On its own, the word “passive” describes something that doesn’t require active response or resistance.
So when it comes to money, passive income refers to money that you can earn without making much effort day-to-day.
However, this doesn’t mean that there isn’t hard work involved, otherwise everyone would be living off passive income.
It’ll usually take time, effort and money – especially at the beginning stages – to establish a passive income source.
Active income vs. passive income
Most working people earn active income. For example, your day job, freelancing, coaching and consulting are all considered active forms of income.
Active income generally refers to money you earn as a result of the time you put in, whether it be hourly, on a salary, or a flat rate.
On the other hand, passive income usually comes from assets you control. Though there can be an upfront investment of time, effort and/or money, it doesn’t require direct involvement when the money is coming through.
Why build passive income?
Who wouldn’t love to sit back and see cash flowing in? Passive income is attractive for many different reasons. Having another stream of income allows you to build wealth, gives you the chance to retire earlier, and protects you if you lose your job.
Though it’s not always the case, you can make a living from passive income. It can help you build financial freedom. This means you could continue paying for your expenses without having to work unless you want to.
How can you make passive income?
Just like there are many forms of active income, there are also many forms of passive income.
There’s a massive range of options, things that could take little investment to start with and others that could take tens of thousands of dollars and a fair amount of time.
A quick Google search will bring up dozens of passive income ideas but here are a few of the most popular methods.
Savings accounts
One of the easiest ways to make passive income is with a savings account. In fact, you probably already have one. It’s worthwhile to compare different savings accounts and find one with the best interest rate. Though you won’t be making tens of thousands of dollars, you could be earning extra money each year for doing essentially nothing.
Investing in shares
Investing in shares can definitely sound daunting. Arguably the lowest effort way to invest in shares is by buying and holding. This means you buy a share and keep it long-term rather than buy and sell to make profit in the short-term. Over many decades, you could earn hundreds of thousands of dollars depending on how much you invest (of course, the reverse is true, too. There are never any guarantees when investing.)
Passive income from investing is generally made by choosing stocks that pay dividends.
When companies make profits, they can choose to share the profit by paying shareholders a set amount of money per share, known as a dividend. Dividends are generally paid quarterly.
Not all companies distribute dividends.
If you don’t want to pick companies to invest in, you could choose to invest in a managed fund, such as the Spaceship Voyager portfolios, though managed funds provide capital growth rather than regular income.
Investing in real estate
A common but difficult way to make passive income is through real estate investing.
Real estate investors make money by renting their property out to tenants. Generally, this makes it a less passive source of income since they have to put time into managing the property. To make it easier, some hire property management companies to do it for them, who take a portion of the profits.
Selling digital products
There’s an increasingly large market for digital products such as e-books, video courses, apps and templates. Though it might take a lot of time and effort initially, you generally don’t have to invest a considerable amount of money to get started.
If you have an existing online presence, creating an educational e-book or course could be super successful. You’ll only have to create the product once but you could continue selling it for as long as you like. Selling digital products can be scaled and could even earn you a full-time income.
Rent out your items or rooms
Renting doesn’t exclusively apply to real estate investors. If you have a spare room in your house, you might be able to find a roommate or turn it into an Airbnb. If you can find a long-term tenant, the income can become largely passive and relatively stable.
On top of renting out a room, you can rent out items. For example, you might have a trailer, a professional camera or exercise equipment that you don’t necessarily need to use all the time. Even clothing that you may only wear on occasion can be rented out! You could charge a small fee to let others use it for a certain period of time. Though you might not make much, you’re not losing anything either.
Should you be making passive income?
With accessible options like starting a savings account or starting a side hustle, getting started could be right for you. However, the upsides of passive income don’t entirely outweigh the need for an active income.
For some, having all your income be passive might sound appealing. If so, go for it! Some people make their living as real estate investors and online business owners. You’ll need to do the hard yards but hopefully, you’ll be able to enjoy yourself after.
For others, working a normal job just makes sense. Active income is generally more stable and you get to see returns as soon as you start putting in the work.
It all comes down to what your goals are and the kind of lifestyle you want to live. Find the balance of passive and active income that works for you!
