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What is Passive Income and Best Ways to Make It

by | Apr 23, 2020

Do you wish there was a way you could make more money without having to take on a second job? Do you wish you could just make money in your sleep?

While making money in your sleep may sound like some far-fetched fantasy, it’s not. With passive income, you can have extra money coming in each month. 

But, what exactly is passive income? And, how do you start a passive income stream?

Check out this guide to discover what you need to know about passive income. 

What is Passive Income? 

Before we talk about the top passive income ideas, we first need to answer the question, “What is passive income?”

Passive income is a way of earning money that requires little to no effort to maintain. While a lot of passive income streams may take a while to get up and running, eventually, they allow you to earn money in your sleep. 

Passive Income FAQs

Now that you understand the definition of passive income, let’s clear up some frequently asked questions about passive income. These include:

How is Passive Income Taxed? 

One of the biggest concerns people have before starting a passive income stream is how it’s going to be taxed. 

As with any other type of income, passive income is usually taxable. How exactly your passive income is taxed will depend on where you live, how you’re earning the income, and how much you’re making. 

Because how you’re taxed can vary greatly from situation to situation, it’s typically best to hire an accountant to help you figure out how exactly you need to report your passive income, especially if you’re earning passive income from multiple sources. Generally, though, you should expect to pay tax on this income so keep that in mind when you’re budgeting your money. 

Does Passive Income Affect Social Security? 

Another common question people have is whether or not passive income will affect their social security benefits. 

In general, passive income should not affect your claim for social security benefits, just as long as the income is truly passive. Additionally, lawsuit payments, pensions, inheritances, IRA distributions, investment dividends, and interest will not cause your benefits to be reduced. 

Does Passive Income Affect Unemployment? 

If someone loses their job but still has money coming in through a passive income stream, are they still able to collect unemployment?

Typically, the answer is yes, your passive income stream should not affect your ability to collect unemployment. This should hold no matter how much you’re earning is passive income. Of course, if you get another full-time job, then you’ll no longer be eligible for unemployment benefits. 

How to Make Passive Income 

Now that you have a bit more background information on what passive income is, it’s time to answer the question, “What are some passive income ideas?”

The great thing about passive income is that there are all kinds of different ways to earn it. And, many people have several passive income streams set up that equates to a full-time salary. Here are some of the best ways to earn passive income:

1. Start a Blog 

Although starting a blog may not be one of the easiest passive income ideas, it’s one of the most popular. But, before you jump online and start spewing out all of your thoughts, it’s important to understand that making passive income through your blog is about a lot more than just being a good writer. 

To make passive income this way, you need to treat your blog like it’s a business. In other words, you need to take your writing hat off and put your CEO hat on. 

When starting a blog, the first thing you need to do is choose a niche. You should choose a niche that you’re both passionate about and that has high earning potential. Then, once you start to grow your readership, you can add in passive income streams such as advertisements, affiliate links, and more. 

2. Sell an Online Course 

While a blog takes some regular maintenance, the great thing about an online course is that once it’s up and running, your work is pretty much done. 

Over the past several years, we’ve seen a huge surge in online learning. More and more people are realizing that they don’t need to sit inside a classroom to get an education. 

You can leverage this shift to digital learning by putting together your online course. If you have expert knowledge in a subject area, then people will listen to you. For the most part, you don’t need a P.h.D. to begin an online course. All you need is a strong background in a topic you care about. 

And, the great thing is that there are already a lot of platforms out there for selling your courses, meaning you have to put less effort into marketing. Some great platforms to check out include Udemy, Skillshare, Coursera, Teachable, and LinkedIn Learning. 

3. Affiliate Marketing

If you run a website that receives a decent amount of traffic, then affiliate marketing can be an excellent passive income idea. 

With affiliate marketing, all you need to do is search for affiliate programs in your niche. Then, the next time you post an article, all you need to do is add the affiliate links into your blog. Then, each time someone clicks on one of those links and buys something with their credit card, you’ll earn a bit of income. 

Of course, you’ll need to disclose to your readers that you have affiliate links in your blog. But, as long as you aren’t spamming your posts with one affiliate link after the other, most readers will appreciate the recommendations. 

For example, if you run a health and fitness blog, you could write a post about working out that contains various links to pieces of exercise equipment. Or, if you run a tech blog, you could do a post rounding up the best laptops of the year, and then link out to those. 

No matter what niche you’re operating in, there are affiliate programs to take advantage of. 

4. Write and Publish an eBook 

Another great way to generate a decent amount of passive income is to write and publish an eBook

You could write a non-fiction eBook to educate your audience on topics such as self-development, online marketing, or whatever it is that you’re an expert in. Or, you could write a fictional eBook and utilize Amazon’s Kindle Direct Publishing platform. While the fiction market can be quite competitive, there’s huge earning potential in this area. 

If you find the Amazon platform to be too competitive, you could sell eBooks through your website. Then, once you build up a following, you could start selling them through Amazon. You could also advertise the eBook on your blog or on social media. 

5. Sell Stock Photos

Even if you’re not a professional photographer, selling stock photos can still be a great way to earn passive income. 

Magazines, websites, and blogs all purchase stock photos to bring their images to life. All you need to do is submit your photos to stock photo sites, and then you’ll earn a small commission every time someone downloads your photo. 

And don’t worry, these photos don’t have to be super artsy or unusual. Oftentimes, it’s the simple photos of people carrying out day to day activities that get the most downloads. 

6. Invest in Dividend Stocks

While investing in the stock market certainly isn’t for everyone, it’s a great way to earn money if you’re wondering how to make passive income online. 

To get started in this market, you’ll need to do plenty of research and invest a large amount of money to receive big dividend checks. However, if you consistently invest money into dividend stocks, you can set up a nice residual income stream. 

What are dividend stocks, exactly?

When you own stock directly through a company or a fund, you may receive dividends. These dividends are distributions of a portion of the company’s profits. They’re decided on by the board of directors, and they can be issued via cash payments, such as shares of stock or other property. Essentially, it’s a way for companies to reward shareholders for their loyalty. 

How much you receive will depend on how much stock you own and how much money there was to divide. Many people choose to reinvest their dividends to buy more shares of stock and potentially earn even more money. 

M1 Finance is a platform for those looking to try their hand at dividend stocks. It’s free to individual investors, and it allows you to create diversified portfolios and access a range of financial tools. 

7. Take Part in Peer to Peer Lending

Peer to peer lending is the process of loaning money to borrowers who typically don’t qualify for a traditional loan.

The benefit of using a peer to peer loan as a borrower is that it allows you to still get money even if you don’t qualify for a loan through the bank. As a lender, you can earn interest through the loans you give out. Oftentimes, the interest you earn through peer to peer lending is higher than the interest you’ll earn through conventional investments. 

Sometimes, it can average as high as 10%. To start earning passive income this way, all you need to do is join a peer to peer lending platform. Some of the top ones to check out include Lending Club and Credible. If you have your finances in order, this can be a great income stream. 

8. Earn Real Estate Rental Property Income

Real estate has been a source of passive income long before the definition of passive income was even a thing. Whether you’re an investor or owner, you can rent out apartments, homes, condos, or office spaces to generate some extra cash flow each month. 

While the income you can earn through real estate can be easy, it does require a sizable upfront investment. But, if you have some extra cash lying around, this is a great passive income source to check out. And, you can hire a property management team to take of building maintenance, marketing, and other tasks, so all you have to do is sit back and earn some money. 

If you don’t want to do the real estate game alone, you can work with a real estate investment trust company (REITs). This type of company gives investors the opportunity to own valuable real estate. 

You can also decide whether you want to rent out your real estate long-term or short-term. Renting out long-term means you’ll earn a steadier income stream. However, you can charge higher prices on short-term rentals, especially if your property is in a vacation hotspot. 

You can check out sites like Airbnb or VRBO to get into the short-term rental game. 

Some people also choose to make money by flipping properties and selling them. But be aware, you’ll have to pay capital gains tax if you do this. 

9. Rent Out Your Stuff 

If you don’t have the cash lying around to buy a new property, why not rent out stuff you already own? One of the best things to rent out is your car. 

If you don’t use your car every day, then why not make some money off of it instead of just having it sit in your garage? Companies like Turo, Getaround, and HyreCar allow you to create a free listing for your vehicle. You can select the times and dates for when your car is available, and then you’ll get a notification when someone rents it out. 

All you need to do is be there with the keys ready to start making money. Also, if you have a prime parking spot in your neighborhood, you could rent that out through platforms like Pavemint, Spot Hero, and Curbflip. 

If your home is near an airport, concert venue, or sporting venue, this can be a particularly lucrative source of passive income. 

Other stuff you can rent out includes camera equipment, sporting equipment, or camping gear. Then, you can transfer the money you earn straight into your savings account. 

How to Make Passive Income: Are You Ready to Start Earning? 

Now that you know how to make passive income, it’s time to choose your revenue stream and get started. Before you know it, you’ll be making money in your sleep!

Be sure to check out our personal finance center to learn more about ways to make money and save!

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