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.

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

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 totalled. 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 cheque 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

Dave Ramsey is America’s trusted voice on money and business. 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. The Dave Ramsey Show is heard by more than 8.5 million listeners each week on more than 550 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.