What Is Passive Income?
There are two main types of income: passive and active. In an email interview with The Balance, Sandy Yong, author of “The Money Master,” said that active income is the exchange of time for money, such as a full-time employee or someone who is self-employed. Your earnings directly relate to how much time you work. Usually, you have a set schedule and get paid regularly—however, if you stop working, you stop getting paid. Passive income streams don’t require active participation from the person receiving the revenue. The opportunities and requirements vary depending on the type of passive income, but they typically call for an up-front investment of time or money and then need minimal effort thereafter. Some income is more passive than others, said Tom Drake, founder of Canadian personal finance hub MapleMoney, in an email to The Balance. An example of very passive income would be dividend income from an investment portfolio—while there’s minimal effort required, you need the money to invest and it can take years to build a substantial portfolio. Another type of passive income is leveraged income. For example, if you take out a mortgage to purchase a rental property, you’re creating leverage by using the bank’s funds to earn passive income for yourself.
Top Passive Income Ideas
There’s a wide range of passive income streams that you can take advantage of. When choosing what options to try, consider how much time and money you’re willing to commit. We’ll discuss some common ways to earn income passively.
Create a Passive Product
Selling products that require minimal effort after the initial creation can be an effective passive income stream. Some examples would be selling digital files for artwork, monthly planners, or craft patterns.
Sell Your Knowledge
If you have expertise on a topic, you can create an educational course to sell on a platform like Udemy. You could also write an ebook on the subject. Recording it as an audiobook as well could be another possible income stream.
Affiliate Marketing
If you have an online following, you can make money through affiliate marketing, which is a method of getting paid for referring new clients and customers to other businesses, products, or services. Blogs, podcasts, and YouTube channels are all popular platforms in which to incorporate affiliate marketing.
Earn Royalties
Royalties from products like music or books are a type of passive income. While they require a large initial time commitment, you can collect royalties afterward with little effort.
Start a Passive Business
Consider starting a business that requires minimal attention, like renting out storage units, buying vending machines, or opening an online drop-shipping store, where you take customer orders but don’t actually keep the goods you’re selling in stock.
Tips for Starting Out
It can be daunting to begin a new business venture. Yong shared some tips to keep in mind when building a new passive income stream.
Consider outsourcing: Depending on your abilities and workload, you may need to outsource some of your work. Make sure to factor in the additional cost and time it will take to find someone to perform the work.Ask for help when you need it: You may be required to commit a lot of time and effort upfront. If you have a partner, maybe see if they’re willing to take on some extra chores to give you more time to focus on building the income stream.Have a financial buffer: Having a financial buffer on hand, like an emergency savings fund, can be helpful so that you’re not strapped for cash as you grow your passive income venture.Expect a steep learning curve when starting: Understand that you’ll likely make a lot of mistakes along the way and take them in stride. Commit to learning from your mistakes and pivoting and making adjustments as necessary.
While there are challenges, passive income can have many benefits, including the ability to be your own boss, achieve financial independence faster, and have the flexibility to work when and where you want.
Limitations of Passive Income
It’s important to understand that passive income often requires a lot of up-front work before you start to earn money, Drake said. For example, before an author sees profits from book sales, they must first spend countless hours writing and promoting the book. While rental property income may sound easy, you need to consider all of the repairs and upkeep it will require—not to mention the stressors that can come with difficult tenants. Individual passive income streams can also be scaled. For example, a blogger who makes money through affiliate marketing or paid partnerships can work on expanding their readership so that each post reaches a wider audience and has the potential to bring in more revenue. You can build investments over time by making regular contributions of small amounts of money. If you don’t have years or money, you can use leverage to build passive income, Drake suggested—like taking out a mortgage to buy an investment property or getting a loan to start a business. Take a look at the things you own and consider if they might be valuable or useful to someone else. There could be multiple angles to earn money from a single asset. For example, can you sell ad space on your car, lease your parking space, or maybe even rent your car out as well?
