Personal Finance
Key takeaway
- Investing money could generate passive income, but there are varying levels of risk.
- Peer-to-peer lending is a relatively new way to put your money to work.
- Digital passive income could come through blogs, videos, online courses and other means.
Having passive income — money earned with minimal effort or involvement — is a dream for many 9-to-5 workers. And luckily, there are lots of ways to create passive income. Some require an upfront investment, but other passive income streams could begin with a minimum investment. Almost anyone can learn how to build a passive income with the right mix of know-how and effort.
This article looks at popular ways to build passive income sources and explores some of the best passive income ideas. We’ll break them down into two categories and investigate what solid passive income is all about.
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The world of finance is complicated and tough to navigate on your own. Sometimes, it’s hard to know what to do next or see the progress you’ve made. But don’t worry, we don’t want you to do it on your own either. That’s why Best Egg Financial Health gives you the tools and knowledge to help you take control of your finances, make confident decisions, and reach your goals — with no judgment, ever.
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Plant your money to grow passive income
When we talk about planting your money, we mean that a “monetary investment” is needed to create an income stream. There are quite a few ways to build wealth with passive income streams that require a bit of investment up front.
Stock market
One of the most popular passive income streams is investing money in the stock market. However, investing in stocks can be a tricky business. Most companies with dividend stocks offer only a small annual payout. As of June 2022, the average dividend yield for S&P 500 companies was 1.69%. At that rate, a $100,000 investment would net $1,690 a year.
When times are good, the stock’s value may rise. But stock investments can be risky. The share price can also fall, and the company might reduce or discontinue dividends. For many investors, exchange-traded funds (ETF) or mutual funds are a safer avenue. With these financial investment vehicles, investments are typically spread out across many companies, and your risk is spread across multiple companies, as well. And mutual funds are managed by professionals who try to beat the market and grow the fund’s value for you.
Savings account
The typical savings account offers little in interest. Although it’s probably the safest passive income idea, interest rates tend to be low. A high-yield savings account might be a better investment. Though it might have more restrictive withdrawal limits, it also provides higher returns.
Real Estate Investment Trust (REIT)
Real Estate Investment Trusts, or REITs, are a fairly straightforward way to get into real estate investment. Buying a rental property — a house, apartment complex, office building — could run from $100,000 into the millions, and REITs are an easier way to get started in the real estate business. Companies handling REITs collect funds from investors, pool that money, and then buy properties that earn rental income.
From 1972 to 2019, on average, the total annual return on REITs was 13.3%. Many REITs will let you get started for as little as $500 or $1,000. When it comes to real estate investing, the risk versus reward scenario could be better with a REIT.
Peer-to-peer lending (P2P lending)
Lending your money, and charging for the service, has always been a way to generate passive income. There are risks, though, and there are account management issues and costs. Peer-to-peer lending, specifically through online companies, matches lenders with borrowers. Some call it “crowdlending.”
Default risks vary, but in many cases, lenders choose what risk category of borrower they’ll allow to borrow money. High-risk borrowers pay more interest on their loans — theoretically, this offsets higher default risks. The P2P company charges a fee and handles everything. If you accept the risks, you’ll make passive income by lending your money, while avoiding the labor that’s usually involved.
Retirement accounts
Funds like IRAs and 401(k) plans are useful ways to earn more money. Their income streams might be delayed, though, depending on your situation. IRAs usually carry a penalty for withdrawals before age 59 and 6 months. But a 401(k) plan, especially if it has an employer match, is a popular way of meeting long-term financial goals.
Pay off debt
Don’t forget the simplest way to increase income streams: pay off your debt. Interest from loans, credit cards, and student loan debt can all add up. Let’s say you carry $500 in monthly payments. If you paid off the debt, you wouldn’t need $500 a month more from a passive income source. You could spend money investing in a passive income source to generate extra income.
Create passive income through an initial push
Perhaps you don’t have capital to invest. Or maybe you don’t have quite enough to fully fund an investment-only business model. There are still plenty of ways to start earning passive income. Let’s explore some popular ways to generate income passively.
Create a website
If you have an interest or hobby, you might create your own website and post articles or blog about it. The costs are minimal to start — basic web hosting runs from free to about $25 a month. That will get you up and running, and you can always upgrade when needed. Fill your site with interesting or fun content and grow your visitor count. As visits increase, you can generate ad revenue from ads on your site.
You might use affiliate marketing to advertise products that link to other vendors. If someone follows those links and buys something, you’ll earn money. Reviewing items that you also link to is a popular passive income strategy.
Write a book
If you’re knowledgeable enough in some subject to write about it, let that generate income for you. With print on demand, it’s never been easier to publish a book. And digital products, like e-books, have opened up many non-traditional markets to writers of fiction and nonfiction, alike.
Online business
Set up your own website with an online store or market items through another online business, like Amazon or eBay. If you’re a crafter or an artist, Etsy is a good marketplace. Or maybe you’ll decide to buy items from one market and resell them for more somewhere else. The days of needing massive warehouses to be a successful marketer are in the past. You can use the income generated to reinvest in your new small business.
Online courses
If you’re knowledgeable in some subject, why not create an online course? Share your experience in an online course and earn income when people sign up for it. There are several websites that let you create online courses and offer them to the public.
YouTube channel
Most everything we’ve been discussing also applies to creating your own YouTube channel. Many YouTubers make a sizable monthly income (some into 5 or 6 figures) by posting videos of interest. If you’re already thinking about blogging or writing about your interests, you can make videos, too. With affiliate marketing and ad revenue, income could add up.
Photography
Stock photography is a nice way to earn passive income if you’re a photographer with good equipment. A stock photography business involves selling commercial images of items, settings, scenery, and people. Opening an account on a site like Shutterstock or Getty Images lets you sell your photos. The photos might be used on websites, for advertisements, in magazines, or on TV. But whenever they’re used, you could earn money.
Renting property
Have a spare room you aren’t using? Space in your garage, or an outdoor shed? How about an extra parking spot? Or just some open property — a field or a wooded area? You can earn rental income. You might earn income from allowing someone to rent any of these resources, without needing any investment on your part. Websites are available to help you market your space. And don’t forget about your ability to rent your tools, equipment, or even one of your vehicles. Just check with your insurance company to ensure you’re covered for any liability issues.
Remember, when it comes to passive income opportunities, the sky is the limit. With a little bit of creativity, you could be earning passive income and turning your free time into some extra money without a lot of effort.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.