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You’ve probably heard the term passive income.
It sounds appealing, right? According to the definition of passive, it would mean you’re earning income without participating or having to do anything at all.
Free money? Sign me up!
Unfortunately, that’s a common misconception. Just like you can’t pluck money from a tree, you can’t expect to earn passive income by being, well, totally passive.
However, it’s a viable way to make money and offers you security and freedom.
If you’re interested in establishing a flow of passive income, here’s a guide to understanding the term and getting started.
What Is Passive Income?
Passive income is money flowing in from a source where a person is not actively involved. Common examples include rental income, investment dividends, and online business profits. It offers financial security with minimal ongoing effort after the initial setup.
Todd Tresidder, a wealth coach and the founder of Financial Mentor,defines passive income as “income that comes in without regard to your time.” He’s a big proponent of this approach and has several passive income streams.
However, remember that the initial setup may take a lot of time and energy.
“Often in passive income, you have to commit the time and energy upfront,” Tresidder says. He describes it as a machine; you must build the machinery before it can work without your assistance. Another name for passive income is “lagged income” since the income follows the setup.
Brad Hines, another big fan of passive income, estimates about 10% to 15% of his income is passive. He first heard the term years ago and was immediately intrigued. However, he admits it’s been a longer and more difficult process than he thought (think: the time required upfront).
Hines compares passive income to its counterpart, active income. That’s the money you’re actively working to make, like at your day job.
“When zero of your money is passive income, that inherently means every minute you’re not working, you’re not making money,” he says.
What’s the Importance of Passive Income?
Why is passive income important? “Freedom,” Tresidder says.“The reason you establish a passive income is because it’s not connected to your time, which gives you the freedom to do other things with your time.”
Because Tresidder has multiple channels of passive income, he uses his freedom to travel when his kids are on summer break. For example, last year the family took a two-month trip to Europe, where they hiked Spain’s 500-mile Camino de Santiago.
“I’ve designed my life to be free and flexible,” he says.
So has Hines.
“The more you’re earning passively, the less you’re becoming a slave to money,” he says. “I can go where I want, when I want.”
Passive income is also important for the financial security it can offer. Although you might take a risk when first establishing it, if it proves to be a steady flow, it offers great security because it’s not connected to your time.
So, for example, if your spouse gets sick or if you can’t work, the idea is you’ll still be earning passive income to pay those never-ending bills.
“No matter who you are — especially if you have debt or student loans or kids or whatever — the more you can get your annual income switched to passive, the better off you are in the future,” Hines says.
8 Benefits of Passive Income
Passive income is an attractive way to earn money without the constant active involvement required in traditional jobs. It offers several benefits that can significantly enhance your financial health and lifestyle. Here’s a more detailed look at these advantages:
- Enhanced Financial Independence: Passive income streams, once established, can provide a steady flow of earnings, reducing dependency on a full-time job. This independence allows for more control over your financial future.
- Greater Flexibility and Freedom: With passive income, you gain the flexibility to choose how and when you work. This freedom enables you to allocate more time to personal projects, hobbies, or quality moments with loved ones.
- Consistent and Predictable Income: Passive income sources like rental properties or dividends provide a predictable and stable income stream. This consistency is particularly valuable during retirement or economic uncertainties.
- Opportunities for Wealth Accumulation: Over time, passive income can lead to significant wealth accumulation. Investments that appreciate in value, such as real estate or stocks, can substantially increase your net worth.
- Tax Benefits: Certain passive income ventures, like investing in real estate, offer tax deductions and benefits. These can include deductions on mortgage interest, property taxes, and maintenance expenses.
- Diversification of Income Sources: By having multiple streams of passive income, you can safeguard against financial instability caused by job loss or market fluctuations, thus ensuring a more secure financial position.
- Location Independence: Many passive income opportunities, especially those based online, allow you to manage your income sources from anywhere, providing the freedom to travel or live in different locations.
- Leveraging Time Effectively: Once set up, passive income endeavors typically require minimal ongoing management. This efficient use of time means you can focus on other income-generating activities or enjoy leisure time while still earning.
15 Passive Income Ideas
Just like everyone else, passive income has various definitions. The one you’ll want to study is from the IRS, which has its own, very specific definition. Take a look at that before tax season.
In the meantime, you can start small with these ideas, then work your way up like Tresidder and Hines did. Think really big like starting a business or investing in real estate.
Really, the possibilities are endless, so don’t begin to consider this as a finite list.
1. Sell Your Photos (Nope, You Don’t Have to Be a Professional)
Those thought-out photos you take can get you more than just Instagram “likes.”
Hines uploads his iPhone photos to stock photography sites. He says many of them are trying to get away from the “perfect” photo and are looking for more realistic images. After a quick upload, he’ll get email notifications when someone purchases his work.
You likely won’t become a millionaire; Foap, for example, splits the profits with the photographer evenly. However, if you have a nicer camera, you can step up your game like Eliza Snow, who quit her corporate job to sell photos full time.
2. Create a Website
…like everyone else you know, right?
Hines says starting a profitable website can be difficult because the competition is fierce; you’ll have better luck breaking into a niche market.
The upside is that it costs little money to start one — and there’s little risk. Your startup expenses might only include purchasing a hosting package. For a new blog, this is affordable through channels such as Bluehost, which offer packages starting at $2.95 a month when you sign up here.
To earn money through your site, learn about affiliate sales. For example, Hines has a site called Nerd Playthings. He lists about 45 toys and gadgets — none of which he made — all linking back to Amazon via Amazon Affiliates. If a consumer clicks on a link and buys the product, he’ll bag some money.
To learn more about this, we have a whole guide on how to make money blogging.
3. Make Money Off Your Extra Space
Do you have a room? A garage apartment? A tent? Establishing passive income in real estate doesn’t have to start with a huge investment.
You can list your space through Airbnb.
Use Airbnb’s price calculator to see how much money you could make in your area.
Tonya Peters’ husband, Miles Rugh, was one of those skeptics.
She wanted to list their Virginia Village basement apartment in Denver, Colorado, on Airbnb, but he wasn’t keen on welcoming strangers into their place.
Finally, though, he agreed to give it a try. Now, three years later, the couple has hosted too many guests to count. And the extra income has been great for them. They plan to use it for some home renovations they’ve been wanting.
“He’s definitely changed his tune,” says Peters, now an Airbnb Superhost. “And he loves having the extra income.”
(Hosting laws vary from city to city. Please understand the rules and regulations applicable to your city and listing.)
4. Buy a Gumball Machine
Scratching your head yet? Hines actually used to make money from those gumball machines you see in restaurants; he’d get 80% of the profit.
You can also look into the same idea with vending machines. There will be some management you have to do, but, again, it’s one of those hybrid passive income sources.
Plus, it’d be kind of cool to say, “Fun fact: I own a gumball machine.”
5. Design Greeting Cards
We wrote about companies that’ll pay you to write greeting cards — some up to $300. We also have a guide about how to get started writing greeting cards.
We included a bonus site at the end, one where you can design your own greeting card through a site like Card Gnome. It’s basically an Etsy for greeting cards. All you have to do is design the card and put it up for sale.
Each time someone buys your card, you’ll get 10% of the purchase. Once you hit $10, you’ll be able to cash out.
One and done.
6. Create an E-Course
One of Hines’ biggest pieces of advice was to “take whatever you’re doing as a day job, and teach what you know by creating an information product and get money from that.”
For example, this math teacher created an online course on programming, and he made $1 million in under a year.
Now, don’t go in setting your expectations that high, but with these tips and a solid platform like Udemy, you could start raking in passive income this year.
7. Sell Random Stuff on Sites Like Zazzle
By random, we mean… pretty random.
If you have art, designs or photos, you can publish them on any kind of product you can think of: invitations, T-shirts, mugs, pillows, phone cases… Then set your own royalty rate (that’s the percentage you’ll rake in from 5% to 99% ), and you’re done.
You won’t have an inventory to handle (no production, no shipping).
Find out more about selling on Zazzle, or look into other platforms, like Amazon.
8. Get Cash-Back with Credit Cards
You’re already shopping, right? A passive way to earn income is to sign up for credit cards that offer cash, or points, back.
We created a list of cash-back cards that offer sign-up bonuses — and are free of fees.
It’s important to remember that for this to truly be passive, you’re not spending money for the sake of earning points or cash back; you’re spending it like you normally do.
9. Teachers (or Not): Sell Lesson Plans
This idea is especially useful for teachers who are already frantically cranking out lesson plans. If you find one you’re really digging, put it up for sale on a platform like Teachers Pay Teachers. This helps other teachers across the world — and gives you some income.
10. Stick an Ad on Your Car
Do you already drive a lot? If so, consider slapping an ad on the side of your car.
One rideshare driver makes an extra $250 a month from car-wrap ads.
Steve Gillman explored the method of income. For example, you could earn $100 a month from a platform like Carvertise with no upfront costs.
You’ll likely have to answer questions about your driving habits, and you’ll have a better chance of getting selected if you live in a bigger city and drive a lot.
11. Make YouTube Videos
Think you have something that might go viral? Or have expertise in something folks might be interested to learn? Make a YouTube video, and establish a passive income.
Gillman has done just that. He’s monetized his YouTube videos with Google AdSense. For example, he shot ten videos about ultralight backpacking. No, they didn’t become huge hits, but he has made more than $1,000 over the years.
He outlines how you can start a YouTube channel.
12. Publish an E-book
If you have a way with words, or an intriguing life experience, you could write a book. But there’s no need to send it off to all the major publishing houses in New York City.
You can publish e-books through Amazon’s Kindle Direct Publishing platform. Again, Gillman did this (because what has he not done?!).
He wrote a book in a week. Note: E-books don’t have be hundreds of pages long. They can be as short as 6,000 words.
After publishing it on Amazon, he started making $350 a month. He outlines exactly how he did it and the best tips and tricks for you.
13. Use Cash-Back Apps While Shopping
Just like the cash-back credit cards, remember that you have to actually shop and buy this stuff — with zero regards to the rebates.
If that’s the case, this can be considered passive income, according to Hines.
While grocery shopping, you can use an app like Fetch Rewards, which will turn your receipts into gift cards. It partners with tons of brands to give you points for every grocery receipt you share. Then you can exchange them for gift cards to places like Amazon, Walmart, Chipotle and dozens of other retailers.
All you have to do is send Fetch a photo of your receipt, and it does everything for you. No scanning barcodes or searching for offers — and you can use it with any grocery receipt.
When you download the app, use the code PENNY to automatically earn 2,000 points when you scan your first receipt. Then start snapping photos of your recent receipts to see how many points you can earn without a single trip to the store!
14. Rent Out Your Car — or Other Stuff You Don’t Use Regularly
Got a car? A driveway? Some tools? Baby gear? Whatever it is you have, you can probably rent it out.
Just like renting out your space, this will require some maintenance and upkeep unless you go through a broker, but it can yield some solid passive income.
15. Share What’s in Your Fridge
You can also earn passive income by sharing your information with research companies.
The Nielsen Consumer Panel is one such option. Once you sign up to be on the panel, you’ll gain access to the NCPMobile app. (If you don’t have a smartphone, Nielsen will send you a scanner.) As you unload your groceries after your next shopping trip, simply use the app to scan items’ barcodes.
Nielsen will reward you with points, which you can redeem for free gift cards, electronics (new TV, anyone?) and household items. The longer you stay on the panel, the more opportunities you have to earn.
Applying to become a panel member is straightforward. You’ll answer some basic questions about you and your household, then Nielsen reviews your application and will contact you when you’re eligible to join.
As mentioned, there are tons of ways to establish a passive income; these are just a few. Just be sure the offer is legitimate. Do your research, and remember that if it’s too good to be true… it probably is.
How to Start Your Passive Income Journey
Embarking on your passive income journey can be both exciting and daunting. Here’s a step-by-step guide to help you get started:
- Assess Your Financial Situation:Begin by evaluating your current financial health. Analyze your income, expenses, debts, and savings. Determine how much capital you can initially invest in your passive income ventures.
- Set Clear Goals: Definewhat you want to achieve with passive income. It could be financial independence, additional income for retirement, or saving for a specific goal.Be realistic and set measurable and achievable targets.
- Educate Yourself:Invest time in learning about different passive income streams. Read books, attend workshops, or take online courses. Understand the risks and rewards associated with each type of passive income. Define what you want to achieve with passive income. It could be financial independence, additional income for retirement, or saving for a specific goal. Be realistic and set measurable and achievable targets.
- Choose a Suitable Passive Income Stream:Select a passive income route that aligns with your interests, skills, and financial capacity. It could be real estate, stock market investments, creating digital products, or starting a blog. Consider starting with one passive income stream and gradually diversifying.
- Develop a Plan:Create a detailed plan for your chosen passive income stream. This should include steps for setup, a timeline, and a budget. If necessary, consult with financial advisors or experts in the field.
- Start Small and Scale Gradually:Begin with manageable projects to mitigate risks. For example, start with a small investment property or a basic website.Reinvest your earnings to grow your passive income sources.
- Monitor and Adjust:Regularly review the performance of your passive income streams.Be prepared to make adjustments, whether it’s tweaking your strategies or shifting to more profitable ventures.
- Stay Persistent and Patient:Understand that building passive income is a long-term process. Patience and persistence are key. Celebrate small victories and stay motivated.
FAQ on Passive Income
What is passive income?
Passive income is earnings from a source that does not require active involvement or daily management. Examples include rental income, dividends, and earnings from online businesses or investments.
How can I start earning passive income?
Begin by assessing your financial situation and setting clear goals. Educate yourself about different passive income streams, choose one that aligns with your interests and financial capacity, and then develop a strategic plan to start.
How much money do I need to start earning passive income?
The amount varies depending on the type of passive income. Some online ventures may require minimal investment, while real estate can require a significant upfront sum. It’s important to start with what you can afford and scale up over time.
Is passive income really passive?
Initially, setting up a passive income stream may require substantial time and effort. However, once established, it should require minimal active involvement, though occasional maintenance and oversight are necessary.
What are the risks of earning passive income?
Risks vary by the type of income stream. Common risks include market fluctuations for investments, property damage for real estate, or changes in consumer behavior affecting online businesses.
How does passive income affect taxes?
Passive income is taxable, and tax rates vary depending on the income type and your location. It’s important to understand the specific tax implications for each passive income stream and plan accordingly.
Can passive income replace my full-time job?
While it’s possible, it depends on the amount of income you can generate and your financial needs. Building a sufficient and reliable passive income stream to replace a full-time job often takes time and strategic planning.
What are some common passive income streams?
Common streams include rental income from real estate, dividends from stocks or mutual funds, earnings from online businesses, royalties from intellectual properties, and income from peer-to-peer lending.
How do I manage and grow my passive income?
Regularly review and adjust your strategies to optimize performance. Consider reinvesting your earnings to grow your income sources and diversify to spread risk.
Is passive income suitable for everyone?
Passive income can be suitable for a wide range of people, but it requires careful planning, research, and sometimes initial capital. Individual suitability depends on financial goals, risk tolerance, and commitment to initial setup and ongoing management.
Set Clear Goals:Define what you want to achieve with passive income. It could be financial independence, additional income for retirement, or saving for a specific goal. Be realistic and set measurable and achievable targets.
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Passive Income Definition: Passive income is money earned from a source where an individual is not actively involved. Examples include rental income, investment dividends, and profits from online businesses. It provides financial security with minimal ongoing effort after the initial setup.
Experts' Perspectives: Todd Tresidder, a wealth coach, defines passive income as "income that comes in without regard to your time." Brad Hines emphasizes that the initial setup may require significant time and energy, likening it to building a machine that operates without constant assistance.
Importance of Passive Income: Passive income offers freedom by decoupling earnings from time, allowing individuals to pursue other interests. It provides financial security and flexibility. Tresidder and Hines highlight the ability to design a free and flexible lifestyle, emphasizing the importance of becoming less dependent on actively earned income.
Benefits of Passive Income:
- Enhanced Financial Independence: Reduces dependency on a full-time job.
- Greater Flexibility and Freedom: Allows individuals to choose when and how they work.
- Consistent and Predictable Income: Provides stability, especially during retirement or economic uncertainties.
- Opportunities for Wealth Accumulation: Over time, passive income can lead to significant wealth growth.
- Tax Benefits: Certain passive income ventures offer tax deductions.
- Diversification of Income Sources: Guards against financial instability caused by job loss or market fluctuations.
- Location Independence: Many passive income opportunities, especially online, allow for management from anywhere.
- Leveraging Time Effectively: Requires minimal ongoing management, allowing individuals to focus on other activities.
Passive Income Ideas (Top 5):
- Sell Your Photos: Upload photos to stock photography sites.
- Create a Website: Start a niche website and earn through affiliate sales.
- Make Money Off Your Extra Space: List your space on Airbnb.
- Buy a Gumball Machine: Invest in vending machines for hybrid passive income.
- Design Greeting Cards: Design and sell greeting cards on platforms like Zazzle.
Starting Your Passive Income Journey (Step-by-Step Guide):
- Assess Your Financial Situation: Evaluate income, expenses, debts, and savings.
- Set Clear Goals: Define what you want to achieve with passive income.
- Educate Yourself: Learn about different passive income streams, understand risks and rewards.
- Choose a Suitable Passive Income Stream: Align with interests, skills, and financial capacity.
- Develop a Plan: Create a detailed plan for setup, timeline, and budget.
- Start Small and Scale Gradually: Begin with manageable projects and reinvest earnings.
- Monitor and Adjust: Regularly review performance and make necessary adjustments.
- Stay Persistent and Patient: Building passive income is a long-term process; patience and persistence are crucial.
FAQ on Passive Income:
- What is passive income? Earnings from a source that doesn't require active involvement.
- How can I start earning passive income? Assess finances, set goals, educate yourself, choose a suitable stream, develop a plan, start small, and scale gradually.
- How much money do I need to start earning passive income? Varies by type; start with what you can afford and scale up.
- Is passive income really passive? Initially requires effort, but should involve minimal active management once established.
- What are the risks of earning passive income? Risks vary by type, including market fluctuations, property damage, and changes in consumer behavior.
- How does passive income affect taxes? Passive income is taxable; tax rates vary by type and location.
- Can passive income replace my full-time job? Possible, but depends on generated income and financial needs.
- What are some common passive income streams? Rental income, dividends, online businesses, royalties, and peer-to-peer lending.
- How do I manage and grow my passive income? Regularly review, adjust strategies, reinvest earnings, and diversify.
- Is passive income suitable for everyone? Can be suitable with careful planning, research, and commitment based on individual goals and risk tolerance.