I am thinking about investing my money into an index fund that generates money over time. From my research, I see that an index fund has about a 7% return rate over a ten year span. I am looking into making money over a long period of time (not short term gains). Is this a good idea to generate a passive income over time, or is there a better way you can think of?

My goal is to increase my annual salary over time (from both investments and through my career) .

  • Why do you need passive income at this juncture?
    – Pete B.
    Apr 5 '17 at 15:05
  • I just want to increase my annual income so I can do more things like take a vacation.
    – Noob
    Apr 5 '17 at 15:28
  • 2
    Why not save out of your salary to take a vacation, and build a nest egg through growth instead? That way when you are unable or don't want to work, you should have plenty of money to draw upon.
    – Pete B.
    Apr 5 '17 at 16:30

The short answer to your question is yes. Index funds are about the easiest and most efficient diversified way to invest your money. Vanguard's are among the cheapest and best.

Be aware, though, that passive income doesn't mean you do nothing for your money. In the case of investing, what you are doing is bearing risk. That is, you are being paid (on average) to put your money in a situation where you may lose money. If you keep your eye on the long-term prize, then when (not if) you sustain losses in your investment account, you will have the patience to leave the money in there.

I'm a little confused by your wording about increasing your salary. Normally we think of index funds as a way to increase our wealth. If you are making new investments, presumably you have more salary than you need right now. Normal index funds will reinvest dividends automatically, so you will see the value of your investments rise but will not see any cash flows per se unless you are selling your holdings. If you want actual cash coming out of your investment, you can use ETF's to achieve the same type of investment and treat the dividends as a supplement to your income. Note, however, that some gains in your ETF will be in the form of capital gains and some will be dividends. Think more like 2% year per in dividend payments and the rest in capital gains.

If your objective is to save for retirement, please consider investing through an IRA, Roth IRA, or through your 401(k). No need to give uncle sam a gift from your hard-earned money.

  • Thanks for your comment. That helps a lot! What ETF should I look into? Also, I maxed out my Roth IRA (that is what I am using for retirement).
    – Noob
    Apr 5 '17 at 15:24
  • 2
    Without knowing more, I'd take a shot in the dark and say a whole market ETF like ITOT or VTI. This forum isn't usually great for getting specific investment advice, though. Try Bogleheads.org for advice about ETFs.
    – farnsy
    Apr 5 '17 at 15:30

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