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What Is Passive Income and How Could You Start Earning It?
You could earn money with minimal effort through passive income.
Wish you could earn money while you sleep or are out on a hike? This idea is what motivates many people to investigate passive income.
Whether you’re trying to build a cushion against rising costs, establish a safety net in case of a layoff, or boost your retirement savings, passive income may help you on the path to financial freedom.
Let’s dive into how passive income works and some ways you could start earning today.
Key Takeaways
Passive income is money you earn outside of your daily job, generated from activity that doesn’t require active, regular involvement.
There are many ways to earn passive income—you may choose methods that most interest you.
Earning passive income alongside your salary from your “day job” could help you build wealth, increase savings, and achieve financial stability more easily.
What Is Passive Income?
Passive income refers to regular money inflows from sources other than an employer. According to the IRS, passive income could come from being a landlord (short- or long-term rentals) or from other actions that don’t require regular, engaged participation to earn or reap the rewards, such as dividend-earning investments.1
While the word passive suggests you don’t have to work for the money, most passive income streams require at least some work at the beginning and may involve occasional effort to maintain.
For example, say you own a rental property. You still may need to list the property for rent or hire a maintenance company to oversee upkeep. But, once you’re done with the “set up”, the ongoing rent payments from the tenant are earned more “passively” since you probably don’t have to work on the property daily.
How Active Income Differs from Passive Income
Active income is what you earn from your day job or side hustle—an economic exchange for specific labor or services you provide. To continue earning active income, you trade your time and effort for money on an ongoing basis. If you stop performing the tasks, you usually stop earning active income.
Typically, most people who pursue passive income maintain their active income too, at least initially. While it’s possible to turn your passive income stream into your primary or only source of income, earning enough to support your lifestyle may be difficult.
Benefits of Earning Passive Income
Earning passive income may help you increase your total monthly earnings, which could help your overall finances and bottom line.
Protect your income against layoffs: These days, layoffs are becoming far more common. Building passive income streams could help reduce the financial strain if you get laid off.
Build savings aggressively: Passive income effectively increases your monthly money inflow. This may make it easier to set money aside, increasing your savings and overall wealth.
Reach financial goals faster: When you have more money hitting your bank account, you may find it easier (and quicker) to reach your financial goals, like paying down debt, saving for a down payment, etc.
Popular Passive Income Ideas
So, how could you start earning passive income? Though the IRS’s definition might seem narrow, it allows for quite a few income-earning options. Here are some of the most common passive income ideas to consider incorporating into your life.
Leverage High-Yield Deposit Accounts
Did you know that savings accounts could help you earn regular passive income? And they require almost no effort!
Once you open your account and make a deposit, the money in the account earns a return over time with the help of compound interest. Compound interest is interest earned on the money you deposit in the account as well as the interest earned by your account balance in previous months. Essentially, you earn interest on interest, providing the opportunity for exponential growth over time.
Many people are aware of the traditional savings account found at most big banks or credit unions. But the rates on these accounts are typically quite low and may seem like they’re not worth the effort. But there are savings account types that frequently offer higher yields. Let’s look at a few examples.
High-yield savings accounts (HYSAs): HYSAs earn a higher Annual Percentage Yield (APY) than traditional savings accounts but function in a similar way, usually allowing you to withdraw funds whenever you need.
Certificate of deposit (CD) accounts: CD accounts sometimes earn higher APYs than high-yield savings accounts. But almost all have a term requirement, meaning that you make an initial deposit and leave the money in the account for a set time. This could range from as few as six months to as many as five years, depending on the term you choose.
Money market accounts: Money markets typically earn higher APYs than traditional savings accounts but lower APYs than HYSAs. They generally allow withdrawals from the account but may have limits on how many you can make in a month. Most offer check writing privileges and debit card withdrawals, which may be appealing to certain people.
Opening more than one savings account could help make the most of your money and allow you to manage savings goals (and wealth building) more effectively.
Become a Landlord
Becoming a landlord could be a great way to earn passive income if you have a property you’re comfortable renting out to someone else.
As a landlord, you’re responsible for sourcing a tenant, taking care of maintenance, collecting rent, and other similar tasks. You could also outsource these tasks to a property management company. These services cost money, but they may reduce the amount of work you have to.2
Become a Vacation Rental Host
If the idea of becoming a full-time landlord is overwhelming, but you want to earn passive income with your property, becoming a vacation rental host is also an option. You could rent out a single room to people on a short-term basis (think a couple of days to a week) or rent out your entire property.
If you partner with a property manager, they could also help manage your vacation listing, collect payments from guests, and more.3 Of course, you’ll only want to go this route if you’re comfortable renting to strangers.
Invest Wisely
Certain types of investments may help you earn passive income for years: one example is something that earns dividends regularly. Many stocks, bonds, annuities, and more pay out based on market performance monthly, quarterly, or annually.4
The key to building passive income through investments is investing according to your risk tolerance. Remember, investments aren’t guaranteed and there’s always a chance that you could lose money if the investments don’t perform well.
Work with a financial advisor and let them help you build a portfolio that factors in your risk tolerance with your passive income goals.
Capitalize on Your Experience
If you have skills that are in demand, you could use them to earn passive income by creating online courses or explainer videos that teach others what you do.
There are several sites available to host your courses, and when someone enrolls in them, you receive a portion of the enrollment fee.5
Become an Affiliate
If you have a social media presence, you may be able to become an affiliate marketer. This allows you to earn commission on sales of products that you recommend. In this model, a company gives you a unique link to pitch to your followers. If your followers decide to purchase the product through your link, you earn a commission on the sale.
Of course, building the following initially does take work. And setting up the affiliate link requires some upfront work too. But once that work is done, you’re able to continue earning commissions on sales made through your affiliate link.6
Final Thoughts
Earning passive income could be a great way to supplement the money you bring in from your job without forcing you to spend long hours working a second job or a side hustle. Consider your skills, passions, and long-term goals as you think about ways to increase your earning potential.
If you’re looking for a low effort starting point, open a Jenius savings account today.