties, can generate income that the Internal Revenue Service (IRS) considers passive income, entitling it to more favorable tax treatment than employment income. However, residential property management can require a lot of effort and attention on your part unless you pay a management company for the rentals, repairs, and other tasks.
It boils down
To generate $500 per month in passive income, you may need to invest between $83,333 and $250,000, depending on the asset and investment type you select. In addition to returns, you also want to consider safety, liquidity, and convenience when selecting the investments you use to generate monthly passive income. However, once you’ve made the decision and deposited your money, you can expect to receive regular payments without much or no extra effort going forward.
Tips for investing
Financial advisors help investors analyze different investment options and can help create an action plan to achieve their goals. Before investing in passive income investments, consider talking to an advisor to understand how it fits into your portfolio. Finding a qualified financial advisor doesn’t have to be d
ifficult. SmartAsset’s free tool pairs you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When investing your money, it is important to spread your wealth across many different types of stocks and bonds. This helps you gain exposure to multiple sectors of the market and capitalize on their growth. Our asset allocation calculator helps you select a profile that’s right for you based on your answers to simple questions.
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