What Is Passive Income and How to Earn It
Earning money with little to no effort is everyone’s dream come true. After all, who wouldn’t want to build up their savings and achieve financial freedom without working themselves to death long before they could enjoy the results of their efforts? Some passive income ideas are quick and easy to launch, while others may take some time and effort. However, once you have everything in place, you will start to see your savings grow with little to no effort on your part.
- What is passive income?
- How much passive income can I make?
- Rental income
- Peer-to-peer lending
- Advertise on your car
- Earn cash back
- The bottom line
What is passive income?
Passive income is money you earn without having to do much, if any, work to get it. The initial steps toward passive income do require some effort on your part, but, once they are established, they will set the stage for income streams that can function on their own.
How much passive income can I make?
Passive income will not lead to great wealth and financial independence in the short term. Instead, you need to look at passive income as another investment strategy in your personal finance portfolio. Over the long term, passive income can add a healthy chunk of change to your personal bottom line depending on which income streams you choose.
Types of passive income
There are numerous ways to earn money without investing a lot of time or effort.
Real estate continues to be a tried-and-true manner for earning passive income. One of the easiest ways is through rental properties. If you have extra funds available, you can purchase a second home, condo or even business property and rent it out. Before doing so, though, it’s important to compare the costs of owning additional real estate versus the potential rental income to evaluate if the investment will pay off over the long term.
Even if you are able to pay for the property outright and won’t need a mortgage, you’ll still need to pay for insurance, property taxes and maintenance. If you hire a property management company to oversee the rental, this will add to your outgoing costs. If the rental income is sufficient to pay your expenses and provide a decent income, this could be a great option for earning passive income.
Of course, don’t be discouraged if you don’t have the funds to purchase another property. You can start small by renting out a room or your basement using sites like Airbnb. You may incur increased insurance costs as well as maintenance expenses, but you won’t have to pay extra toward a new mortgage or property taxes.
Investments are a great way to make your money work for you by earning passive income. With so many choices available, you can get started with a minimum investment and increase those as you earn extra money.
Real estate investment trusts (REITs)
A REIT is a great way to benefit from real estate without purchasing additional properties. These funds, such as Fundrise, are made up of different types of commercial real estate—think shopping centers, apartment buildings, office buildings, etc.—and investors purchase a portion of those properties. If the properties do well, you receive dividends based on the amount of your investment.
Mutual funds group together stocks, bonds, or other types of investments into one account, with multiple investors pooling their money together to buy into those funds. The hope is these funds will grow over time, and you will earn a certain percentage on your investment. A good example of a mutual fund is a 401(k), although there are many options for investing in mutual funds.
Investing in the stock market has long been considered an investment for those with big bucks and no fear of risk. However, with the increase in investors as well as online brokers, it’s now easier than ever to invest in stocks and exchange-traded funds (ETFs) without a lot of money. You can set up an account with many online brokers and start buying and selling stocks in minutes. To make the most of these investments, though, it’s important to research the online brokers and find one that best meets your needs. Many offer low-cost trades as well as educational resources to help you choose the best stock buys for you.
Retirement accounts are investments set up at financial institutions and typically include funds similar to mutual funds. The most common retirement accounts are traditional individual retirement accounts (IRAs) and Roth IRAs. You can invest in these accounts each year according to the contribution limits set by the Internal Revenue Service (IRS). The goal is the funds will grow over time, providing a substantial income for you following retirement. Of course, how much your funds grow depends on how much you invest as well as how well the accounts perform.
One of the most common ways to earn passive income on your money is with a savings account. How much you earn depends on the type of account and the current interest rates. These typically won’t be big money earners, but every bit counts.
High-yield savings accounts
Similar to traditional savings accounts available at most financial institutions, high-yield savings accounts earn a higher interest rate, which provides a little bit more cash in your pocket. According to the Federal Deposit Insurance Corporation (FDIC), the national interest rate on savings accounts is 0.05%. However, the interest rate on many high-yield savings accounts is 0.50%. While still not great, this rate translates to a few more dollars for you.
Money market accounts
Similar to high-yield savings accounts, money market accounts typically earn a higher interest rate compared to traditional savings accounts. However, unlike a high-yield savings account, you can withdraw funds from your money market account like a checking account. This can be helpful if you need your money right away.
Certificates of Deposit
In the past, certificates of deposit (CDs) provided a great avenue for earning passive income. However, interest rates have dropped dramatically in recent years. According to the FDIC, the current national interest rate on a six-month CD is just 0.10% and that increases to 0.33% for a five-year CD. CDs are a low-risk way to earn passive income, but you are more likely to do better with a high-yield savings or money market account. Plus, your money won’t be locked down with a high-yield savings or money market account like it is with a CD.
With peer-to-peer lending, you provide a personal loan to a borrower through a third party such as Payoff or Prosper lending clubs. You earn income via the interest payments on the loan. You don’t have to provide the entire loan amount. For instance, with Prosper you can start with a minimum investment of $25. You can loan the entire amount or invest smaller amounts in multiple loans. However, these loans are unsecured, so you could lose your money if the borrower defaults. Also, you do have to monitor these accounts regularly, so it may be more work than you want for a passive income stream.
There are a number of side hustles that you can do from home that may translate into passive income, all online businesses that can bring in monthly payments.
If you have a successful blog, you can optimize your revenue streams from the site to earn passive income. You already put in the time to create your content, promote it on social media and build up your audience. Using passive income streams, you can keep earning money on those efforts over the long term.
Selling ad space on your blog is a great entry point for implementing passive income streams into your blogging business plan. WIth its minimum requirements, Google AdSense is a good starting point, and, as your audience grows, you can apply to join better-paying ad networks such as MediaVine. It’s important to note these ad networks have strict guidelines regarding participation, and failure to adhere to them will result in having your account closed.
Many companies want you to promote their products and services on your blog, and they will pay you a commission when someone makes a purchase through your website using a trackable link. There are numerous affiliate programs available that align with your content and audience, so you can choose ones that appeal to your readers. Like ad networks, you will need to follow specific guidelines or your account could be closed.
Monetize your social media
In tandem with a successive blog is a large social media following. Many successful bloggers maintain strong engagement with their social media followers on such platforms as Instagram and YouTube. This engagement can be leveraged to earn money through sponsored content on Instagram or Facebook and monetizing your YouTube channel. If you are new to this income stream, influencer marketing companies such as IZEA can be a good place to get started.
Stock photos residual income
If you are a good photographer, you can sell your photographs through stock photo sites like Adobe Stock or Shutterstock. These sites market your images, and you receive a percentage of every sale. To make the most of selling your images as stock art, look for sites that allow you to control your copyright as well as require credit to the image owner—you.
Sell your own products
In addition to selling your images through stock photo sites, you can create your own content and sell it on your blog. This could include everything from ebooks to handcrafted items like jewelry. Think about what your site covers, and create something that complements that content. For instance, if your blog covers travel, consider putting together an ebook on the top 20 road trips east of the Mississippi River. If you are interested in planning an online course in your area of expertise, you can offer this through your own site or create a video course and sell it on Udemy.
Advertise on your car
Turn your car into a rolling billboard, and get paid for it. There are specialized advertising agencies like Carvertise that will pay you to put ads on your car. Essentially, they “wrap” your car with the ads, and you just drive like you normally do. Agencies look for drivers with newer cars, clean driving records and a preferred location. When considering this revenue stream, it’s crucial to do your research on every company because there are many fake companies offering this service that turn out to be scams.
Earn cash back
A great way to earn money with little effort is to use a cashback rewards credit card to pay all of your bills. You have to pay your utilities and mortgage every month, so why not make money while doing so? You can do the same when purchasing groceries, gas or paying your car payment. However, for this to truly benefit you, it’s important to do two key things: (1) Look for a credit card that doesn’t have an annual fee, and (2) pay off your credit card in full every month. Otherwise, your cashback rewards may go toward fees and interest.
Another option is using cashback sites like Rakuten when shopping online. Every time you make a purchase, you earn cash; pay with your cashback rewards credit card, and you increase your earnings.
The bottom line
Passive income can be a great way to boost your personal wealth without putting in extra work. Instead, it builds on efforts you’ve already put in place, such as investment accounts, rental properties or affiliate marketing. Not all passive income streams are right for all people, so it’s important to research them and find the ones that fit your personal finance goals.
Although passive income won’t make you wealthy overnight, it could provide a solid boost to your overall finances. In fact, if leveraged correctly, passive income could help you achieve financial freedom earlier than you originally planned. Who doesn’t want that?