What is Passive Income? (12 Best Passive Income Streams)

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What is Passive Income? (12 Best Passive Income Streams)

Try a quick Google search like, “how many millennials are broke?” and you’ll probably find a concerning list of headlines: “Are Millennials the Brokest or Richest Generation?”, “Millennials Aren’t Breaking Traditions. They’re Just Broke”, “Further Proof That Millennials are the Brokest Generation,” to name a few.

To say making ends meet as a millennial is challenging is an understatement. The good news is that there are plenty of ways you can supplement your income without having to work extra on the weekend. It’s called passive income. From making investments on the stock market to becoming an influencer, odds are, you can find a profitable path that works for you. In fact, earning passive income has become quite popular. Deloitte recently reported that 8 in 10 millennials said they’d consider taking a job in the gig economy (which can include passive options like Airbnb), instead of or in addition to their full-time job.

If you’re curious about making some extra cash with minimal effort, this post is definitely worth a read. To skip ahead, simply click on the links below — or read all the way through for an extensive overview of the best passive income opportunities.

What is Passive Income?

Passive income is a source of income that requires minimal effort to achieve. Income from a rental property, investments on the stock market, and participating in affiliate marketing are all examples of passive income opportunities.

Many people who partake in passive income avenues use it as a secondary source of income while still maintaining their primary income, like their salary or hourly wage. Like most other types of income, passive income is taxable. However, depending on the passive activity, you’ll notice that some are taxed at higher rates than others. For example, interest income is treated like ordinary income when it comes to taxes, while dividends and capital gains have their own tax category.

Active income vs. passive income

So, now that you know what constitutes passive income, let’s talk about what makes passive income different from the other two types of income (active and portfolio).

• Active income is essentially the opposite of passive income because it requires an effort to keep and maintain it. Active income is generally your salary or hourly wage.
• Portfolio income is income that’s made from dividends, interest, capital gains, and stock investments. For the purpose of this article, we’ll count portfolio income as a type of passive income.

Should you have a passive income stream?

Like any financial decision, you’ll have to consider how opening a passive income stream will impact your financial situation and personal life. Many financial experts recommend individuals give passive income a try because it offers a variety of benefits that can boost your personal finance goals. Let’s take a look at a few of the potential advantages of bringing in passive income:

• It can help you establish financial security. Whether you’re saving up for retirement or want to build an emergency fund, having an extra form of income can help you siphon more money into areas you might not have been able to with only one source of income.
• Starting a passive income stream can help you boost your discretionary income without sacrificing other areas of your budget. Planning out your dream vacation but can’t afford it with your primary income alone? Passive income can give you the financial freedom to help you afford lifestyle expenses without taking up too much of your free time.
• Speaking of time…passive income allows you to make money on your own schedule. Unlike active income where you have to come into work from 9-5 or keep up with a predetermined work schedule, passive income enables you to make extra money at your own pace.
• You can earn passive income from anywhere. Since so many passive income opportunities exist online, you have the freedom to engage from your home, on your lunch break, or while you’re traveling the globe.
• You don’t (always) need money upfront to start earning. There are tons of opportunities out there to make some extra cash without spending any money to get started. Likewise, you don’t necessarily have to be an expert in something in order to capitalize on your skills.

How to Make Passive Income

If the benefits of earning passive income have you seeing dollar signs, your next step will be finding a passive income stream that works for you. We’ve broken down these passive income opportunities into three categories: passive income opportunities that require startup money, passive income types that require knowledge and time, and miscellaneous opportunities.

Passive income that requires money upfront

You know what they say…it takes money to make money…and sometimes, it takes more money than you might be ready for. However, the rewards can be well worth it if you play your cards right. Here are a few ways you can earn a passive income through investment.

1) Real estate

There are two different ways you can boost your bucks through real estate supplemental income: long-term rentals and short-term (vacation) rentals.

• A long-term rental means leasing part or all of your property to a tenant for a predetermined period of time, such as a year-long or six-month lease.
• A short-term rental is when you rent out part or all of your property for a shorter timespan, often without a lease agreement. Websites like Airbnb and VRBO allow property owners to list their space on a nightly basis.

Whether you rent out your property for a long or short period of time, being a host or landlord does require some effort, especially if you want to earn positive reviews and find great renters. Besides maintaining your property and answering questions from renters, managing this income stream is generally pretty simple—and if you can afford a property manager, your job becomes even easier.

Like any type of investment opportunity or real estate income stream, there is some risk associated with leasing out your home. If you’re renting out your property for a long period of time, you’ll probably want to screen prospective tenants in order to find respectful and reliable people to live in your home. As for vacation rentals, you may want to invest in the platform’s insurance plan to help protect your property.

Along with the risks come the possibility for great reward. In fact, Fortunebuilders.com says that passive real estate investment can be useful for a number of reasons including:

• Tax breaks
• Retirement funding
• Mortgage payments

2) Dividend stocks

Dividend stocks are a type of investment that allows you to earn income on a regular basis rather than just when you sell your stock. Generally companies distribute a predetermined amount to their investors every quarter, based on their quarterly revenue. The two most common ways people invest in dividend stocks is through ETFs and individual dividend stocks.

• Investing with ETFs: An ETF (exchange-traded fund) is basically like a bulk collection of stocks, commodities, and bonds that focus on a particular industry. The main benefit to ETF investment is that you can invest in a diverse set of securities and just track the ETF, rather than investing in many different stocks and having to track each one separately. Like individual stocks, ETFs are traded on an exchange and can be purchased through a brokerage firm.
• Investing in individual dividend stocks: Individual dividend stocks basically function in the same way as ETFs, but instead of buying a collection of securities, you’d have to invest in them one by one, which could require more time and effort.

There’s risk with any investment, especially when you’re investing in the stock market. This means that you’ll have to mitigate your risk by following market trends, researching business profiles, and only risking what you can afford to.

3) Real Estate Investment Trusts (REIT)

If you’re interested in real estate investment, but don’t have your own property to lease—or maybe you just don’t want to be a landlord—a Real Estate Investment Trust might be a viable passive income avenue for you. REITs are organizations that own and operate real estate property like apartment complexes, commercial buildings, or healthcare facilities. REITs sell a certain amount of shares to investors, then they collect rent from tenants and return a percentage of the proceeds (dividends) to their shareholders.

REITs can be a good investment opportunity for many reasons: the dividends are steady, the companies are typically very transparent, and they have good liquidity. On the other hand, REITs can have low growth and have high transaction fees.

4) Peer-to-peer lending

If you have some extra cash on reserve, peer-to-peer lending, also known as “P2P”, might make sense for you. P2P lending sites connect borrowers to private lenders, allowing them to take a loan out outside of a bank or traditional lender. As an investor, you would deposit a sum of money to your account and then approve an individual to borrow the amount, then you’d collect interest paid on the loan.

Before investing in peer-to-peer lending, you should consider how loan default rates affect you and you should also evaluate the transaction fees.

5) High yield savings, CDs, and money market accounts

Another way to make passive income is simply earning interest on your savings accounts. This method requires minimal effort so long as you can resist tapping into your savings funds. Here are your passive income savings options:

• Savings Accounts: Some savings accounts have higher interest rates than others (high yield savings) which can bolster your savings. The benefit to having a standard savings account is that you can continue to withdraw money and have access to cash from ATMs while still collecting some interest. However, savings accounts tend to have much lower interest rates than other options.
• Money Market Accounts: Money market accounts have higher interest rates and allow you to make limited withdrawals, but have a high minimum deposit amount in order to avoid banking fees.
• Certificate of Deposit (CDs): CDs typically have higher interest rates than regular savings accounts and the rate doesn’t change according to the terms of your account. However, there are penalties if you choose to withdraw early.

Passive income that requires time and knowledge

If you’re hoping to build your savings but don’t have enough money saved up to fund your investment ventures, you might opt for some passive income ideas that use your knowledge and (some) time instead.

6) Blogging and affiliate marketing

According to data from eMarketer, there are approximately 106.7 million Instagram users in the United States alone. What’s more, the platform expects usership to increase with approximately 125.5 million U.S. Instagrammers expected in 2023. If you’re already on Instagram, you’ve likely seen the wave of influencers taking over your feed. In the marketing industry, influencer marketing is known as affiliate marketing. Affiliate marketing is a tactic where companies and marketers pay individuals to share their support for products among their social network.

Sometimes these individuals simply have to include a link on their blog. Their contract may also require them to post X number of Instagram stories or Facebook posts about a product in a certain timeframe. Affiliate marketing has become an extremely popular source of passive income over the years; in fact, Business Insider reported that U.S. companies spent approximately $5.9 billion on affiliate marketing campaigns in 2018.

Depending on your partnerships, affiliate marketing can require more work than you’d want for a passive income. The other main risk with affiliate marketing is that it often puts individuals in a more vulnerable position online by posting more frequently or opening your profile up to public comments. On the other hand, if you’re lucky, this route can allow you to express yourself and explore your passions while supplementing your income.

7) Digital product sales

If you’ve been gifted with a talent for words, you might consider putting your talents up for sale online. There’s practically a market for anything you’re interested in writing—recipes, poetry, cover letters, podcasts, magazines—the list goes on.

While this one is more of a hybrid between active and passive income, we’ve included it since you can do it on your own time and at your own pace. Plus, it can be something you really love so it doesn’t have to feel like work. One of the easiest ways to get started would be to join a freelancing site like UpWork or Fiverr.

8) Create an app

Another way to make extra money is by creating an app. Of course there’s some work required upfront, but once it’s launched, you can continue to benefit from sales without having to do too much maintenance.

Miscellaneous passive income opportunities

If money or time are holding you up from generating a passive income, you might try one of these creative passive income opportunities.

9) Vending machines

Investing in vending machines is one popular (sometimes challenging) way to earn supplemental income. To start making money on vending machines, you would need to buy a machine, stock it, and find a place to install it. From there, the rest can be pretty simple, other than required maintenance and inventory as needed.

The main risk here is how much standard repairs will cost you, as well as the effort to restock it, or hire someone to restock it.

10) Laundromats/ATMs

If you’re ready for a bit of a project that will have a passive pay-off in the long run, opening up a laundromat might be a good option for you. Of course there are some startup costs and efforts involved, but once it’s up and running there’s not a ton of operational support needed with self-service machines. Similarly, owning and installing ATMs can be a simple business model with good returns.

11) Cash-making apps

The age of technology has made our lives easier in many ways—from online shopping to bill splitting and budgeting—we can do pretty much anything by simply using our smartphones, including making money. Just check out these side hustle apps, for example.

• Bird/Lime Scooters: Get paid for collecting and charging electric scooters.
• Turo: Rent out your vehicle online.
• WAG: Walk pets on your own schedule.

Which cash-making app gets you the most bang for your buck? Earnest.com says Airbnb ranks the highest at an average $924 per month.

12) Surveys

If you’re looking for an easy way to make money, survey-taking might be it. Make money while you watch TV, as you enjoy your lunch break, or while you’re on vacation. Taking surveys is relatively simple, and you can do it while you multitask.

Here are some websites you can use to take surveys for money online:

Keep in mind, some of these sites will reward you in gift cards instead of cash, which can still end up being pretty useful when you need to make a Target run or hit up the grocery store.

Debunking Passive Income Myths

Now that we’ve covered some passive income ideas, let’s talk about the common misconceptions that surround passive income.

“All passive income opportunities are equal”

Like any investment or employment opportunity, there are different benefits and risks associated with passive income types. When you’re looking for the right kind of passive income for your situation, you should consider the following:

• Does this method have a positive long-term history? Simply put, are people making money off of it?
• How high are the risks? Sometimes high risks equal high rewards, but you’ll want to be careful about accepting opportunities that are too risky for what you can afford.
• Finally, you’ll want to keep your wits about you. Income opportunities that offer unrealistic promises or startup requirements might be more sketchy than lucrative.

“With passive income, you can make money while you sleep”

Engaging in passive income is kind of like getting a new, less demanding second job. No matter which avenue you choose, you’ll have to do some work to begin or some work later on in order to continue generating income.

“You don’t need to keep your day job if you have a good enough passive income strategy”

Everyone’s financial situation is different, but in most cases, passive income activities function as a secondary way to make money. Unless you’re financially stable enough to leave your primary income behind, you should probably continue to work your day job.

Passive Income Fundamentals

• Passive income is a way to make money without putting in a ton of effort. You might need to do some startup or maintenance work, but a passive income stream shouldn’t be like a second job where you have to work X number of hours or abide by a regular schedule from week to week.
• There are many different ways to earn a passive income—some require money upfront (like real estate investment) while others demand more time and experience (like blogging or creating an app).
• Although it doesn’t have to be as much work as a part-time job, having a passive income stream doesn’t mean that you get to make money while putting forth no effort at all.
• When searching for a source of passive income, you should look for something that other people have used to make money, you should carefully consider the risks, and you should avoid opportunities that make overzealous claims or promises.

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