Passive income 101

Passive income may appear to be the new #trend these days, but you may be surprised to learn that passive income earners have been around for quite some time. However, only 20% of American households earn passive income, and of that 20%, the median amount earned is about $4,200.

If you can create additional streams of income, you can help pay down debt or save for vacation—or you can begin to create a nice nest egg for retirement (or, in some cases, even become a millionaire!). So, let’s talk about what passive income is, the most common forms and how you could turn a side hustle into a passive income stream.

What is passive income?

Passive income is the money you earn regularly with minimal effort or involvement once you’ve completed the initial setup. It’s created through a variety of sources that continue to generate revenue over time. It’s used to help supplement your current active income (i.e., your full-time job) but doesn’t require your full attention. You can even earn passive income in your sleep, which, let’s face it, you probably can’t do in your current role.

  • Passive income has several benefits, including:

  • Financial freedom

  • Diversification of income sources

  • Stability and scalability

  • Wealth accumulation

  • Generational wealth

While passive income does take an initial commitment of time, effort and money to get set up, it can be worthwhile because it doesn’t require your ongoing time and active participation. And it can lead to financial independence that allows you to supplement your current income.

Common forms of passive income

Many individuals can take advantage of several common forms of income, from rental properties and dividends to digital products or affiliate marketing. Here are seven of the most popular types of passive income, keeping in mind that each one takes time, effort and money to pursue in the beginning.

1. Rental income

Owning and renting out properties, like condos, homes or commercial spaces, can provide additional income through monthly rental payments. Short-term rentals such as Airbnb or Vrbo® are also good options, especially during peak seasons.

2. Investments

Think stocks, bonds and mutual funds. Investing in stocks that pay dividends allows you to earn a portion of the company’s profits as regular payments. Dividend income can provide a steady stream of passive income, especially from established companies.

3. Interest income

If you’re able to lend money to individuals, businesses or institutions, you can earn interest on loans as passive income. This can be done through peer-to-peer lending platforms or by investing in bonds, certificates of deposit (CDs) or Treasury securities.

4. Royalties

If you’ve penned the next bestselling novel or the newest radio hit, you can earn passive income through royalties. This includes anything that falls under intellectual property rights you own, such as copyrights for books, music or artwork, or even patents for inventions. You earn royalty payments when others use or license your intellectual property.

5. Affiliate marketing

Building a website, blog or social media presence and promoting products or services through affiliate links can generate passive income. You can earn a commission when someone makes a purchase through your affiliate link.

6. Digital products

Creating and selling digital products, like eBooks, online courses, templates, software or music, can provide passive income. Once you’ve created the product, it can be sold repeatedly without any additional effort on your part.

7. Automated business

Establishing online businesses or systems that can run automatically (or with minimal effort) can generate passive income. This includes dropshipping, print-on-demand, software as a service (SaaS) businesses or membership websites.

Turning active income into passive income

Turning active income into passive income is all about investing your money—and time—wisely. Rather than spending every penny of your paycheck, think about how you can invest any disposable income for future gains.

Investing in the stock market is a popular route. Start by setting aside a portion of your paycheck to invest in a diversified portfolio. If you’re unsure about picking the right stocks, consider using an app that will do the investing for you.

If you’re leaning toward real estate, consider investing in real estate investment trusts (REITs). This allows you to invest in real estate without owning actual property. If you want to go the more traditional route, rental properties are a good way to go, but it will require more time and management.

For online enthusiasts, consider starting a blog, a YouTube channel or an e-commerce business. Keep in mind that it will take some time to create a substantial following, but with patience and persistence, you can begin to take on paid and sponsored advertising and watch the money roll in.

If you have a knack for creativity, think about writing a book, creating music or inventing a new product. While it requires an initial investment of time, you have the chance to earn royalties for years to come.

Remember, Rome wasn’t built in a day, and you won’t build a passive income stream that quickly, either. Getting started takes strategy, patience and, sometimes, a little money. But once you’re up and running, you’ll enjoy the riches (which look different to everyone) that roll in.

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