Financial freedom is definitely something everyone can get behind, and it’s even more of a bonus when that freedom comes at little to no effort. However, very few people understand how to successfully earn earn a passive income. Learn more about what passive income is and the many ways you can earn this type of income so that you can become financially free.
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What Is Passive Income?
Passive income is making your money work for you. Quite simply, passive income is earnings derived from something that a person is not directly involved with. This can be earnings from a rental property, limited partnerships, and other types of enterprise. Passive income can also be earnings from your investment portfolio, such as dividends and interest. Like active income, passive income is taxable but treated differently by the Internal Revenue Service (IRS).
There are many misconceptions surrounding passive income. Many people think that earnings from stocks, interest, retirement pay, lottery winnings, and capital gains are passive income because they’re not managing the source of these earnings on a daily basis. However, these sources are not considered passive income sources by the IRS’ Passive Activity Losses Real Estate Tax Tips. Note that most passive income requires an upfront investment and monitoring.
How to Make Passive Income
There are four ways to invest in passive income sources: buying cash-flowing assets, building cash-flowing assets, sharing or selling assets, and creating “reverse” passive income. Below is a breakdown of what each of these types of passive income entails, the funding they require, and how they differ from one another.
- Buying cash-flowing assets: With cash-flowing assets, like rental properties, the payout comes at regular intervals. Purchasing cash-flowing assets ensures you’re earning a passive income consistently. Plus, it costs significantly less to purchase an asset that’s already built. The amount required to purchase a cash-flowing asset depends on what the asset is. For example, you could purchase an entire apartment complex or a duplex that serves as your home and rental property.
- Building cash-flowing assets: These are like the assets previously discussed, but they’re not built yet. Building cash-flowing assets requires a substantial amount of funding to get a project started. If you want passive income from a rental property but there aren’t any for sale, you can have one built to generate that income.
- Sharing or selling assets: Another popular strategy for generating passive income is to share or sell assets that are currently idle. This can be information you haven’t shared with the world.You can create e-books, videos, or even online courses. Residual income generated after you publish your book is passive income. While it takes a lot of time and effort to initially capitalize on these assets, they are an excellent form of passive income thereafter. The key is to continuously leverage these assets by keeping them available to the public on a popular platform.
- Reverse passive income: This is a method of saving that asks that you cut your monthly expenses in half. Your savings becomes a source of income, allowing you to focus on income generation in other ways. Unlike the other forms of passive income, this method asks that you invest your income back into yourself rather than into property or other assets.
Best Passive Income Ideas
While there is no equation for passive income because the amount of profit depends on a variety of factors, there is an array of great options available to help individuals make their money work for them. These include taking out ads, renting out space, investing in a business, renting out a vehicle, and even investing in vending machines. Below, we break down the best ways to put your money to work and earn a passive income.
Investing
Passive investing can help you grow your income while minimizing fees and risks. This investment strategy maximizes returns by minimizing buying and selling. More broadly, passive investing involves a buy-and-hold portfolio that involves minimal trading. This serves as a safe, long-term investment that is more affordable and less complex that actively managed portfolios. The amount required and the return received depend entirely on where the money is invested.
Real Estate
There are many ways to invest in real estate instead of just having a rental property. Other properties, like commercial real estate, self-storage facilities, and Real Estate Investment Trusts (REITs) are an excellent form of passive income. Another way to put your money to work through real estate is to buy a property, flip it, and sell it for profit. The amount required to earn passive income from real estate depends on the type of real estate you invest in.
Affiliate Marketing
If your business is online, affiliate marketing can help you generate an income passively. By promoting a third party’s product on your site and including links to their product, you’re able to earn a substantial amount. Each time someone makes a purchase through an affiliate link, you get paid. This requires little to no funding on your part and serves as one of the most liquid passive incomes.
Peer-to-Peer Lending
Peer-to-peer lending is the act of making a personal loan to a borrower, facilitated through a third party. By providing loans to other individuals, you’re able to earn on the interest paid. While returns on this type of passive income tend to be high, peer-to-peer loans come with the risk of the borrower defaulting.
Dividend Stocks
If you own stock in a company, you can receive dividends on a quarterly basis. Often, dividend stocks come from well-established companies, making them a fairly safe investment. Safer than many other types of stocks, dividend stocks offer a healthy return and financial flexibility with relatively little concern.
High-Yield Savings Account
This is one of the easiest ways to make more money. Many banks or third parties offer these types of savings account. Generally, the minimum balance is substantial and you are limited to the number of withdrawals you can make in any given month, but the interest rates are well worth the restrictions.
Make your money work for you. Invest in passive income sources and watch your money do the rest.
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