Passive income might not be as simple as earning while you sleep, but it can lead to some tidy profits when done right!
With inflation at a 40-year high, prices on just about everything are up for Americans. Even if you have enough to pay the bills, you may be concerned about how to earn enough for retirement, or just having a buffer.
Enter passive income. That’s a stream of funds that – once you set things up – typically needs little regular effort to maintain. You may have heard the phrase “earn money while you sleep.” That’s passive income, whereas active income involves trading time for money.
“In this modern world, where even if you have a salary, it’s still good to have multiple sources of income,” says Cynthia Meyer, a certified financial planner (CFP) with Real Life Planning in Gladstone, New Jersey who works with real estate investors.
Are you interested in earning some extra income? Here’s what you need to know about how to earn passive income – including how to get started.
8 passive income ideas
There are dozens of kinds of passive income streams. You should be able to keep your day job while generating passive income.
In need of a passive income idea? Here’s a quick list.
Regular interest from a certificate of deposit (CD), U.S. savings bond or high-yield savings account may be beneficial as interest rates rise
Dividends from stocks or other investments
Royalties from a creative endeavor like a book or website
Affiliate marketing, earning cash for running advertisements or posting monetized links on your website or social media account – or even wrapped around your car
Make money online activities like starting a blog, taking surveys or testing apps (you can get set up with a free blog easily – just follow these simple steps)
Money from a rental property
Renting out your home short-term
Selling items on marketplaces such as eBay or Amazon
“They’re all not necessarily passive. They might involve some activity, But once that kind of side-hustle is up and running, it may require not too much effort,” Meyer notes.
How to set up a source of passive income
In some cases, such as buying stocks or property, you need upfront cash. Others, such as affiliate marketing, take setup time and plenty of sweat equity. You should also weigh risks against the likelihood of regular income. Lending money can be riskier than buying dividend-bearing stocks or a savings bond, experts note.
A dividend, for example, “provides a decent return on investment and is very reliable, with zero effort,” says Erin Hadary, a CFP with Denver-based Moneta Group Investment Advisors. “However, you need a lot of money to earn money. $100 [per] month would take roughly $40,000, invested in a 3% dividend stock basket.”
Are there some types of passive income that require little money to start?
Yes, but be prepared to put in “sweat equity” – your time. Activities like affiliate marketing or renting out your home take some initial setup and may require maintenance to produce a steady stream of cash.
Royalties from intellectual property like books, patents or music can also offer passive income. You should always thoroughly research your idea before jumping in.”Most people severely underestimate how difficult it is to consistently make money from books,” says Hadary. Other categories can “require some upfront money.”
How much up-front time will I need to invest to earn passive income?
Setup varies depending on the kind of income stream. Take real estate. Unless you’re in the real estate business as a profession, like real estate agents, the Internal Revenue Service (IRS) generally considers these kinds of investments passive income, Meyer says. Be sure to check the IRS website for details on passive income, like renting out property.”Practically speaking, it’s both passive and active,” Meyer says. “It’s passive in the sense that you’re getting rents every month, but you still have to run your real estate like a business. That would be the caveat there.”If you own property and are renting to tenants, for instance, there might be work up front to set everything up as well as regular maintenance.
“Whether or not the tenant pays the rent, you still have to pay the mortgage, the property taxes and insurance and things like that,” adds Meyer. Some investors hire management companies to take care of those details, making the investment more passive, Meyer notes.
Can you earn enough with passive income to make a living?
In some cases, yes, experts like Meyer say. But it takes time to build.
“To live off your real estate, you’re looking for positive cash flow,” Meyer says. “So even in an environment like now where the rents are generally going up – it takes a while to build up any compound return. It takes a while to get to the point where you’re like, ‘Oh, wow, that’s really a lot of money.'”
Depending on the passive income mechanism, setting up an income stream can be daunting (or even temporary). Instagram accounts and blogs can lose popularity, for instance.And remember, most passive income streams require some serious exploration and work to set up. Still others can be risky, experts note. “Unfortunately, it’s next to impossible to find a true passive option,” Hadary says.