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What Is Passive Income?

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Last editedJun 20212 min read

What if you could make money without hands-on activity? This is the idea behind passive income, which can refer to any number of self-managing revenue streams from royalties to index funds. So, what is passive income, and how does it work?

Understanding passive income

Passive income includes any source of revenue received when you’re not putting active work into it. This would include passive income investments like mutual fund returns and stock dividends, as well as things like royalties from a book or ad revenue from a blog. Once you’ve put in the initial work to set up the stream of income, you should be able to make passive income without further effort.

In finance, passive income lets your own money build additional revenue that you can put back into your business. The idea is to let your existing money work for you by putting it aside into investments that will grow without active management.

5 passive income ideas

Build wealth bit by bit by incorporating passive income ideas into your financial strategy. Here are five ways to make passive income.

1. Earned interest

One of the most common passive income investments is a fixed-rate savings account. Your money’s set aside into the account for a predetermined period, during which time it earns money in interest. Bonds work the same way. You purchase a bond for a certain amount of money, earning interest over time. These are examples of passive income because once you’ve deposited your money into the account or purchased a bond, no further action is required to generate income in the form of interest. The longer the money’s set aside, the higher the interest rate will usually be. For example, a Lifetime ISA comes with a 25% bonus from the government on deposited funds, paid annually.

2. Investing

While purchasing government-backed bonds can already be seen as a form of passive investment, another is to play the stock market. Shareholders who purchase dividend-yielding stocks receive regular payments from the company without further effort. However, this does require some time and research to get started since you must choose a stock that’s likely to perform well. In addition to stocks, look for passive income investments like exchange traded funds (ETFs) to potentially earn money 24-7.

3. Peer-to-peer lending

Yet another type of investment to consider is peer-to-peer lending. There are numerous intermediaries that will facilitate your loan. As the lender, you agree to loan money in exchange for interest payments and full repayment at the end of the loan term. However, this option is riskier than some passive income investments on the list because peer-to-peer loans are unsecured. You can reduce this inherent risk by diversifying your portfolio with multiple loans in small amounts, as well as doing your research into each borrower.

4. Real estate

Investing in real estate isn’t entirely passive, since it requires some effort to buy and rent property. However, you can always farm out the hard work to a property management company who will take care of securing tenants and arranging maintenance on your behalf. If you currently have extra space in your business premises, you could also consider renting out rooms or desks for freelance workers. This generates passive income with minimal effort.

5. Online advertising

Do you currently have a blog or business website? If so, it could be earning a tidy sum using affiliate marketing and display ads. Affiliate marketing pays you each time a website visitor uses one of your affiliate links to sign up for a service or make a purchase. Display advertising is even more hands-off for website owners, paying you for space on your site. It’s the modern version of a billboard, with advertising placed on the top or bottom.

There are many forms of passive income, some more involved than others. To get started, it’s helpful to consider how much income you’re willing to invest and your comfort level with risk. It’s well worth exploring your options to start generating additional revenue for maximum wealth creation.

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