How to earn money while you sleep: income tips and traps

Whether you are working, saving or retired, the power of extra income is huge, and there are several strategies to achieve it.

Working for money is hard.

Making money while at home, tucked in bed and counting Zs, is much more enjoyable, although it takes effort to get the ball rolling.

It’s called passive income, and should be the goal of every saver, investor and retiree, money experts say.

“You don’t want to have to work for every dollar that you earn,” says MBA Financial Strategists director Darren James.

“That’s not what it should be about. The importance of compound interest is extremely beneficial – the more you can leverage that, the better you are in the long term.”

Compound interest – the process of earning interest on your interest, on your interest, and so on – was reportedly described by Albert Einstein as the eighth wonder of the world, and there are free calculators online to illustrate how it works.

Here are six strategies to earn income while you sleep.

1 SAVINGS ACCOUNTS

The simplest source is bank deposits, but even these have tricks and traps.

Many savers must jump through hoops – such as minimum monthly deposits or no withdrawals – just to earn a good advertised rate, some now paying above 5 per cent.

“If you are getting a rate that doesn’t start with at least a 4, you need to be looking around,” James says.

Money coach Karen Eley says patience is vital. Picture: Supplied

If seeking interest, avoid transaction accounts that often have interest rates around 0.1 per cent, and remember that you also pay tax on interest earned.

For this reason, people paying mortgage interest above 6 per cent are likely to be better off pumping spare cash into that rather than earning 2-3 per cent after tax on cash deposits, James says.

2 YOUR EXISTING STUFF

Money coach Karen Eley says think about existing assets that can generate an income.

“Renting out a property when you’re not using it, Car Next Door to rent your car out if it sits idle during the week or when you’re on holidays, storage space or a spare car park can earn income,” Eley says.

Online platforms also allow people to rent out their caravans or camper trailers, boats, swimming pools, clothes and much more.

3 GROWTH ASSETS

Shares, property, managed funds, real estate investment trusts and exchange traded funds are among assets that grow in value while producing income – via rents and dividends – that can be used or reinvested for later.

“Fortunately, today you don’t need a lot of money to start investing in shares and property with low cost trading apps and ETFs,” Eley says.

But patience is necessary, she says. “If you want shade today, you needed to have planted a tree 10 years ago. The same lesson applies to creating a long-term sustainable passive income.”

4 AN ETF FOR INCOME AND EASE

Investing in the stock market can take time and effort, but the boom in exchange traded funds in the past 20 years has made it much easier, because your money is spread across many different companies – often in line with an index such as the S&P/ASX 200 or overseas markets.

Investment platform Stockspot’s founder, Chris Brycki, says “broad index ETFs tend to increase in value over the long run, making it an effortless way to make money while you sleep”.

“Australian share ETFs already pay great dividends and pass on franking credits, making them useful investments for income-focused investors,” Brycki says.

“For investors who want a little more income in their portfolios we recommend the Vanguard Australian Shares High Yield ETF, which has a tilt towards dividend shares.

“You can consider getting a robo-adviser to manage and rebalance your portfolio so you can focus on more important things in life.”

5 INVESTMENT PROPERTY

Owning residential real estate is popular among Aussie investors and, while costly early because of interest repayments, rates, insurance and other expenses, a property can become a long-term income-producing machine.

MBA Financial Strategists director Darren James says working for every dollar isn’t fun.

As its value and rents rise over time, and the mortgage does not, investors eventually turn negative gearing into positive gearing – earning income while they sleep.

“If you’re considering real estate as a source of passive income, you’ll need to outsource property management,” Brycki says.

“Hiring a property manager can help handle tasks such as tenant management, property maintenance, and addressing ad hoc issues, allowing you to generate income without being actively involved.”

6 BUILD A BUSINESS

Savvy business owners have staff generating the income for them, while they focus on the bigger picture and eventually have more time for themselves.

“If you’re running a small business for passive income, aim to streamline operations to reduce your direct involvement,” Brycki says.

James says business ownership comes with challenges. “Working for an employer has a level of certainty – owning a business has a lot more risk, but a lot more potential reward.”

TIPS WHEN CHASING INVESTMENT INCOME

• Consider the tax implications.

• Diversify your money across several income-producing investments.

• Beware of products offering too-good-to-be true investment returns.

• Remember that investing for income is a long-term strategy.

• Understand transaction costs and any ongoing fees.

• If uncertain, seek professional advice

Originally published as How to earn money while you sleep: income tips and traps