Everything You Never Knew — Until Now — About How Passive Income Can Generate Money
About Ashley
ExpertiseAshley Jones is a freelance writer based in Houston, Texas and can be reached at ashleyaustin89@gmail.com. Her work has appeared across multiple platforms including Romper, Cancer Today, Publisher’s Weekly, Elite Daily, Mommy Poppins, Cancer Wellness Magazine, Motherfigure, Ladders News, and Let Grow.
Read full bioYou may have heard about people who “make money while they sleep,” but do they really? Yes and no. It is totally possible to earn passive income from investments in real estate, the stock market, online ventures like blogging and YouTube videos, and much more. Based on the latest United States Census Bureau data, approximately 20% of Americans generate passive income, leading to a median annual influx of around $4,200 per household that takes advantage of passive income. Though honestly, the sky is the limit.
The ins and outs of generating passive income are a bit more complex than simply hitting the hay and letting dollars accumulate in your bank account. Still, with a bit of an investment upfront, you can — and should — look into these potential revenue streams.
What is passive income?
As defined by the Internal Revenue Service (IRS), passive income refers to trade or business activities in which your material involvement is limited. That’s a fancy way to say that you’re not consistently or substantially engaged in the day-to-day operations of whatever is making your passive income. The IRS also categorizes rental real estate endeavors as passive income, provided you’re a property owner who doesn’t qualify as a real estate professional.
Passive income involves acquiring funds outside of your traditional source of income — aka, your day job. But passive income is more than just a plain old side gig or even the trendy side hustle. It’s about making the most of the resources you have in order to make your money earn you even more money.
Is it possible to make money without doing any work? Well, first you have to define “any work” because, despite the name, earning passive income does require work. The difference between your day job and passive income streams is that the bulk of your work is done upfront when setting things up. It’s not always easy in the beginning — in fact, it can take a long time to see the fruits of your passive income labor.
With passive income, you’ll be mostly hands-off day-to-day once things get rolling. Sure, you may have to check in here and there depending on what you’re doing to create passive income — think weekly administrative tasks, monthly content planning, quarterly taxes, etc. — but for the most part, the majority of what most people would consider to be “work” is completed at the onset.
There are many ways to create passive income, so choose what works for you
Unlike traditional earned income, where you exchange your time and skills for a paycheck, passive income allows you to generate revenue while not actively working. In other words, it’s like setting up a money-making machine that keeps churning out cash even while you sleep (hence, the reference to people who are “making money while they sleep”).
The allure of passive income lies in its potential to provide financial freedom, flexibility, and a more secure future. It offers an opportunity to break free from the limitations of a 9-to-5 job and build wealth in a way that suits your lifestyle and goals.
Here are some examples of passive income to consider:
1. Invest in dividend stocks. Investing in dividend-paying stocks allows you to earn a portion of a specific company’s (or multiple companies’) profits regularly. These dividends can provide a consistent income stream, and over time, they can grow as you reinvest them.
2. Create a blog or start a YouTube channel. If you’re passionate about a particular topic, creating a blog or YouTube channel can eventually generate passive income through ads, sponsorships, and affiliate marketing. This is one way to earn passive income that truly only requires your time, effort, and imagination, with very little upfront monetary investment.
3. Engage in peer-to-peer lending. Using online platforms, you can actually lend money to other individuals or small businesses, which then, in turn, earns you interest on your loans.
4. Write a book or create an online course. Sharing your expertise by writing a book or creating an online course for others to buy and learn from can lead to ongoing royalties or sales, providing a source of passive income. These routes require a lot of upfront work and may come with a smaller payoff than other streams of passive income, but they can definitely generate some cash.
5. Start an automated online business. E-commerce stores, dropshipping, and affiliate marketing can all be automated to a large extent, allowing you to earn income from online sales without constant hands-on involvement. You’ll need to research your area of interest and learn the best approach to make this tactic as hands-off as possible, but once you get going, the cash flow will come.
6. License your photography or art. If you’re a photographer, artist, illustrator, or designer, you can license your work for use in various media and earn royalties whenever your creations are used. This route may take some self-promotion and could be slow-going, but it is definitely an excellent option for artists of all sorts.
7. Purchase rental property. Though it requires a significant upfront investment, owning and renting out rental properties can be a reliable source of passive income. Whether it’s a residential property, commercial space, or vacation rental, the rent you receive can provide a steady stream of income.
If you choose to go the real estate route and take out a loan to do so, you can use Credello’s loan payoff calculator to help determine your loan payoff date. This simple-to-use tool can help streamline your experience by keeping track of monthly payments alongside an easy-to-read breakdown of the interest and loan amount. It’s a great way to stay on top of your loan and determine when your real estate investment will start generating free and clear profits.
How to get started making passive income?
With so many ways to earn passive income, it can be difficult to know where to begin. First, take a look at your budget and see how much money you can realistically commit toward creating passive income. There is some financial risk involved with passive income, regardless of which route you choose. In fact, monetary investments like dividend stocks, dividend index funds, bonds, and even high-yield savings accounts can be considered passive income.
As John Csiszar explains, simply moving your money around can earn passive income. “Thanks to the Fed’s campaign of raising interest rates to combat inflation, yields on short-term, conservative income investments like CDs have soared,” Csisizar writes for a Yahoo Finance article on passive income investment strategies.
He suggests adding funds to high-yield savings accounts, no-penalty certificate of deposit (CD) accounts, and U.S. Treasury Bills. “Essentially, this passive income strategy involves moving your money whenever possible to the type of account that pays you the highest yield,” he writes. “Of course, this only works if you have liquid money ready to spend — or if your money in another investment matures and pays off.”
From there, you can use the passive income generated to move forward into other ventures to bolster your revenue streams even further. Your earning potential is truly unlimited.
Just remember that not all passive income streams are equal, and some may require significant upfront investment, time, or ongoing management. Plus, relying solely on one source of passive income could expose you to risks. So, take your time deciding which type of passive income works for you and then be sure to diversify. You can create a more stable and resilient passive income portfolio by spreading your investments and income sources across different avenues.
Bottom line
Passive income can lead to financial wellness. Even if you’re currently working toward paying off credit card debt or saving for your emergency fund, using a little bit of your financial resources toward investing in a passive income stream can help get you where you want to be even faster. It does take time, and it does take effort, but whether you’re interested in real estate, investments, online ventures, or creative pursuits, exploring various sources of passive income could be a game-changer you didn’t even know existed.