What Is Passive Income? 9+ Proven Ways to Start Earning It
April 12, 2024
Passive income refers to a steady income stream that doesn’t require your active involvement, like a full-time job and freelance gigs do. It can be a great way of supplementing your salary, but it can also replace your job entirely.
In recent years, inflation has been negatively affecting personal finances to the point where more than 40% of Americans have one or more side hustles. Figuring out how to turn your side hustle into passive income (e.g., with affiliate marketing or real estate investing) can be a crucial step toward multiple streams of income and your financial freedom.
Key Takeaways
- Passive income is any additional source of earnings you have that you do not actively participate in but steadily add to your regular income.
- Some of the most common types of passive income include renting properties, selling products online, affiliate marketing, real estate investment, and creating a YouTube channel.
- Passive income is taxed in the same manner as active income, with the tax rates and eligibility for tax deductions depending greatly on the type of passive income stream the taxpayer declares.
- On average, having five to seven income streams helps set you up for long-term financial stability. However, it is important to know your limitations and explore your options to maximize the different income streams you want to pursue.
What is Passive Income?
Passive income is a money-making venture that requires little effort or work. The difference between passive and regular income is that you don’t need to exert effort to generate money with the former.
The keyword ‘passive’ means that this income consistently generates money without the need to work tirelessly, meet specific performance KPIs, or clock in like you would in a full-time or freelance job.
You can take a vacation or a holiday with the assurance that you’re still raising money.
By combining active and passive income streams, you can achieve more stable financial health and minimize instances of falling short of your budget.
It is also an excellent way to steadily increase your income in time for your future or long-term goals. For instance, you can boost your savings with passive income to purchase a car or pay your child’s educational fees.
Passive vs. Active Income
The main difference between passive vs. active income is that the latter refers to the typical earnings or income you get when you work at a regular 9 to 5 job or earn through taking on short-term projects as an independent contractor.
You can also earn active income through commissions, bonuses, and other monetary incentives your employer gives. Active income is not earned without completing a particular task, service, or responsibility in exchange.
It is important to note that while passive income requires minimal effort to generate profit, you must still lay the foundations to ensure you maximize the earning potential of your passive income idea of choice.
9+ Practicable Passive Income Ideas
Here are ten creative and practical passive income ideas to help you maximize your personal finances and reach your short and long-term goals:
#1. Get Income From Renting
Technically, generating income through renting one’s property is classified as an example of active income. This is especially true if you rent your property as a real estate broker because your income is directly due to your profession.
However, if you rent your property as a vacation spot for tourists, backpackers, and travelers while on a trip, you can count your rental earnings as passive income. While it’s a low-skill passive income method, it often requires a significant upfront investment of capital.
A famous example is homeowners renting their homes on Airbnb, Booking.com, or Vrbo. Leasing your property in partnership with any online rental marketplaces described above may charge service fees, which can take roughly 3 to 14% of your total earnings.
You can also rent part of your property, particularly if you own a commercial space or building, and lease some floors as office space.
#2. Do Affiliate Marketing
Affiliate marketing lets you earn passive income by promoting the products and services of other organizations. Most affiliate marketers currently engage in paid promotions through their social media pages or websites.
This is an intermediate-level passive income stream that best suits social media-savvy individuals. To make affiliate marketing work, you need to understand the preferences of modern-day audiences.
For instance, if your partner company wants you to promote their products on Instagram or TikTok, you must have basic photo and video editing skills to make your posts more appealing.
Moreover, you must have a solid understanding of relevant trends, jargon, and topics that you can include in your promotions to boost your posts’ audience reach.
#3. Create a YouTube Channel
Creating a YouTube channel is perhaps the most familiar and popular idea among the passive income examples in this list, and it is also beginner-friendly. Monetizing YouTube channels began after YouTube introduced the Partner Program in 2007.
The Partner Program presented a series of metrics that content creators must meet for their channel to start earning money. Some of these metrics include reaching 1,000 subscribers and running ads on their videos.
The number of views and likes on a YouTube channel’s videos also factor into how much a content creator can potentially earn. It is fairly easy to start earning passively through YouTube, as long as you know your target audience or have a specific niche in mind.
Most of the top-earning YouTubers today started by producing comedic skits, reviewing gadgets and hi-tech products, offering beauty and makeup tutorials, or recording their reactions to viral videos and societal issues.
If you are considering starting a YouTube channel to make more money on the side, think of how you can keep up with the changing demands, preferences, and trends in the online community.
#4. Sell Products Online
You can sell products online using different platforms. Some online sellers use Facebook Marketplace, Instagram, and TikTok, while others use e-commerce sites like Amazon, Etsy, eBay, and AliExpress. This makes online selling more geared toward experienced professionals.
You can create and sell your products or be a reseller for specific brands. Alternatively, you can also supply materials to other sellers. It would also help to use online tools such as an invoice generator to keep track of all customer payments.
Understandably, some may argue that online selling yields active income due to the direct labor required to make a living out of it. However, it still counts as a passive income source if you do it alongside a full-time job or other occupation that takes up a more significant chunk of your time and energy.
#5. Write Blog Content
Writing blog content is quite similar to creating a YouTube channel. The only difference is in the format of the content you produce. The best thing about earning through blogging is that you can focus on a broad range of topics to get started.
Travel, fashion, food, movie commentaries, series recommendations, and product reviews are some trending niches that attract several readers and subscribers.
Blogging is a great passive income option if you have a passion for writing and exploring your preferred topic. After all, you must ensure that your content is of high quality to attract new readers and continuously retain your existing audience.
A good grasp of search engine optimization and digital marketing will also help boost your blog page’s rankings and traffic, thereby increasing your potential income. It’s also essential to be an expert in the field about which you’re writing.
#6. Invest in Real Estate (REIT)
If renting your property seems like a more enticing potential source of passive income, try investing in real estate instead. Passive income through investment is ideal if you are quite familiar with the real estate market.
With real estate investment trusts (REITs), you don’t need to own property or finance real estate to make money. The key is to study other professional portfolios and REITs and invest in different types of properties.
You must also stay updated with any changes in the investment market to assess your potential losses beforehand, making this an idea geared toward knowledgeable experts.
#7. NFT Staking
NFT staking means locking up your non-fungible tokens or digital assets in a digital wallet or a staking platform within a fixed period. It requires knowledge of finances and cryptocurrencies, making it an intermediate-level passive income idea.
During this period, your NFTs or crypto assets are not up for trading, and you are also contributing to the operation and distribution of a blockchain and other networks dedicated to NFTs.
By staking your NFT, you earn additional crypto tokens or NFTs and significantly grow your crypto investments. The more investments and NFTs you earn, the more investors and collectors you attract.
The rewards for staking your NFT may also vary. Some rewards follow a fixed-rate structure, while others depend on your NFT’s staking duration.
#8. Audiobook Recording
Suppose you love books and have a knack for doing voiceovers, storytelling, and portraying different characters or personas for entertainment. In that case, you might enjoy earning passive income through recording audiobooks.
The key to getting started with audiobook recording is to ensure you have the basic equipment and tools, such as a high-quality microphone, noise-canceling headphones, and audio recording and enhancement software.
For beginners, try listening to different audiobooks or joining a voice acting class. It is important to learn how to modulate your voice better and diversify the niches and characters you can bring to life using your voice.
#9. Build An App
You can build and monetize different types of apps, including web, desktop, legacy, hybrid, and progressive web apps. Before you start working on your app, make sure you have a specific niche and market to target.
Check out popular applications similar to the software app you plan to build and study their user demographics. Read user reviews and find common issues that users often encounter while using the app.
This can be used as a reference when developing and improving your app’s features. Some key features also worth focusing on while making your app include a user-friendly interface, a distinct value proposition, and the platform you use to build your application.
Since it requires market research and development skills, this passive income idea is best for tech-savvy professionals.
#10. Set Up Annuity
Setting up annuities entails a written contract between an insurance firm and the individual who provides the annuity. In this arrangement, you give a fixed sum to the insurance firm, and the latter secures regular disbursements or payouts.
The payouts depend on the payment options that you have chosen or agreed upon. For instance, a lifetime payout means that payments continue for as long as you live. This makes it a great beginner-friendly passive stream of income.
Meanwhile, period-certain annuity payments allow you to choose the frequency and duration for which you get paid.
#11. License Your Photography or Music
If you’re an artist with a talent for photography or a passion for creating music, you can license your work and turn it into passive income. This is a great entry-level idea that requires no monetary investment.
Photographers can explore websites like Shutterstock, Adobe Stock, and Getty Images. These allow you to upload photo and video material and earn royalties every time someone purchases your work. In a similar manner, musicians can upload their songs, sound effects, and other audio material to platforms like AudioJungle and Pond5.
The more you upload and grow your portfolio, the more you’re likely to earn. Over time, the amount of work will decrease, and your existing uploads will continue to generate passive income.
#12. Peer-to-Peer Lending
Peer-to-peer lending allows you to lend money directly to individuals and small businesses. You can use platforms like Prosper and LendingClub to earn income on the money you aren’t using. Consider these funds as an investment, and spread them across multiple borrowers to mitigate risk.
This is an excellent passive income method for finance-oriented individuals who have significant savings and seek a relatively hands-off way to generate additional returns. The platforms handle most of the processes, including verifying borrowers and collecting payments.
This method typically yields more income than traditional investing. However, there is always the risk of a borrower defaulting and you losing your funds.
Is Passive Income Really Always Passive?
Passive income isn’t always passive. More than that, it often requires some input on your end, and it’s rarely a completely hands-off method that will endlessly generate money while you sleep. The term “passive” often refers to a minimal effort required to maintain the income stream, so let’s see what that effort is.
Upfront Work Required
In the vast majority of cases, passive income requires a significant upfront investment of your time, money, or both. For instance, creating a popular blog or a YouTube channel with a big and engaged audience may require years of work and endless hours researching, creating content, and promoting.
On the other hand, investing in real estate requires a lot of capital and time spent analyzing the market to find the right opportunity. Once the purchase is made, it will likely take years before the investment starts to pay off.
Also, it’s important to understand that the upfront work you put in will likely yield little to no returns. However, it’s essential in setting a solid foundation for your passive income stream.
Long-Term Maintenance of Passive Income Streams
Once your passive income stream is set up and running, it will typically require occasional input and maintenance to remain operational and profitable.
For instance, if you’ve purchased and rented real estate, you’ll have to manage it and conduct repairs. Similarly, your blog or YouTube channel will have to be updated with fresh content to stay relevant in a competitive online market.
Although this maintenance won’t be as intense as a regular job, it may still be necessary to prevent your passive income from declining over time.
How is Passive Income Taxed?
Passive income is taxed using the same tax treatment and rates the IRS levies on active income. In other words, the IRS uses your tax bracket to determine the percentage of your passive earnings that goes toward paying your taxes.
Use the following tax forms when reporting your passive income:
- Form 1040, U.S. Individual Tax Return or Form 1040 S.R., U.S. Individual Tax Return for Seniors
- Form 8582, Passive Activity Loss Limitations
- Form 8582-CR, Passive Activity Credit Limitations
On the other hand, the tax treatment will also depend on the type of passive income stream you have. Passive earnings generated through renting properties are subject to tax deductions of up to $25,000 if you report any losses from leasing real estate.
The IRS recommends grouping together similar passive income activities to help reduce the amount of taxes levied on your passive earnings. A typical example is combining real estate rental and investment income.
Make it a habit to document all transactions and payments related to your passive income. If you earn passively through selling goods or writing for different brands, creating a self-employed invoice may come in handy.
Documenting your passive income transactions helps keep track of your profits and losses and provides accurate values when filing your taxes.
How Many Income Streams Should You Have?
Ideally, the number of income streams you should have will depend on your long-term financial goals. Your range of knowledge and skills will also factor into how much you can diversify your profits.
If you have a good grasp of the cryptocurrency market and are skilled at sales, you can combine NFT staking with investing in crypto and selling products online.
Or, if you are more creative, you can try creating YouTube videos, blogging, and affiliate marketing to maximize your earning potential.
Some financial experts may claim that millionaires have at least seven income streams. In truth, this is possible for the average person, provided they know how to budget their time and resources accordingly.
Can You Make Passive Income With No Money?
Yes, you can make passive income with no money or zero capital. After all, there are several passive income streams that you can try for as long as you have the essential tools, equipment, and knowledge to help you get started.
If you love writing, all you need is your laptop or personal computer, a stable internet connection, and your creative juices to slowly but steadily unlock an alternative source of money through blogging.
Investing in high-quality video and audio recording equipment is an excellent place to start if you prefer producing enriching content or storytelling.
For crypto investments, NFT staking, or any type of investment or annuity, you may need to have saved a specific amount of assets and money to gain stable ground as you explore the passive earning potential of these activities.
3 Passive Income Myths
The concept of passive income is surrounded by many myths and wrong ideas that can deter some people from trying or disappoint those who do.
Here are some of the key misconceptions you need to be aware of to succeed in creating a passive income stream:
- It’s a get-rich-quick scheme. Many people believe that there are plenty of tricks and “money hacks” you can do to obtain significant wealth overnight. In reality, the vast majority of passive income streams require a lot of time and money invested upfront. It can take years before all that hard work starts to pay off.
- It doesn’t require any work. The word “passive” leads many to think they won’t have to do anything, and the money will keep coming. In reality, many passive income ideas and businesses will require constant input and regular maintenance. The goal is to minimize this involvement so that it requires much less than a regular job.
- It’s too risky. While there’s always a degree of risk involved with passive income, the downsides aren’t as big as you may think. Various methods offer different levels of risk. You can start small and diversify your investments to mitigate the risk while safely and gradually growing your passive income.
Passive Income Record Keeping With Paystubs.org
No matter the passive income method you opt for, you can use Paystub.org to generate the required documentation and keep your operations running smoothly. Spend less time doing administrative work and more time building your income stream.
We offer the following software tools:
Final Thoughts
Now that you know the definition of passive income, you can weigh your options accordingly and find passive earning streams that suit your lifestyle and interests and help improve your family finances.
The beauty of having passive income is the endless possibilities and opportunities that come with it. You can learn new skills and expand your knowledge to prepare for a new investment or set up more channels to maximize your profits and gain financial security.
Passive Income FAQ
#1. How long does it take to build a reliable passive income stream?
Building a reliable passive income stream can take anywhere from a few months to several years. The exact timeline depends on the method you choose, your skill level, current market conditions, and the amount of time and money you have to invest.
#2. Can I earn passive income while working a full-time job?
Yes, you can earn passive income while working a full-time job. Many individuals start working on their passive income stream as a side hustle, during evenings or weekends. Once their efforts start to pay off, they can quit their job or keep it to have multiple streams of income.
#3. What income doesn’t need to be reported?
In general, all income needs to be reported. This is especially important for passive income from business endeavors. However, there are some types of income that aren’t taxable and don’t have to be reported, like some gifts, inheritances, or certain child support payments.
