‘Passive income’ defined

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 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.

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.

— Dave

Dear Dave,

I’m 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

Follow Dave Ramsey on Twitter at @DaveRamsey and on the web at daveramsey.com.