Generating passive income

Dear Dave,

I’ve been following your plan, and I’d like to find a way to make a little more money on the side. Do you have any ideas for generating some passive income?

-Taiwan

Dear Taiwan,

First, I want to make sure you’re not getting involved with some get-rich-quick scheme, like a nothing-down real estate seminar. “Passive income” is a term that’s sometimes attached to those sorts of things.

Passive income is pretty simple; it’s income off of investments. In other words, it’s money you set aside that makes you money. There’s not any other income that is real passive income.

If you wrote a book and got royalties from the sales, some people would call that passive income. I get royalties from the books I’ve written over the years, but the people who would call that “passive income” didn’t follow me around while I was working my tail off to write and sell those things. To me, it wasn’t passive income at all; it was a business. Technically, the government would call it passive income. But they don’t have anything to do with reality.

When it comes to passive income, I only invest in two things — real estate, for which I pay cash, and good growth stock mutual funds. Active income usually takes the form of a small business idea or your career. That’s income that you, yourself, are literally creating.

But that’s how I look at that stuff. Some people may have a different view on it, but I like to keep things simple.

-Dave

It’s a smart buy!

Dear Dave,

I’m following your plan and trying to find different ways to save money. What’s a good way to decide whether or not you need full-coverage insurance on an automobile?

-Barbara

Dear Barbara,

I think you should look at a couple of things. First, you need full-coverage or collision if you don’t have a lot of money, because you’ll end up walking if the car gets totaled. You need this coverage even if it’s a $2,000 car. You might keep the deductible a little high to save on premiums and then, if something unexpected happens, you can cover the out-of-pocket expense with your emergency fund.

Let’s say you have $50,000 in savings. You’re driving a $5,000 car, and you decide to drop collision coverage because you’re thinking if you total it you can just write a check and replace the car. You can, but then you have to look at the other side of the coin. What does this collision coverage cost per year versus the $5,000 risk you’re taking?

I’ve run those numbers a few times, and generally I find collision insurance to be a pretty smart buy!

– Dave

EDITOR’S NOTE:Dave Ramsey is America’s trusted voice. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover, EntreLeadership and Smart Money Smart Kids. His show is heard by more than 8 million listeners each week on more than 500radio stations. Follow Dave on Twitter at @DaveRamsey and on the web atdaveramsey.com.

DAVE RAMSEY

Financial Guru