Six Passive Income Strategies to Start Today
Passive income is money earned with minimal labor required. Inside, explore ways to start earning passive income today.
August 4, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
When we think of “income,” we typically think of the paychecks we get from our jobs. Salaries and wages are known as active income, as they require active effort in order to earn them.
But there’s another type of income that may be less familiar — it’s called passive income, and it requires little to no active effort on your part.
In this guide, readers can learn what passive income is, how it works and how to start earning passive income streams of your own.
What is passive income?
Passive income is income that is obtained automatically, with minimal labor to earn or maintain that income stream.
For example, if someone owns a rental property and uses a property management company to handle repairs and issues, the income that the owner receives might be considered passive income.
Oftentimes, passive income requires upfront effort, but minimal ongoing effort. For example, someone who writes a book would have to put in a lot of work to get it published, but might continue earning passive income from book sales for many years to come.
The definition of passive income varies, but it’s most often used to refer broadly to any type of income that doesn’t require much active effort on an ongoing basis.
Note: For tax purposes, the IRS has its own definition of passive income, which is either “net rental income” or “income from a business in which the taxpayer does not materially participate.” For the purposes of this article, we will discuss the broader definition of “passive income.”
How to get started with passive income
For the most part, passive income comes from assets that produce a stream of income. Those assets could be stocks, real estate, intellectual property, businesses, or something else.
To get started with passive income, you need to acquire or create one of these assets. There are three broad categories of passive income opportunities:
Some strategies let you simply buy something that produces passive income. This includes dividend stocks, rental properties, annuities, bonds and certain types of small businesses.
With some strategies, you can put in effort upfront in order to build something that goes on to produce passive income. Examples include starting a blog, coding an app or writing a book.
Other strategies involve contributing to something that is already producing income. Examples include buying half of a small business or making an asset you already own produce income (like renting out a room in your house).
Six passive income ideas
There are hundreds of ways to earn passive income. Here are some of the most accessible to everyday people.
Investing in dividend stocks
Many companies pay out a percentage of their profits to investors, which come in the form of dividends. Investors who own stocks can receive dividends on a quarterly basis — or even on a monthly basis for certain stocks.
Many stocks pay out dividends but some companies pay far more than others. You can also earn dividends by investing in index funds — the S&P 500, for example, yields around 1.38% per year in dividends.
For most investors, dividends will provide a small but steady stream of passive income — often in the range of 1-4% of invested assets per year. For example, if an investor had $100,000 invested, they may earn between $1,000 and $4,000+ per year, depending on which companies they own. Investors with significant net worth could theoretically live off of dividends if they had enough saved.
Owning rental property
Rental income is generated by owning real estate and renting it out. This strategy requires a significant upfront investment but it can produce substantial income.
For true passive income, it may be necessary to hire a property management company to find tenants and handle repairs.
Owning a small business
Owning a business can be a passive income source, although it usually takes a lot of time (and/or money) to get there. For example, an investor could buy a fast-food franchise, hire management to run it and sit back as a “silent” owner.
At the same time, the vast majority of small business owners actively work in their businesses. It usually takes years — or a hefty upfront investment — to make small business ownership truly passive.
Creating a product
There are various ways to put in effort upfront to create a product or service, then sit back and enjoy passive income. Examples include coding an app, starting a blog, or selling stock photography.
Renting out assets you already own
You can also utilize assets that you already own to produce rental income. This could mean renting out a spare room in your home or renting your car on a platform like Turo.
Earning money on your savings
If you’re hesitant to invest in stocks, there are other ways to earn passive income on your savings. You could open a high-yield savings account, or invest in bonds for a steady stream of passive income.
Which passive income strategy is best for me?
The best strategy is one that is accessible, given your assets, experience, interests and location.
For example, a good strategy for a wealthy individual may be to simply buy rental properties in their city. But for someone with much less wealth, starting a blog or another semi-active side hustle may make more sense.
Your interests and desired involvement level also play a role. Do you want to own rental property or does the idea of that sound stressful? Do you want to be a business owner or would you rather simply own publicly traded stocks?
How many passive income sources should I have?
There’s no magic number here. Anecdotal reports suggest that many millionaires have around 7 streams of income, on average — but it’s unclear where this “statistic” actually comes from.
Ultimately, it’s good to have multiple streams of income — even if that’s just from your salary and your investments.
You can certainly go overboard, too. If you have so many income streams that they become difficult to manage, or they overly complicate your tax situation, it may be wise to cut back.
How much money do I need to start earning passive income?
Many passive income opportunities do require an upfront investment — of time, money or both.
For example, buying a rental property requires at least a hefty down payment, as well as monthly mortgage payments. Buying dividend stocks requires an upfront investment of cash.
The cost of launching a side hustle varies significantly. Some are practically free but require an upfront time investment.
There’s no simple answer to this question, as it depends on a lot of factors. But one principle is true — it’s easier to earn more passive income if you have a larger upfront investment available.
For example, an investor who has $100,000 to invest in stocks could buy a high-dividend ETF like HDV, which yields around 3%. They would then have around $3,000 in passive income from that investment each year, with no effort required on their end.
Taxes on passive income
Passive income is still considered taxable income and will be subject to income taxes just like your normal salary.
However, the specific tax treatment varies depending on the type of income, and your level of involvement in the income source. For example, real estate rental income is taxed differently to standard wage income.
It’s best to discuss your tax obligations with a qualified tax professional.
Passive income is any source of income that doesn’t require much (or any) ongoing effort in order to earn it. Having streams of passive income can help bolster your finances and reduce the stress of always needing to work for your income.
Is credit card debt holding you back from your financial goals? Tally† is an app that may be able to help. Tally helps qualifying Americans consolidate credit card balances into a single line of credit, helping to save on interest costs. Learn how Tally works here.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.