The 5 key steps to making money while you sleep

I’ve been making money while I sleep for the last six years. This year I’ve made over $6,000 in passive income. The way I do it isn’t sexy but it is very simple and effective.

The common understanding of making money while you sleep is selling products online. I’ve done this before and made $50,000 in sales in the first month. Most of those sales came from international buyers. The purchases happened in their time zones literally while I slept.

The challenge with this method is that it’s complex and difficult. Most importantly, the success of it is far less certain than the method I’m about to take you through.

The method I’m going to take you through is much simpler and has guaranteed results. It’s the same method that 49% of America’s wealthiest households used to make their wealth. That is, by consistently saving 20% or more of their income and investing their savings over the long term.

This is what I started doing six years ago. One of the outcomes is that my investments make money for me while I sleep.

Here are the five key steps you can use to do the same.

Step 1: Create a goal

Making money while you sleep is typically the outcome of the pursuit of a goal. It’s rarely the goal itself because it’s not meaningful enough to be a true motivator.

My goal is to be able to offer my now two-year-old daughter a private high school education. This will cost an approximate total of $281,000 in school fees.

I didn’t go to a private school but I grew up in an area where everyone else did. This has been strong motivating factor for me in life and it’s pushed me to create and achieve a lot of financial goals.

Figure out a goal that is really meaningful to you and determine how much it will cost. It could be something as big as retiring early from work or as simple as owning a luxury car.

Once you have that goal, you can move to step two.

Step 2: Limit your spending

This isn’t about how much you spend on groceries. This is about how much of your income you can invest on a regular recurring basis.

The more you invest, the more money you’ll make while you sleep. We’ll get to where you can invest in step three.

At the time I started investing, I was in my mid 20’s and a few years into my professional life. My salary was around $70K annually (pre-tax).

I started investing $200 every fortnight. This worked out to be about 10% of my after-tax income.

I started with 10% of my income because of a book I read called "The Richest Man in Babylon" by George Clason. The book has lots of lessons and suggestions, one of which is to save and invest a minimum of 10% of your income.

At the time of writing, as my income has grown, I’m investing 30% of my income towards my goal.

I suggest your budget should be as simple as carving out as much of your income as you can afford to live without. You’ll learn to live comfortably with what’s left.

You’ll also have more money to invest which means you’ll be more effective in step three.

Step 3: Invest in an index fund

There are lots of options to invest your money into. Rather than exploring the pro’s and con’s of each I’ll just tell you where I invest and why.

I invest directly into an index fund because it has:

• Low management costs (less than 1%)

• No transaction cost to buy more units in the fund

• Diversification of investment across various asset types e.g. shares, commercial property, fixed interest and bonds

• Returns averaging 9% per year over the past 10 years

• To start investing in an index fund you need a $5k investment. Once you’ve started the fund there are no fees.

• Establishment fee: $0

• Application/contribution fee: $0

• Withdrawal fee: $0

• Termination fee: $0

• Switching fee: $0

When I invest in the fund, I do it through BPAY which is a free transaction. The minimum investment amount using this method is $100.

With the growth of your money in the fund, you’re technically making money while you sleep.

But, I’m guessing you want to be paid money while you sleep too. Fortunately, the fund also pays dividends. This is how I made over $6,000 in passive income this year.

To get to this point, I followed step four religiously.

Step 4: Invest regularly

Your investment should be an automatic regular recurring amount e.g. weekly, fortnightly or monthly. Ideally, it’s an automatic scheduled transfer from your bank account.

The main reason for this is that over time, investing will become a habit and your investment will continue to grow.

The other reason is a simple but powerful strategy called dollar cost averaging.

Investing the same amount consistently into an index fund means that when the value of the fund’s units goes up you buy less and when the value goes down you buy more. This is dollar cost averaging.

You don’t have to try and predict when the value of the fund’s units will go up or down in value because your consistent investment effectively smoothes out the ups and downs of the price.

It ensures that as long as the trend of the value of the units is up, your total investment goes up in value.

Fortunately, my index funds units have increased in value by 22%, not including dividends, since I started investing in it.

Now that we’ve covered steps one to four, we arrive at the final and most powerful step.

Step 5: Use the power of compound interest

Compound interest is where you reinvest the interest from your investment back into your investment.

Albert Einstein famously called compound interest “the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”

Warren Buffett, arguably the world’s greatest investor and inarguably one of the richest people in the world, said “my wealth has come from a combination of living in America, some lucky genes, and compound interest.”

On average, the fund I invest in has paid out interest, through dividends, of 7.5% per year since I started investing in it.

I reinvest the dividends back into my fund to maximise the power of compound interest. By doing this, the fund grows faster, I make more passive income, and I get closer to my goal quicker.

Now that you have the steps, all you need is a goal and you can start to enjoy making money while you sleep too.

If you’re looking for more ways to make money, take a look at my post on the five best ways to make money.

The information shared in this article is general in nature and does not consider your individual circumstances. It should not be relied upon to make an investment or a financial decision.

This story originally appeared on Money and My Daughter. Read the original here.