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How to create passive income to improve your cash flow

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Last editedMar 20213 min read

In a tough economic climate, passive income streams provide multiple sources of revenue to see you through. An extra source of income could be the boost your business needs to ride out slow periods. Learn more about how to create passive income and improve your cash flow below.

What is passive income?

Passive income refers to any source of revenue that you receive without active involvement. It often refers to payments you continue to receive after work’s been completed. For example, book royalties would qualify as passive income. Although you put work into writing the book, you still receive earnings although you’re not actively involved anymore.

Passive income doesn’t always have to come from a creative endeavour. This category of earnings also includes revenue from rental properties, limited partnerships, or interest payments. Because these types of payments don’t require a high level of ongoing activity, you can set up multiple passive income streams for a consistent improvement in cash flow. However, passive income is sometimes miscategorised as a get-rich scheme, which isn’t true. In most cases, some form of initial investment or work is involved. 

How to create passive income: 5 passive income ideas

Are you ready to get started? Here are a few passive income ideas to use as examples.

1. Earn interest.

Earned interest from a savings account or bond is one example of a passive income stream. You simply put money into the savings or bond account and then receive returns in exchange.

To make the most of this type of set-up, you should look for accounts that offer high returns. In most cases, accounts that lock money away for longer periods of time will provide higher fixed interest rates. You could be charged an early withdrawal fee if you need to access your money before the end of the term, which could negate the financial benefits. Help to Buy and Lifetime ISAs currently offer the best returns on your savings.

If you’re comfortable with taking on slightly more risk, index funds offer a passive way to invest in the stock market. You don’t need to choose any stocks yourself or manage your portfolio. Instead, it’s handled by the fund, which pays dividends in return.

2. Invest in a rental property.

Another option is to invest in a rental property. Real estate investment involves more activity at first than some of the other passive income ideas on this list, because you have to make that initial purchase. You’ll also need to do some research to make sure your property is a sound investment, in an area that will easily attract tenants. To keep it even more passive, if you rent out a property you can hire a management company to take care of the day-to-day handling of maintenance and collecting rent. Another benefit of this type of investment is that your tenants help you pay off your loan. When the mortgage is fully paid, your cash flow increases significantly.

3. Invest with peer-to-peer loans.

Those with money to invest might also want to look at the world of peer lending. Third-party apps facilitate peer-to-peer loans, where you provide the funds for other consumers. The lending platform handles everything else. When everything works as planned, you receive interest payments from the borrower as a passive stream of income. However, be sure to analyse historical data before you invest to minimise chances of your borrower defaulting on the loan.

4. Become a silent partner.

Rather than investing in a stranger through peer-to-peer lending platforms, another option is to become a silent investor in a company you know. With this type of passive income idea, you take on an equity position to earn profits. At the same time, the business owner is the one who handles everyday operations. This keeps you in the position of passive investor rather than active participant.

5. Create content.

The internet made it possible for any of us to become content creators. Whether you want to make YouTube videos or write eBooks, you can use your talents and skills set to create multimedia content. For example, you could film a tutorial, put it on YouTube, and link your creation with Google AdSense. Every time a viewer watches your tutorial, you’ll be compensated by AdSense. This option does require some activity up front, just as writing a book would, but you then earn a steady passive income as views grow.

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