Table of Contents:
- What’s passive income?
- Passive income ideas
- Best way to make passive income
- Misconceptions of passive income
- Passive income ideas with little money
- What are some profitable passive income ideas?
- How many passive income streams are necessary?
- Passive income FAQs
- The bottom line
When building generational wealth, you may think about what passive income means to you and how you can apply it to improve your finances. Passive income can be a good way to build your financial future as you determine what your short- and long-term goals are. Plus, it allows you to make additional earnings while maintaining your primary source of income.
In some cases, passive income can be misinterpreted in the sense that people think it requires no work and is an easy and fast way to create additional income sources. This, unfortunately, isn’t the case.
What’s passive income?
Passive income is income that requires minimal work. In other words, it’s a way to make another source of income with little participation in the everyday flow of a business. This means that it may require an upfront investment in the form of sweat equity or simply more time and attention to the business.
Investment income is an example of passive income. An investor may choose to invest to increase the earnings such as in a rental property. Initially, this may call for more energy in researching a property and putting in some sweat equity to get the property up and running. The initial work that passive income requires may serve as the upfront cost in order to reap the benefits of earning income later with little participation.
The best passive income investments are dependent on each individual and their personal goals. However, let’s talk about how to earn passive income.
- Passive income is income that’s received from trade or business activities in which you do not actively participate.
- While residual income can be passive, passive income isn’t always considered residual.
- Passive income doesn’t include your regular employer activity and salary. Passive income is also not a second job because a second job still requires you to actively participate in order to get paid.
- Passive income can be trial and error. You may find that some passive income ideas work better than others. However, passive income still requires time, energy, and work in the beginning and isn’t necessarily an easy path to generating income.
Passive income ideas
When thinking about how to build passive income, you may be wondering what the best passive income ideas are. Let’s first look at average net worth and liquid net worth and how these things can relate to passive income. Average net worth is the total number of assets you own minus your liabilities. While liquid net worth just focuses on your liquid assets, which are assets that are cash or assets that can be easily converted into cash. Therefore, liquid net worth is the number of liquid assets you own minus your liabilities. Average and liquid net worth can be good tools to use when assessing the overall snapshot of your financial health, but can also be great for assessing where you can fill the gaps in your finances with passive income.
So, what are some ideas for passive income? The Internal Revenue Service (IRS) says “passive activities include trade or business activities in which you don’t materially participate.” It further explains that “material participation” is when you spend more than 500 hours on something, so to be considered passive income, it would have to require less time than that. Let’s take a look at some ideas that could fit the bill!
Passive income stream ideas
- Affiliate marketing
- Amazon seller
- Real estate (rental property, Airbnb, etc.)
- Social media
- Dividend stocks
- Invest in stake cryptocurrency
- Sell non-fungible tokens (NFTs)
- High-yield certificates of deposit (CD) or savings account
- Create an online course
- Create an app
- Real estate investment trusts (REITs)
- Rent out a spare room or rent out your car
- Car advertising
- Sell your designs or stock photos online
- Earn royalties
- Start a dropshipping business
- Start a vending machine business
- Peer-to-peer lending
Best way to make passive income
As mentioned earlier, average and liquid net worth can be helpful tools for you to get an idea of your overall financial position and determine how much passive income you’re aiming to earn. In personal finance, residual income is the amount of money you have leftover after all of your debt and expenses have been accounted for which can help you get a closer look at where you stand with your personal finances. Although residual income can be passive, passive income isn’t always considered residual.
Keep in mind that there are a variety of ways that an individual can create an extra source of cash flow. You may find that some passive income ideas work better for you than others. However, let’s get into further detail about the above passive income ideas and how these can be beneficial ways to generate passive income for your long-term goals.
- Affiliate marketing
Whether you’re a business owner who has a website, a social media influencer, or a brand ambassador for your favorite brand, affiliate marketing is a popular passive income stream. Affiliate marketing is when an online business pays a commission to an external website or individual for traffic and sales generated from their referrals. As a business owner, you may want to promote your business through an ad on another website to generate sales for your brand. When individuals click on your ad from another website and purchase products from your brand, this results in a profit for your business, and a commission is paid to the third-party affiliate for their referral. On the contrary, you can earn a commission as a third-party affiliate when hosting an external website ad on your website.
You may also be familiar with this concept on social media, where social media influencers or brand ambassadors promote brand products to their followers. They may share a brand that they are using and tell you that you can receive a certain percentage of that brand’s product just by being their follower and clicking the link in their bio to purchase. This is a form of affiliate marketing.
In the beginning, affiliate marketing may require work to gain followers or website traffic to even earn a commission. The upside is that once you’ve established a good following, you can generate a healthy passive income stream. The downside is that gaining an audience is no easy feat, and everyone doesn’t succeed at this passive income idea.
2. Amazon seller
Selling products on Amazon can become a form of passive income. Amazon gives its sellers the option of handling all of their shipping, handling, and customer service queries. This means that, in the long run, little work may be required of the seller. In addition, unlike starting your own business, Amazon may be easier as it offers access to its large and loyal customer base. However, all businesses aren’t created equally. This means that another business or seller may have a great product that attracts a huge audience, but this won’t automatically extend to your business. Customer loyalty is sold separately.
3. Real estate (rental property, Airbnb, etc.)
Owning real estate, whether it’s a rental property for tenants or an Airbnb property, is one of the most effective ways to earn passive income. Once the property is up and running, it may require as little work as maintaining the property for tenants, tourists, etc. However, owning real estate, in general, is not an easy task. The process of owning a property can require a substantial amount of leg work in the beginning—some of which can include searching for the right property to invest in, determining the investment costs, fixing the property depending on its initial state, doing the proper legal work to own the property and to conduct it as a business, and more. In addition, determining if there’s a market for your property, the health of the economy and its effect on the housing market and travel, and having reliable tenants are also things that can affect your passive income flow. It’s important to do the proper research to have a strategy in place for your goals. This way, you can create a passive income stream that works for you and avoid the pitfalls that come with real estate.
4. Social media
As mentioned earlier, affiliate marketing is one of the many ways to create a passive income stream on social media. However, the world of social media offers many different income streams outside of being an influencer. This may include managing a brand’s content. This opportunity could be considered passive if you are able to schedule posts ahead of time through a third-party website and get paid for it. There are a lot of brands that look for help handling certain aspects of their marketing. Small businesses especially may not have the initial costs to pay big marketing companies or to hire a full marketing team. Depending on the opportunity and circumstance, this might take more effort than a traditional passive income stream, but you might be able to automate your contributions, making your regular effort very small.
When you buy shares in a company that has dividend-yielding stocks, you can receive payment at regular intervals from the company. These payments are a company’s way of rewarding you for investing in the company. Dividends are paid per share. This means that your payment amount depends on how many shares you own. The more shares you own in a company, the higher the payout. Dividend stocks are a common strategy investors use to earn passive income. However, choosing the right stocks is a determinant of whether this can be a beneficial passive income stream.
6. Stake cryptocurrency
Cryptocurrency requires hefty research to gain a clear understanding of how it works. Educating yourself on stake cryptocurrency, the coin options that offer staking, and what crypto wallets work best for your goals can go a long way and help you make the right decisions. Stake cryptocurrency allows you to earn rewards on your crypto simply by holding certain cryptocurrencies. Crypto investors may use staking as a way to get their assets to work for them instead of the other way around. However, just like the stock market, there’s a lot of volatility when investing in crypto, which can result in you gaining or losing money. The right strategy and proper research can help you navigate the ins and outs of crypto.
7. Sell NFTs
NFTs, also known as non-fungible tokens, are non-interchangeable data recorded on a blockchain. This type of digital ledger can be sold and traded on NFT platforms. NFT data can be in the form of photos, artwork or digital illustrations, music videos, GIFS, photography, music albums, and the list goes on. NFTs allow you to earn royalties on your sales. NFTs are very new, and this industry is constantly evolving. In addition, the upfront costs of getting started on NFT platforms and selling your work, as well as creating work that actually sells, are some of the factors that will determine whether this is the right passive income idea for you.
8. High-yield certificates of deposit (CD) or savings account
Investing in a high-yield CD account or savings account allows you to passively save more money than a regular savings account. These accounts typically have higher interest rates than a regular savings account, which allows your money to increase at a faster rate. Investing in these types of accounts is safer than investing in the stock market and can benefit you more than a checking account where your money doesn’t grow from interest. However, high-yield CDs and saving accounts don’t yield much of a return on your investment and are not really considered the most beneficial for building generational wealth, like a strategy like investing in the stock market can be considered.
9. Create an online course
Creating a course can be a popular form of passive income in today’s digital world. You may have expertise in a specific subject or professional industry that will work well as a course for others to learn. Again, depending on the situation, a digital course may become more than a passive opportunity, but if you already have one built or can pull your experitice together without too much effort, you could enjoy the income from digital downloads. However, in the end, this can be a successful way of making passive income online.
10. Create an app
Have you been sitting on an idea lately that you think can change the game for people or make their everyday life better? You might’ve found a specific market niche you haven’t come across yet. If that’s the case, creating an app may be a good passive income idea. However, creating an app takes a special kind of expertise, like knowing about tech and all the ebbs and flows that go into building an app, making it user-friendly, fixing a problem in the market that will attract a target audience, figuring out how to generate sales from the app, and more. These are all things that require time, effort, attention, money, and possibly a bigger team than yourself in the beginning. Again, depending on the situation, this might be more of a part-time hustle than an easy passive income opportunity, but once it is up and running, you can reap the benefits as such.
11. Real estate investment trusts (REITs)
REITs are companies that own and manage real estate. When you invest in REITs, you receive a percentage of the company’s income as a shareholder. You can invest in REITs through the stock market and earn your payments in dividends. Investing in individual REITs can be riskier than investing in exchange-traded funds (ETFs), which have a variety of REITs stock. Like stocks and investing in any other securities in the stock market, you’ll have to do your research on which REITs are the best option for your financial portfolio.
12. Blog or YouTube channel
Do you love to travel? Are you a foodie? Do you have a knack for style and fashion? Do you love beauty? Are you a handyman and know how to fix things? Is the kitchen your sanctuary? Or do you love giving movie reviews? Whatever you love doing, you can take your passion to the next level by creating a blog or YouTube channel. Building your following can be an uphill battle starting out. However, these things take consistency and time. As you post engaging content, you can earn money with ads or sponsors on your blog or YouTube channel. Over time, this can prove to be a lucrative passive income source.
13. Rent out a spare room or rent out your car
Renting out a spare room or your car when you’re away can be a way to earn passive income with little work. There are many platforms that you can list for both your spare room and spare car. The downside, however, is putting the right things in place, such as insurance, etc., in case of any damage done to your rented property.
14. Car advertising
You may have seen cars on the highway that are wrapped in advertisements. Advertising agencies will wrap your car free of charge to advertise for a company. In turn, you can earn passive income as you drive your car. However, a clean driving record and a new car model may be a requirement. In addition, doing your research and choosing a legitimate advertising agency is also something to keep in mind. Another downside can be the wear and tear on your car from driving.
15. Sell your designs or stock photos online
If you’re a maker or photographer, there are many platforms that allow you to sell your designs online. As a photographer, selling stock photos on online platforms can also be a useful way to make an easy passive income stream while you’re working as a full-time photographer or at your regular job. However, if you’re a maker of products that require shipping and handling and upfront investment costs for your product, this is also something that you’ll have to account for.
16. Earning royalties
You can also earn royalties on projects in the entertainment industry that you may have done, such as commercial acting. If you’re an inventor, you can also earn royalties by selling your invention. Of course, these things aren’t as easy as 1,2,3. Breaking into the entertainment industry itself can be difficult. Moreover, creating an invention that’s useful and solves a problem for others is only the first step. Other factors like patenting, research, and striking a deal to sell your invention are other factors that contribute to this being a unique and inflexible form of passive income.
17. Start a dropshipping business
Dropshipping is a business model that allows you to make money by selling products on an e-commerce store. The unique thing about this business model is that suppliers handle everything from supplying the product that you wish to sell to manufacturing, fulfilling orders, and shipping. It’s a very hands-off approach to a business as it pertains to not having to physically deal with the product. However, setting up this type of business takes time and energy. Like other passive income ideas, it may require upfront investment costs, marketing, and supplying products that people are actually interested in purchasing.
18. Start a vending machine business
The upfront costs, finding an establishment to place your vending machine, and sourcing products and/or snacks to fill your vending machine may be the initial work that comes with starting a vending machine business. However, once the initial work is done, this can be a business that requires very little maintenance and a healthy stream of passive income.
19. Peer-to-peer lending
Peer-to-peer loans are personal loans between you, a borrower, and a third-party lending platform. As a lender, you can earn money from the interest the borrower pays on the loan. It’s essential to do your research on the borrower’s history so that you won’t end up with a defaulted loan. A recession can also lead to a defaulted loan which is why it’s important to do proper research and diversify your lending portfolio.
Misconceptions of passive income
There are many misconceptions when it comes to passive income. As mentioned earlier, passive income is income earned outside of your regular income from a job or contractor. Again, the Internal Revenue Service (IRS) states that passive income is income that is received from trade or business activities in which you do not actively participate. If you actively participate or are heavily involved in a business, this doesn’t count as passive income. This means that passive income sources don’t include your regular employer activity and salary. Passive income is also not a second job because a second job still requires you to actively participate in the business by showing up when scheduled in order to get paid. When thinking about passive income ideas, keep in mind that 500 hour measure, as mentioned before. If you spend more time than that during a given year, the opportunity isn’t considered passive.
Passive income ideas with little money
You may think that starting out with little money to invest will hinder you from creating another reliable stream of income. This isn’t always the case. Learning how to make passive income online may be a good option to avoid upfront costs. As mentioned earlier, creating a course, affiliate marketing, and becoming a social media influencer or a brand ambassador are some of the many ways to make passive income online while initially investing with little to no costs. The investment for these activities may be in the form of time, energy, and your expertise in order to be successful.
What are some profitable passive income ideas?
The top passive income ideas may include owning rental properties or investing in dividend stocks or REITs, etc.
Passive income ideas with money
You may find that there are certain passive income ideas that require a larger initial investment and generate a larger profit, while other passive income ideas may have smaller upfront costs and generate less profit. Whatever the case, it’s ultimately your perspective that will determine the best ways to create passive income for your personal and financial goals. Over time, you may be able to invest more by building on your current passive income streams to create other opportunities to earn more.
How many passive income streams are necessary?
There’s no specific way to build passive income, and the number of income streams necessary is dependent on each individual and what they are looking to achieve. However, having a few income streams is a good starting point. In addition to choosing the right passive side hustles, it’s important to balance your income streams as you build them over time so that one doesn’t fall by the wayside.
Passive income FAQs
Q: What are beginner passive income ideas?
A: Investing in REITs, a high-yield savings account, or certificates of deposit (CD) may be good options when starting out and exploring passive income ideas. While a high-yield savings account won’t generate ample income, it may be a good source to learn about how your money can grow over time. A CD account may not be as flexible as a high-yield savings account, so it’s important to learn both the pros and cons when it comes to your options. If you’ve been curious about real estate investing, REITs are a way for you to invest and earn in real estate without managing properties.
Q: What are the benefits of passive income?
A: Earning from other sources of income in addition to your regular work can result in building a nice cash flow. Passive income is one of the essential ways to build generational wealth over time. The good thing is that there are a variety of ways to earn passive income–choosing the right income sources for your goals and educating yourself on the risks is where the work begins.
Q: Are there any disadvantages to earning passive income?
A: Like anything, passive income is trial and error. It still requires time, energy, and effort to reap the rewards over time. There may be instances where your time and energy result in little reward, and you lose an investment opportunity or even lose money. Understand that passive income is not a get-rich-quick scheme. It requires proper research as well as exploring what works and may not work for you.
Q: Can you minimize taxes on passive income?
A: You may be wondering how to have passive income without accruing tax liabilities. Although every passive income source doesn’t qualify, there are some passive income activities that can be considered a business. If your passive income source meets the requirements, setting yourself up as a business and signing up for a retirement account such as a solo 401(k) or simplified employee pension (SEP) IRA is an effective way to minimize your taxes and build your future earnings.
Q: How can I make $1,000 a month from passive income?
A: There isn’t one specific way to build $1,000 a month through passive income. While most of the passive income ideas above can generate $1,000, it’s more about the time you put into the activity that can produce quality results from your efforts.
Q: How can I generate $20,000 from passive income?
A: As mentioned above, choosing the right passive income source for your goals, creating an effective strategy, and knowing that generating a healthy passive income takes time are essential factors in building wealth. However, if you have more money to invest initially, you may look to passive income ideas, such as rental properties, diversifying your portfolio with dividend and interest income, and other larger investing activities to produce bigger returns.
The bottom line
Passive income can be one of the most essential ways to build a more financially flexible future. It can result in more free time and less worrying about funding all of your responsibilities through your primary source of income. It can also help you create a better lifestyle and a comfortable retirement. While passive income can help build generational wealth, it’s important to understand that it still requires work, time, energy, and, for some, a monetary investment. Moreover, educating yourself and understanding the risks associated with each passive income opportunity will help you make the right decisions along the way. Get the Public app today to learn more about investing.