Passive income can be a great way to help you generate extra cash flow, whether you’re running a side hustle or just trying to get a little extra dough each month, especially as inflation rages throughout the economy. Passive income can help you earn more during the good times and tide you over if you suddenly become unemployed, if you voluntarily take time away from work or if inflation keeps chipping away at your purchasing power.
With passive income you can have money coming in even as you pursue your primary job, or if you’re able to build up a solid stream of passive income, you might want to kick back a little. Either way, a passive income gives you extra security.
And if you’re worried about being able to save enough of your earnings to meet your retirement goals, building wealth through passive income is a strategy that might appeal to you, too.
Passive income ideas:
- Create a course
- Write an e-book
- Rental income
- Affiliate marketing
- Flip retail products
- Sell photography online
- Buy crowdfunded real estate
- Peer-to-peer lending
- Dividend stocks
- Create an app
- Rent out a parking space
- A bond ladder
- Sponsored posts on social media
- Invest in a high-yield CD or savings account
- Rent out your home short-term
- Advertise on your car
- Create a blog or YouTube channel
- Rent out useful household items
- Sell designs online
What is passive income?
Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.
“Many people think that passive income is about getting something for nothing,” says financial coach and retired hedge fund manager Todd Tresidder. “It has a ‘get-rich-quick’ appeal… but in the end, it still involves work. You just give the work upfront.”
In practice, you may do some or all of the work upfront, but passive income often involves some additional labor along the way, too. You may have to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing.
But if you’re committed to the strategy, it can be a great way to generate income and you’ll create some extra financial security for yourself along the way.
Passive income is not…
- Your job. Generally, passive income is not income that comes from something you’ve been materially involved in such as the wages you earn from a job.
- A second job. Getting a second job isn’t going to qualify as a passive income stream because you’ll still need to show up and do the work to get paid. Passive income is about creating a consistent stream of income without you having to do a lot of work to get it.
- Non-income producing assets. Investing can be a great way to generate passive income, but only if the assets you own pay dividends or interest. Non-dividend paying stocks or assets like cryptocurrencies may be exciting, but they won’t earn you passive income.
20 passive income ideas for building wealth
If you’re thinking about creating a passive income stream, check out these 20 strategies and learn what it takes to be successful with them, while also understanding the risks associated with each idea.
1. Create a course
One popular strategy for passive income is creating an audio or video course, then kicking back while cash rolls in from the sale of your product. Courses can be distributed and sold through sites such as Udemy, SkillShare and Coursera.
Alternatively, you might consider a “freemium model” – building up a following with free content and then charging for more detailed information or for those who want to know more. For example, language teachers and stock-picking advice may use this model. The free content acts as a demonstration of your expertise and may attract those looking to go to the next level.
Opportunity: A course can deliver an excellent income stream, because you make money easily after the initial outlay of time.
Risk: “It takes a massive amount of effort to create the product,” Tresidder says. “And to make good money from it, it has to be great. There’s no room for trash out there.”
Tresidder says you must build a strong platform, market your products and plan for more products if you want to be successful.
“One product is not a business unless you get really lucky,” Tresidder says. “The best way to sell an existing product is to create more excellent products.”
Once you master the business model, you can generate a good income stream, he says.
2. Write an e-book
Writing an e-book can be a good opportunity to take advantage of the low cost of publishing and even leverage the worldwide distribution of Amazon to get your book seen by potentially millions of would-be buyers. E-books can be relatively short, perhaps 30-50 pages, and can be relatively cheap to create, since they rely on your own expertise.
You’ll need to be an expert on a specific topic, but the topic could be niche and use some special skills or abilities that very few offer but that many readers need. You can quickly design the book on an online platform and then even test-market different titles and price points.
But just like with designing a course, a lot of the value comes when you add more e-books to the mix, drawing in more customers to your content.
Opportunity: An e-book can function not only to deliver good information and value to readers, but also as a way to drive traffic to your other offerings, including audio or video courses, other e-books, a website or potentially higher-value seminars.
Risk: Your e-book has to be very strong to build up a following and then it helps if you have some way to market it, too, such as an existing website, a promotion on other relevant websites, appearances in the media or podcasts or something else. So you could put in a lot of work upfront and get very little back for your efforts, especially at first.
And while an e-book is nice, it will help if you write more and then even build a business around the book or make the book just one part of your business that strengthens the other parts. So your biggest risk is probably that you waste your time with little reward.
3. Rental income
Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect.
If you don’t take the time to learn how to make it a profitable venture, you could lose your investment and then some, says John H. Graves, an Accredited Investment Fiduciary (AIF) in the Los Angeles area and author of “The 7% Solution: You Can Afford a Comfortable Retirement.”
Opportunity: To earn passive income from rental properties, Graves says you must determine three things:
- How much return you want on the investment
- The property’s total costs and expenses
- The financial risks of owning the property
For example, if your goal is to earn $10,000 a year in rental cash flow and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, you’d have to charge $3,133 in monthly rent to reach your goal.
Risk: There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if you’re unable to rent out your property? Any of these factors could put a big dent in your passive income.
And economic downturns can pose challenges, too. You may suddenly have tenants who can no longer pay their rent, while you may still have a mortgage of your own to pay. Or you may not be able to rent the home out for as much as you could before, as incomes decline. And home prices have been rising quickly due in part to relatively low mortgage rates, so your rents may not be able to cover your expenses. You’ll want to weigh these risks and have contingency plans in place to protect yourself.
4. Affiliate marketing
With affiliate marketing, website owners, social media “influencers” or bloggers promote a third party’s product by including a link to the product on their site or social media account. Amazon might be the best-known affiliate partner, but eBay, Awin and ShareASale are among the larger names, too. And Instagram and TikTok have become huge platforms for those looking to grow a following and promote products.
You could also consider growing an email list to draw attention to your blog or otherwise direct people to products and services that they might want.
Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission. The commission might range from 3 to 7 percent, so it will likely take significant traffic to your site to generate serious income. But if you can grow your following or have a more lucrative niche (such as software, financial services or fitness), you may be able to make some serious coin.
Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you won’t earn anything if you can’t attract readers to your site to click on the link and buy something.
Risk: If you’re just starting out, you’ll have to take time to create content and build traffic. It can take significant time to build a following, and you’ll have to find the right formula for attracting that audience, a process that itself might take a while. Worse, once you’ve spent all that energy, your audience may be apt to flee to the next popular influencer, trend or social media platform.
5. Flip retail products
Take advantage of online sales platforms such as eBay or Amazon, and sell products that you find at cut-rate prices elsewhere. You’ll arbitrage the difference in your purchase and sale prices, and may be able build a following of individuals who track your deals.
Opportunity: You’ll be able to take advantage of price differences between what you can find and what the average consumer may be able to find. This could work especially well if you have a contact who can help you access discounted merchandise that few other people can find. Or you may be able to find valuable merchandise that others have simply overlooked.
Risk: While sales can happen at any time online, helping make this strategy passive, you’ll definitely have to hustle to find a reliable source of products. Plus, you’ll have to invest money in all of your products until they do sell, so you need a robust source of cash. You’ll have to really know the market so that you’re not buying at a price that’s too high. Otherwise, you may end up with products that no one wants or whose price you have to drastically cut in order to sell.
6. Sell photography online
Selling photography online might not be the most obvious place to set up a passive business, but it could allow you to scale your efforts, especially if you can sell the same photos over and over again. To do that, you might work with an organization such as Getty Images, Shutterstock or Alamy.
To get started, you’ll have to be approved by the platform, and then you license your photos to be used by whomever downloads them. The platform then pays you every time someone uses your photo.
You’ll need photos that appeal to a specific audience or that represent a certain scene, and you’ll need to tease out where the demand is. Photos could be shots with models, landscapes, creative scenarios and more, or they could capture real events that might make the news.
Opportunity: Part of the value of selling or licensing your photos through a platform is that you have the potential to scale your efforts, especially if you can provide pictures that will be in demand. That means you could potentially sell the same image hundreds or thousands of times or more.
Risk: You could add hundreds of photos to a platform such as Getty Images and not have any of them really generate meaningful sales. Only a few photos may drive all of your revenue, so you have to keep adding photos as you search for that needle in the haystack.
It may require substantial effort to go out and shoot photos, then process them and keep up with the events that may ultimately drive your revenue. And motivation could be hard to maintain: Every next photo might be your lottery ticket, though it almost certainly won’t be.
7. Buy crowdfunded real estate
If you’re interested in investing in real estate but don’t want to do a lot of the heavy lifting (management, repairs, handling tenants and more), then another option is using a crowdfunding platform to invest in property. An experienced investing team picks out the real estate, and then you can decide to invest in it and how much you’re comfortable with.
You’ll pay an annual management fee to the real estate platform and have minimum investment amounts that could range from ten dollars to tens of thousands of dollars.
Opportunity: You can get access to private real estate deals that may be attractive, and they’ve been preselected by knowledgeable investors. You can check out the returns on the platforms, so you’ll have some idea of what level of returns you can expect and over what time frame. Real estate investments can also help diversify your portfolio, helping to smooth your returns.
Some platforms invest in equity (stock), while others invest in debt. Generally, stock offers high returns in exchange for more risk, while debt offers lower returns in exchange for less risk. Some platforms require you to be an accredited investor, with a certain minimum income or assets. Popular platforms include Fundrise, Yieldstreet and DiversyFund.
Risk: You’re on the hook to make your own investments on many crowdfunding platforms. So while past returns may look good, they’re no predictor of future success. And you’ll have to make the judgment call about what to buy. That means you’ll need to read the prospectus for every deal you’re interested in and understand the pros and cons.
In addition, real estate is typically funded with high levels of debt financing, making it more susceptible to any economic downturn. You’ll also want to understand how long your money will be locked up in the investment and when you can access it, especially in an emergency.
8. Peer-to-peer lending
A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub. Other players include Funding Circle, which targets businesses and has higher borrowing limits, and Payoff, which targets better credit risks.
Opportunity: As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you could end up with nothing in the event of a default.
To cut that risk, you need to do two things:
- Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com and LendingClub, the minimum investment per loan is $25.
- Analyze historical data on the prospective borrowers to make informed picks.
Risk: It takes time to master the metrics of P2P lending, so it’s not entirely passive, and you’ll want to carefully vet your prospective borrowers. Since you’re investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build income.
Economic recessions can also make high-yielding personal loans a more likely candidate for default, too, so these loans may go bad at higher than historical rates when the economy worsens.
9. Dividend stocks
Shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company. Companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock. Dividends are paid per share of stock, so the more shares you own, the higher your payout.
Opportunity: Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money. The money will simply be deposited in your brokerage account.
Risk: The tricky part is choosing the right stocks.
For example, companies issuing a very high dividend may not be able to sustain it. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. “You’ve got to investigate each company’s website and be comfortable with their financial statements,” Graves says. “You should spend two to three weeks investigating each company.”
That said, there are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks. ETFs also diversify your holdings, so if one company cuts its payout, it doesn’t affect the ETF’s price or dividend too much. Here are some of the best ETFs to choose from.
“ETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds,” Graves says.
Another key risk is that stocks or ETFs can move down significantly in short periods of time, especially during times of uncertainty, as in 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch.
Compare your investing options with Bankrate’s brokerage reviews.
10. Create an app
Creating an app could be a way to make that upfront investment of time and then reap the reward over the long haul. Your app might be a game or one that helps mobile users perform some hard-to-do function. Once your app is public, users download it, and you can generate income.
Opportunity: An app has huge upside, if you can design something that catches the fancy of your audience. You’ll have to consider how best to generate sales from your app. For example, you might run in-app ads or otherwise have users pay a nominal fee for downloading the app.
If your app gains popularity or you receive feedback, you’ll likely need to add incremental features to keep the app relevant and popular.
Risk: The biggest risk here is probably that you use your time unprofitably. If you commit little or no money to the project (or money that you would have spent anyway, for example, on hardware), you have little financial downside here. However, it’s a crowded market and truly successful apps must offer a compelling value or experience to users.
You’ll also want to make sure that if your app collects any data that it’s in compliance with privacy laws, which differ across the globe. The popularity of apps can be short-lived, too, meaning your cash flow could dry up a lot faster than you expect.
11. Rent out a parking space
Do you have a parking space that you’re not using or that could be used by someone else? You could trade that spot for some cash. It could be an even better set-up if you have a larger area that could fit several cars or that would be useful for multiple events or venues.
Opportunity: In particularly high-demand areas or during high-demand times (for example, during a concert or sporting event), your parking spot could be worth real money. For example, if you live near a place that has frequent commuters but that is strapped for parking spots, you might have a money-maker on your hands. You might have the best chance of turning a profit by renting to someone who needs the spot on a daily basis, rather than for one-off events.
Risk: This idea might not be particularly risky, but you do want to make sure you aren’t violating any restrictions from your place of residence or other entity by renting out a parking space. It’s probably worthwhile having a disclaimer of liability as a condition of parking in your spot, too.
A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate. REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.
Opportunity: You can purchase REITs on the stock market just like any other company or dividend stock. You’ll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time.
Like dividend stocks, individual REITs can be riskier than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks — and you’ll still get a nice payout.
Risk: Just like dividend stocks, you’ll have to be able to pick the good REITs, and that means you’ll need to analyze each of the businesses that you might buy — a time-consuming process. And while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing. Like any stock, the price can fluctuate a lot in the short term.
REIT dividends are not protected from tough economic times, either. If the REIT doesn’t generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.
13. A bond ladder
A bond ladder is a series of bonds that mature at different times over a period of years. The staggered maturities allow you to decrease reinvestment risk, which is the risk of reinvesting your money when bonds offer too-low interest payments.
Opportunity: A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You can sit back and collect your interest payments, and when the bond matures, you “extend the ladder,” rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years and seven years.
In a year, when the first bond matures, you have bonds remaining of two years, four years and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.
Risk: A bond ladder eliminates one of the major risks of buying bonds – the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable.
Bonds come with other risks, too. While Treasury bonds are backed by the federal government, corporate bonds are not, so you could lose your principal if the company defaults. And you’ll want to own many bonds to diversify your risk and eliminate the risk of any single bond hurting your overall portfolio. If overall interest rates rise, it could push down the value of your bonds.
Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.
14. Sponsored posts on social media
Do you have a strong following on social media such as Instagram or TikTok? Get growing consumer brands to pay you to post about their product or otherwise feature it in your feed.
You’ll need to keep filling your profile with content that draws in your audience, though. And that means continuing to create posts that grow your reach and engage your followers on social media.
Opportunity: Leveraging your social media presence is an attractive business model. Draw eyeballs and clicks to your profile with strong content and then monetize that content by setting up sponsored posts from brands that appeal to your followers.
Risk: Getting started here can be a Catch-22: You need a large audience to get meaningful sponsored posts, but you’re not an attractive option until you get a meaningful audience. So you’ll have to focus a lot of time first on growing your audience with no guarantee that you’ll be successful. You can end up spending tons of time following the trends and building content, in the hopes that you eventually get the sponsorship that you’re aiming for.
Even when you’ve got the sponsored posts you’re looking for, you’ll need to keep posting to draw in your audience and remain an attractive option for advertisers. That means committing to more time and monetary investment, even if you do have a lot of autonomy on exactly when to do it.
15. Invest in a high-yield CD or savings account
Investing in a high-yield certificate of deposit (CD) or savings account at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country. You won’t even have to leave your house to make money.
Opportunity: To make the most of your CD, you’ll want to do a quick search of the nation’s top CD rates or the top savings accounts. It’s usually much more advantageous to go with an online bank rather than your local bank, because you’ll be able to select the top rate available in the country. And you’ll still enjoy a guaranteed return of principal up to $250,000, if your financial institution is backed by the FDIC.
Risk: As long as your bank is backed by the FDIC and within limits, your principal is safe. So, investing in a CD or savings account is about as safe a return as you can find. However, while these accounts are safe, they’re returning less these days than before. And that return can pale in comparison to inflation, which hit mid-single digits last year, hurting the real purchasing power of your money. Nevertheless, a CD or savings account will yield better than holding your money in cash or in a non-interest-bearing checking account where you’ll receive nothing.
16. Rent out your home short-term
This straightforward strategy takes advantage of space that you’re not using anyway and turns it into a money-making opportunity. If you’re going away for the summer or have to be out of town for a while, or maybe even just want to travel, consider renting out your current space while you’re gone.
Opportunity: You can list your space on any number of websites, such as Airbnb, and set the rental terms yourself. You’ll collect a check for your efforts with minimal extra work, especially if you’re renting to a tenant who may be in place for a few months.
Risk: You don’t have a lot of financial downside here, though letting strangers stay in your house is a risk that’s atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.
17. Advertise on your car
You may be able to earn some extra money by simply driving your car around town. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If you’re a match with one of their advertisers, the agency will “wrap” your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.
Opportunity: While you do have to get out and drive, if you’re already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.
Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.
18. Create a blog or YouTube channel
Are you an expert on travel to Thailand? A maven of Minecraft? A sultan of swing dancing? Take your passion for a subject and turn it into a blog or a YouTube channel, using ads or sponsors to generate your income. Find a popular subject, even a small niche, and become an expert on it. At first, you’ll have to build out a suite of content and draw an audience, but it can create a steady income stream over time, as you become known for your engaging content.
Opportunity: You can leverage a free (or very low cost) platform, then use your great content to build a following. The more unique your voice or area of interest, the better for you to become “the” person to follow. Then draw sponsors to you.
Risk: You’ll have to build out content at the start and then create ongoing content, which can take time. And you’ll need to be really passionate about the product, since that can help you maintain the motivation to continue, especially at the start as your followers are still finding you.
The real downside here is that you can outlay a bunch of your time and resources, with little to show for it, if there’s limited interest in your subject or niche. Your area of expertise may be too niche to really draw a profitable audience, but you won’t be sure of that until you experiment.
19. Rent out useful household items
Here’s a variation on renting out an idle car: Start even smaller with other household items that people may need but that may be collecting dust in your garage. Lawnmowers? Power tools? Mechanics tools and tool box? Tents or large coolers? Look for high-value items that people need for a short period of time and where it might not make sense for someone to own the item. Then put together a way for clients to discover your inventory and a way for them to pay for it.
Opportunity: You can start small here, and then scale up if there’s interest in a particular area. Do people suddenly want a tent for weekend camping when the weather gets warmer or cooler? Figure out where the demand is, and then you could even go buy the item, rather than having it right on hand. In some cases you might be able to recoup the value of the item after a few uses.
Risk: There’s always the possibility that your property is damaged or stolen, but you can mitigate this risk with contracts that allow you to replace the item at the client’s expense. If you start small here, you’re not exposed to much risk, especially if you already have the item and you’re not likely to need it in the near future. Pay particular attention to liability issues, especially if you’re renting out equipment that has the potential to be dangerous (e.g., power tools.)
20. Sell designs online
If you have design skills, you may be able to turn them into a money maker by selling items with your printed designs on them. Businesses such as CafePress and Zazzle allow you to sell items such as T-shirts, hats, mugs and more with your own designs.
Opportunity: You can start with your own designs and see what the market is interested in, and expand from there. You may be able to capitalize on surging interest in a current event and design a shirt that captures the spirit of the times or at least a snarky take on it. And you can also set up your own web storefront through a site such as Shopify to market your goodies.
Risk: Printing partners allow you to ship items without directly investing in the merchandise yourself, avoiding one of the biggest risks of tying up your capital. But you may be able to get better pricing if you invest in some of the inventory yourself. Another big risk here is that you could invest a lot of time with little payoff, but this avenue might be interesting if you’re already doing the design work for another purpose, such as personal interest.
Which passive income source is best?
The question of which passive income source is best depends on several factors, but some of the most important include the amount of money you have to invest, the total opportunity size, your interest and ability in the area, the amount of time you need to invest and the potential to succeed. Typically, the lower the barriers to entry, the more crowded the field of competitors and the lower likelihood of success.
So you’ll need to weigh the opportunity against these factors and see which passive income strategy works best for you. But it can be helpful to have natural ability and an interest in your target area, because these can help motivate you in the early days when things are likely to be tougher.
There are passive income opportunities for people who are starting out with some money and even those who have no money to start.
How can I make passive income with no money?
If you have little or no money to start, you’ll have to rely mostly on your own time investment to power you through, at least until you build up a little money. That means focusing on passive income sources that take advantage of the following traits:
- An area where you’re an expert. Here you can build your expertise out into a useful product or service for consumers, e.g. design, software coding and others.
- An upfront work-heavy opportunity. You’ll need an opportunity that requires a time or work investment, such as creating a course, building out an influencer profile or other options.
In effect, you’re substituting your time for your lack of capital, until you can get enough capital to expand your set of opportunities.
How can I make passive income with money?
Money can provide you with more passive investment opportunities. If you have money to invest in a passive opportunity, you have not only the opportunity set above but a new range, too. Money is a prerequisite for taking advantage of the following passive income areas:
- Investing in dividend stocks or REITs. Investing in stocks means you need money upfront, but you’ll receive some of the most passive forms of income around.
- Save with bonds or CDs. Other purely passive activities include buying bonds or CDs.
Here you can use your money to make money with little or no effort on your part, if that’s what you’d like to do. Of course, you could pair your money with a lot of time investment to move into an even more lucrative niche, too.
How many income streams should you have?
There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.
“You’ll catch more fish with multiple lines in the water,” says Greg McBride, CFA, chief financial analyst at Bankrate. “In addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream.”
Of course, you’ll want to make sure that putting in effort into a new passive income stream isn’t causing you to lose focus on your other streams. So you do want to balance your efforts and make sure you’re choosing the best opportunities for your time.
Passive income ideas for beginners
- High-yield savings account. A high-yield savings account can be an easy way to get an extra boost on your savings beyond what you’d receive in a typical checking or savings account. It won’t be much, but it’s a simple way to get started with passive income.
- Certificates of deposit. CDs are another way to generate some passive income, but your money will be tied up more than it would be in a high-yield savings account.
- Real estate investment trusts. REITs are a way to invest in real estate without having to put in all the effort that comes with managing properties. REITs typically pay out the majority of their income in dividends, making them an attractive option for investors looking for passive income.
Minimize your taxes on passive income
A passive income can be a great strategy for generating side income, but you’ll also generate a tax liability for your effort. But you can reduce the tax bite and prepare for your future, too, by setting yourself up as a business and creating a retirement account. This strategy won’t work for all these passive strategies, however, and you’ll have to be a legitimate business to qualify.
- Register with the IRS and receive a tax identification number for your business.
- Then contact a broker who can open a self-employed retirement account such as Charles Schwab or Fidelity.
- Determine which kind of retirement account might work best for your needs.
Two of the most popular options are the solo 401(k) and the SEP IRA. If you stash the cash in a traditional 401(k) or SEP IRA, you can take a tax break on this year’s taxes. The solo 401(k) is great because you can stash up to 100 percent of your earnings into the account, up to the annual maximum. Meanwhile, the SEP IRA allows you to contribute only at a 25 percent rate. In addition, the solo 401(k) permits you to make an additional contribution of up to 25 percent of your profits in the business.
If you’re thinking of going this route, compare the differences between the two account types or look at the best retirement plans for the self-employed.
Note: Bankrate’s Brian Baker also contributed to this story.