The Best Passive Income Tool for the 9-5 Crowd (and $50 for free!)

Basics of Investing and Wealth Management

Investing may sound complex, and it can be. But investing shouldn't be complicated, and it doesn't have to be. The easiest way to get started, whether you have a lump sum to invest, or want to invest every paycheck, is by index investing. Index investing is one of the few proven ways of compounding interest effectively and considered by many the best way to achieve passive income over time. 

What is a stock market index?. It is essentially a numerical score based on the performance of a collection of companies. If you want to further your understanding of the different types of indices out there, or are interested in learning more about finance, Investopedia has many of the important terms defined in an easy-to-understand fashion. 

When we index invest, instead of trying to guess which stock is the next Google or Amazon, we can diversify away a lot of our risk by spreading our money into hundreds of companies. If one fails, or doesn't perform as well as we had hoped, we still make a positive return on our investment because the other stocks in the basket will have performed favorably. 

Index investing reduces our overall risk, just like the saying to not put all of our eggs in one basket, the same principles apply to long term investing.

On the opposite end we have day trading. Buying and selling stocks, or day trading, is a good way for the average person to become disappointed with the stock market. It's easy to not make any progress with a strategy of constantly chasing returns. This is because for the most part it is very difficult to predict the future stock performance or earnings of any one company, or even sector.

A long-term view ignores short term fluctuations in the stock price, which just like the rollercoaster, goes up and down. When we hear news or a hot tip about the next big stock, we should ignore all this and focus on long term returns of 5, 10 years, and longer.

Employer Sponsored Plan

Before you do anything on your own, check to see if your employer has a retirement account that matches your contribution.

If they do, you should participate in this, as it is essentially free money. If you contribute 5% of your income for example, and the employer gives also 5% that is a good deal. 

My advice is to contribute up to the maximum of the match. Here, you are building for your future income when you are no longer able to work, or don't want to work. Since you are going through your employer, what you can invest is usually more limited than if you were to open a brokerage account. 

But you are still likely to find good options from the menu. Continue reading to learn more about what I consider wise ways of growing your assets so that they can eventually produce the passive income we all dream of. 

Invest more through a brokerage account

After you have contributed up to the maximum matched, it's wise to open a taxable brokerage account. If you want to get started, you can use the following link and get $50 for free today by opening an investing account! You don't have to use SoFi to invest, but you may want to since they can also offer you other great services like a savings account that pays almost 5%!

Don't let the word tax scare you. A standard brokerage account gives you the freedom to sell your portfolio for things that you actually need. Like a house, car, you child's education, etc. 

And depending on your income you may end up paying only a small percentage as taxes. But make sure you consult with a licensed professional before committing a substantial amount if you think your tax situation warrants it (this may apply more to high income earners). 

Getting started with a Focus on Costs

Don't fall for active management. The commissions, advisor fees, and fund fees will kill your returns. A 1% advisor fee plus a 1% fund expense ratio will really put a dent in your wallet. This is highway robbery! Especially in these days of commission fee brokers.

What is active management? This usually refers to either a mutual fund or an exchange traded fund where the fund managers are trying to guess which stocks will become the next Apple or Google. This almost always comes with a high price, even though you are not swiping your card to pay for it. The price in this case comes out straight out of the value of your investment. And in the long run the .5%-1% in management fees can compound to hundreds of thousands of dollars!

Remember that these fees are paid regardless if the fund managers are making money for you!. So even when your portfolio is down for the year they still get paid!. They get richer from your loss!.

Index Invest

Choose passively managed funds from discount brokers like Fidelity, Charles Schwab, SoFi, etc. You can't go wrong with an expense ratio of less than .1%. 

Stick with funds that track either well known indexes like the S&P 500 (500 largest publicly U.S. traded companies), choose funds that invest in all the small, medium, and large public companies in United States, or choose my personal favorite style of investing which is in the worldwide stock market. 

To reduce your risk to any one country, the Vanguard Total World Stock ETF can smooth out the ups and downs and make you sleep better at night. Type in VT in the search bar to start investing after you have set up your account.

Stay away from speculative investments like crypto, partnerships, or whatever new craze you're being sold. Partnerships and other private equity investments should be left for the more experienced.

Generally, stocks outperform bonds in the long run, so if you don't need the money in the next 5-7 years, my preference is for stock investing. Stocks have a proven record of providing solid returns when held for an extended period.

So, if you are more comfortable with your investments fluctuating more in the short term invest in an index fund that is 100% stocks. Otherwise, if you wish to reduce the volatility of your portfolio, choose a fund that has a bond allocation. Investing in a passively managed index fund that holds stocks from the entire world can also reduce how much the value of your portfolio fluctuates. 

You can't go wrong with almost any passively managed index fund; my suggestion is to skip funds that track only specific sectors of the economy like technology or healthcare. Stocks in these sectors can quickly become overpriced when the demand is there, and you may end up overpaying for the risk you are taking. 

Invest Consistently

Doing well in anything, including investing, requires repetition. Investing a portion of a paycheck only once won't get you the outcome you hope. But doing this every time you get paid will. Just remember to be realistic with your expectations. Don't expect to double your money every year.

Investing periodically is also known as dollar cost averaging. Dollar cost averaging also keeps you disciplined by forcing you to live below your means. Investing from every paycheck also helps with reducing the anxiety from parting with a large sum of money all at once.

Ignore the Noise 

Unless you are in a real emergency, don't sell if the market is down!. That is a sure way to lose money. Understand that all investing has risk, in fact everything you do has a level of risk!.

It's also important to have a goal for your money. Ask yourself why am I investing? Do I need a new car, house etc.? Or maybe I just wish to donate the money to my kids, charity, etc. This helps you to stay focused because it helps you understand your decision-making process.