So there comes a time in everyone’s life where you stop and think to yourself, “how do I make six figures in a year through investments?” All right fine maybe it doesn’t exactly happen like that but chances are since you clicked on the title, you’re at least mildly interested in the combination of investing index funds and passive income. Or maybe you don’t care about any of that, but you saw a hundred dollars a day and you realized that’s a very SEO friendly amount that seems reasonable enough for me not to be skeptical. Whatever your reasons, I just want to use this as an opportunity to combine three investing strategies all in one post since statistically this is the simplest way to build wealth for 99% of investors, it takes the least amount of time, the entire topic could be thoroughly explained in under 15 minutes, and come on it’s not like anyone would say no to earning an extra $36,000 a year without having to answer to a boss who tells you not to read blog posts while you’re at work.
Yeah, I’m looking at you right now.
Just keep pretending to be busy, okay?
But seriously let’s go over exactly how you could do this in real life. This has been a topic that I’ve researched for a tiny bit of time, and if these strategies have helped others build up a portfolio that can cover all of their day-to-day living expensesm, chances are it’s gonna help you too.
No. This is not something that’s gonna happen overnight.
No. I’m not trying to sell you anything.
No. This is not a scam.
But yes, you can subscribe and share this post with others if you find it helpful. Plus how about this: you could read the whole post and then decide at the very end if it’s worthy of your share as long as you promise not to forget.
Let’s begin.
Zoom out, big picture. $36,000 is basically about $100 dollars a day. Earning a hundred dollars a day through index fund investing, that’s the objective, but to break it down a little further it’s important to understand why index funds in the first place and not, let’s say, selling covered calls while selling plasma on the weekends.
The premise behind this is very simple. Instead of buying a single stock of an individual company that may or may not do well, an index fund contains a small portion of everything that you could buy into for one low price, so you get the benefits of the entire market without having to do any of the legwork.
I’ve mentioned this example before (lightly), but it’s really just the perfect way of putting it.
Imagine I own a thousand vending machines, and they’re each worth a thousand dollars. You have the option to do all of the research and buy any ONE of them for a thousand dollars and own 100% of it outright; or you could automatically invest a thousand dollars and now you own 0.1% percent of everything in the portfolio.
So what do you do?
Well the first option even though you own one vending machine entirely for yourself, there’s the chance that something goes wrong. User break the card reader, the location shuts down or decides to put in their own machines, the machine needs extensive repairs and now your only investment is worth less.
There’s also the question of how do you know which vending location is going to do the best and what if you pick the wrong one? On the other hand, with the second option, by owning a small portion of everything you get the average return of an entire portfolio across a thousand different vending locations and even if a few of them don’t do well, the rest should more than make up for it without you having to constantly worry about being right.
Well, essentially this is exactly index funds explained in a nutshell. If you want to invest a small amount to buy all 500 companies in the S&P500, you could do that with something like VTI for around $225 and gain exposure to the major technology companies. That means as long as you literally have a few hundred extra dollars to spare, you could practically buy a small portion of every single stock in existence without having to do any of the legwork buying each of them individually; and then you could sit back and let the market do all the work for you, while you just relax and read more blog posts about making six figures in addition to that because index funds are so simple to manage; they’re easy to put together and they don’t require a lot of overhead. Those savings get passed on to you as the customer in the form of lower fees; that means instead of paying for a fancy investment manager’s Tesla Model 3 car payments, you could enjoy the benefits of a passively managed index fund for the low cost of free.
Plus on top of saving more money, index funds have historically outperformed more than 92-95% of professional portfolio managers over a 15-year period; and I have to say, I can only imagine how much worse that would be for the individual investor who trades emotionally and tries to time their investments based on whatever is trending at the top of wall street bets.
Actually, I don’t have to imagine. Apparently 99% of investors cannot beat the market long term and lastly, you get the ultimate benefit of diversification and stability. Even if you own 20 or 30 stocks, you still run the risk of a few of those going down and lowering your average or being too concentrated in one sector that keeps getting kicked down over and over again like corsair gaming.
Give me a break. With this, it’s easy, there’s no stress, there’s no confusion of what to do; just buy into it consistently and you’re done.
So now that we have the index fund portion explained, let’s move on to the passive $100 a day part, because I know that’s what you came here for.
Alright. Now in terms of passive income, the goal here is that it should truly be passive like most people have this idea in their mind that they could wake up one day do absolutely nothing and then open up their computer to see thousands of dollars just magically appear and the truth is it’s called OnlyFans.
Just kidding.
Okay, no. But really when most people talk about making passive income – including myself – there’s always a bit of a catch. Either, it requires ongoing work to maintain like a rental property, it can be wiped out overnight from an algorithm change like with so many passive income online businesses, or it takes a significant amount of unpaid upfront work ahead of time to reap the benefits in the future. But with this I’ll be honest. It is actually a 100% passive income you can make decent money without much long-term risk. I do exactly this myself, but it requires one skill that most people spend their entire lives learning and that would be patience.
Being able to make a hundred dollars a day passively from an easy investment that anybody could make is going to take time.
The good news though is that it’s not difficult and there’s nothing complicated about it but you’ll need to be okay building this up and not try to rush the process to make as much money as fast as possible, otherwise it’s not going to work; although, I will say this, once you start seeing the passive income roll in be prepared to get absolutely obsessed investing everything back into your portfolio to help it grow even faster.
It all starts small, but in terms of combining the two topics and how to make passive income with index funds, you have two ways.
The first, and most common approach that most people automatically think of, is dividends. See anytime you go and buy a stock, you’re entitled to a small portion of that company’s profits, and sometimes those profits are distributed to you on a regular basis in the form of a dividend payment.
In this case, since index funds cover such a wide variety of companies, dividend payments are almost always a part of your investment. Generally they’ll range anywhere from 2.5% if you’re buying into a real estate index fund, 1.26% if you’re buying into the S&P500, 1.2% if you’re buying the entire market, or if you’re really wanting to go for it, as high as 7% if you’re only buying a high yield dividend fund.
Overall though, across most index funds, you’ll find an annual dividend payment anywhere from 1.2-2.5% and all of that is probably going to be the easiest passive income you will ever make in your entire life. For every thousand dollars you invest, you’ll be getting a free $20 deposited back to your bank account for doing nothing other than just investing your money.
Now, the one thing to keep in mind is that with dividends your income will be taxable, and it’s important to use this to your advantage to make sure you’re not paying more than you need to. In order to do that, you want to make sure the dividends you receive are what’s called qualified dividends, which means they originate from a US-based company and in return for holding onto those investments for more than 60 days, those dividends are taxed at the long-term capital gains rate which could be nothing if you earn under $40,000 a year being single or $80,000 a year if you’re married. Then, for anybody earning more than that amount, your qualified dividends will be taxed at the low rate of just 15% and then anything above that is taxed to 20% plus state taxes.
In California this is considerably cheaper than paying dividend taxes at ordinary income rate, which means you get to keep more money in your pocket each and every year. This is very important to be made aware of, because even though dividend payments could be very enticing, upfront taxes could absolutely eat away at your profits if you’re not careful.
And second the next approach to earning passive income with index funds is simply growth. The way I see it, this is the real reason to invest in index funds, not so much the dividend. Sure, the dividend payment is nice and it doesn’t hurt, but the real money is made here as the price of the index fund goes up in value over time. An investment in something like a total stock market index fund is literally an investment that the entire economy will continue growing, businesses will become more efficient, other people will invest to become a part of it, and historically those investments have gone up above 8% a year in value.
Even if we go back further than that; in just the US in the last 100 years the S&P500 has seen a 10% annualized return with dividends reinvested, and the best part about all of this is that you’re not going to be taxed on this growth and profit until you decide to sell.
That means essentially your money gets to grow completely tax-free up until the point where you want to spend the principal. At that point you’re going to be taxed at the long-term capital gains rate which means you could strategically sell your investments at different times to make sure you’re in the lowest tax bracket possible.
Either way, with these funds having grown an average of 8% a year, investing a $1,000 is going to give you a free eighty dollars every single year on average and passive growth that you could later invest or spend. But in terms of using all of this to make an extra 100 a day here’s what you need to know: if you just look at this objectively from the perspective of dividends, it’s not going to look pretty because if you average a two percent dividend paid to you annually you will need $1,850,000 invested and then bam you’ll make one hundred dollars a day in passive income with an index fund.
Now something like this is not impossible and by investing $17 a day you should be able to achieve that within 40 years. Bump that up to $30 a day and you’ll get there in 33 years, and if you can invest $50 a day, you’ll get there in 27 years.
I know that’s probably not what you wanted to hear and you were expecting some sort of magic that could do that in a few months, but even though I can’t do magic tricks, thankfully there is a bit of a shortcut that everybody could use and that’s what’s known as the 4% rule.
This is the basic early retirement principle, sometimes known as the trinity study, which suggests that you could spend four percent of your portfolio every single year without running out of money. That’s because as your portfolio grows an average of 8%, data shows that you could safely spend half of that while leaving the rest to continue working on your behalf so that you’ll have more money to spend the next year. It’s no different than growing out a rose garden large enough to give you a brand new bouquet of flowers every single month without running out except instead of roses it’s flat out money in this case.
Now assuming that you could periodically sell 4% of your portfolio every single year as passive income, you could achieve your goal of a $100 a day by investing $920,000 in a broad index fund throughout the entire market.
Now, I realize that’s a pretty significant number that most people would not be able to accumulate in a matter of months or even years. But if you break it down and let it become a daily habit as simple as brushing your teeth, here’s how attainable it could really be. Just like our last example investing $10 a day is going to get you there in 38 years; it’s a long time, I know but investing $10 a day is something that almost anybody could do on autopilot without a second thought. By the time you’re about to retire you would have hit that goal with almost no effort whatsoever.
However, if you’re willing to invest more you could speed up the process dramatically at $20 a day, you could reach that goal in 30 years. With $30 a day, it’s 25 years. At $50 a day, it’s 20 years. And if you could swing a $100 a day, you’re literally 13 years away from making that a reality and everything else after that is purely passive.
Unfortunately, I would say this is the biggest reason holding people back. It’s not necessarily the work, because once you set this up with a brokerage and enable auto invest, you’re pretty much done in 20 minutes; but it is the impatience of staring down the barrel of another 20 years and thinking, “eh, this is too long, I’ll do something else instead.”
That is why so many people don’t even try, but I will say this: it’s kind of like going to the gym. Once you start, you’re not going to want to stop. I’ve never met someone earning even $5 a day passively who isn’t thoroughly excited with the aspect of passive income and earning money without having to lift a finger every single time. Once you see the momentum beginning to work in your favor, you’re gonna be absolutely obsessed with it, like I AM.
Then you’ll find every way imaginable to invest even more because it’s fun or it could just be my weird idea of fun.
But probably not because you’re literally reading a 15 minute blog post about passive index fund investing. So who’s the weird one? Now I will say this; in terms of which index funds I personally like, here’s the list.
The easiest from all of them would simply just be a broad stock market index fund like VTSAX or FZROX and that’s it.
This covers the entire US stock market and I would say for most investors this could be all you need. With this you get the diversification across thousands of different companies. It doesn’t matter if a few of them don’t go up in price; it’s done really well historically and it’s really simple, because it’s almost a one fund fits all type approach.
Beyond that, since I like taking a bit more of the yellow approach you also have the S&P500 index fund like VFIAX or FXAIX, that covers – you guessed it – the S&P500.
Now, this one is slightly riskier, because you’re taking everything within the entire market and then condensing it down into just the top 500 companies in the US. But you can’t argue with the fact that so far these top 500 companies have done really really well. Who knows if that’s going to continue over the next 50 years, but for me I’m fine taking that risk and betting that the entire US economy will continue to grow and expand; and this could be a good option for anybody who wants to be a part of that.
There’s also other options that you could add on with this, like an international index fund that covers the entire market outside of the US. Examples could include VGTSX or FSPSX.
Now here’s the thing, over the last 10 years international index funds like this have remained fairly flat and as of now the US market is on a roll outperforming just about every other market out there, but always remember that is never guaranteed to happen. Throughout history there have been multiple times where international index funds have outperformed the US, like throughout the 1980s and 2000s and there’s certainly the chance of that happening again.
Plus, even if it doesn’t outperform the United States, at least in the meantime you’re getting paid a slightly higher dividend. I personally would not go 100% into this, but I think at 15-20% it couldn’t hurt.
Finally, you could throw some others into the mix as well like with real estate you got VNQ. If you want tech there’s VGT, and even though I’m listing off vanguard funds here, the truth is pretty much any fund will work depending on which brokerage you’re with.
Between all of these, you should be able to get the ultimate diversification across the entire market and be that much closer to your goal of $100 a day.
Just set up these investments on autopilot, preferably in a retirement account, contribute as much as you can, and then just wait for it to turn into a money tree.
Like I said, this is not meant to be something that happens overnight or even in the next few years; but for something that anyone could start working towards almost immediately regardless of how much money, time, skill or effort they want to put in, this is absolutely one of my favorite easiest ways of making truly passive income without ever needing to lift a finger – or make an OnlyFans account.
Oh and one last thing, if you enjoyed this blog post and find it helpful just do me a huge favor and either subscribe or hit the share button because it does truly make a big difference.
So with that said, thank you so much for lending me your eyeballs. Feel free to add me on Instagram.
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