What is Passive Income?
Contrary to popular opinion, passive income isn’t “free money.” It’s often the result of hard work in the past.
January 11, 2022
Is it possible to get something for doing nothing?
It sounds like a riddle, but in reality, that’s the premise behind passive income.
For many of us, most or all of our income is considered active income. This is income you directly work for, whether that means salary, hourly wages, driving for Lyft on the side, etc.
So can you make money by doing nothing? Below, we’ll dive deep into passive income and how to build wealth through passive income.
What is passive income?
Passive income is earned without active involvement or directly working on the income-producing activity.
Active income includes jobs and side-hustles. Passive income could be anything from investment dividends, profits from rental properties or royalties from the sale of intellectual property.
Any time you earn income without actively working could be considered passive income. Even something as minor as the interest you earn from your savings account is passive income.
Some forms of passive income are taxed differently than salaried income. You should speak with a tax advisor if you have questions about passive income tax implications.
Pros and cons of passive income
Even passive income doesn’t come free, and there are pros and cons involved in earning it.
Not tied to the amount of time you put in
Can provide better financial stability
Can improve your freedom and flexibility
There’s theoretically no limit to how much you can earn
Most passive income opportunities require large upfront investment; either of money or of time (or both)
Many activities are described as “passive” but require a fair amount of work (i.e. having rental properties)
Types of passive income
Wondering how to make passive income? There are many different categories of passive income. Some of the most common include:
Investors who buy stocks receive passive income from dividends and profits when they eventually sell their shares.
Landlords receive income from rent paid by their tenants. In many cases, this isn’t totally “passive” (if the landlord performs repairs, for instance), but rental profits are typically considered passive income.
Most business owners actively work in their businesses, and as such, any income they earn isn’t passive. However, some business owners are hands-off and hire employees to run every aspect of their business. For instance, a retired couple who own several fast-food restaurants may earn passive income from their businesses without directly working on them.
If you write a book, produce an album or create a piece of art, you may earn ongoing royalties for that work. For instance, every time an author’s book is purchased new, the author may receive $1 or $2 in royalties from their publisher.
Selling digital products
If you create a course, a piece of software or a downloadable digital product, you may sell it on an ongoing basis to customers. Although you worked hard to create the product, it could make passive income for you for many years (even if you don’t put any more time into it).
Various activities could be considered “semi-passive,” meaning they require a bit of work. The terminology is somewhat subjective. What is passive income to you? For instance, renting out a spare bedroom on Airbnb could be semi-passive. It may require some work, but many of these tasks (such as cleaning) could be outsourced to make it more hands-off.
How to build wealth with passive income
The powerful thing about passive income is that the amount you earn has nothing to do with how much time you put in.
For example, true passive income sources produce income even if you spend just 5 minutes every year on them.
You only have so many hours in a day. While you could get a second job or start a side-hustle to increase income, you’ll eventually reach a point where you don’t have any more time to devote to earning income.
Passive income has no limit. Because of this, passive income is a powerful tool for building wealth.
Wondering how to make passive income? Here are some passive income ideas.
Investing in the stock market
For most people, the most approachable opportunity for passive income is simply investing in the stock market. Many stocks pay dividends, which are like interest that is sent out several times each year. And as your investments grow, you will eventually earn profits when you sell. Read our Investing 101 guide for more information on how to make money investing.
Renting out a spare bedroom or car
Platforms like Airbnb and VRBO make renting out a spare bedroom easy, while platforms like Turo allow you to rent your car out. Bookings are handled online through these platforms, so often, all you’ll need to do is clean the bedroom or car in between bookings. You could also outsource this to a cleaning company (although this will eat into your profits).
Create a blog or a YouTube channel
If you have a passion for something, you may enjoy blogging about it or creating videos for YouTube. These strategies can eventually create passive income (from advertisements or affiliate marketing). However, it typically takes a long time to build enough audience to make any substantial amount of money.
There are dozens of other opportunities. Pick one that sounds interesting to you, and research it to get started. Some other passive income ideas include:
Creating an app
Creating information products
Creating courses to sell on Udemy or Skillshare
Using peer-to-peer lending platforms
Advertising on your car
Improving your financial wellbeing
Earning passive income streams is a great way to improve your financial standing.
But passive income isn’t the only way to become more financially secure.
Paying off debt is even more important because debt costs you money while you sleep (while passive income earns you money while you sleep).
If paying off debt is on your financial to-do list, look at Tally†. Tally is a powerful personal finance tool that may help qualifying Americans get out of credit card debt faster.
†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.