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Passive income can be a great way to help generate extra cash flow, whether you have a side hustle or are just trying to make a little extra money each month. This is because consumers have been hit particularly hard by high prices. Passive income can help you make more money in good times and help you weather the storm if you suddenly lose your job, voluntarily quit, or your purchasing power continues to decline due to inflation.
Passive income allows you to earn money while pursuing your day job, or you may want to take some time off to build a strong passive income stream. Either way, passive income provides added security.
And if you’re concerned about your ability to save enough income to reach your retirement goals, building wealth through passive income can be an attractive strategy.
What is passive income?
Passive income includes regular income earned from sources other than your employer or contractors. The IRS says passive income can come from two sources: rental property or a business in which the individual is not actively involved, such as book royalties or stock dividends. While this is legally correct, in practice passive income can take many different forms.
“A lot of people think passive income is getting something for free,” says Todd Tresidder, a financial coach and retired hedge fund manager. “It sounds like a get-rich-quick scheme, but it still takes time. Work. You just have to do the work.”
In practice, you can do some or all of the work up front, but passive income often involves additional work as well. To keep the passive income flowing, you may need to update products or keep your rental property well maintained.
However, if you stick with this strategy, it can be a great way to generate income and provide additional financial security in the process.
Passive income is not…
- your job. Passive income is generally income that does not come from something financial, such as a salary from a job.
- Second job. Having a side hustle is not considered passive income because you still have to show up and work to get paid. Passive income is about creating a steady stream of income without putting in a lot of effort.
- Non-income-producing assets. Investing can be a great way to generate passive income, but only if the assets you own pay dividends or interest. Assets like non-dividend-producing stocks or cryptocurrencies may be interesting, but they don’t generate passive income.
25 Passive Income Ideas to Build Wealth
If you’re considering creating a passive income stream, review the following strategies to learn what it takes to be successful, while also understanding the risks associated with each idea.
1. Create a curriculum
A popular strategy for generating passive income is to create an audio or video course and then sit back while the money rolls in from product sales. Courses can be distributed and sold through sites like Udemy, SkillShare, and Coursera.
Alternatively, you can consider a “freemium model” where you build a following through free content and then charge for more information or for people to learn more. For example, language teachers and stock pickers can use this model. The free content serves as a demonstration of your expertise and can attract people who want to improve.
Opportunity: This course can provide a great source of income as you can easily earn money after the first time you do it.
Risk: “It takes a lot of work to create a product. In this business, the product has to be good,” Tresider said.
Tresider says that to be successful, you need to build a strong platform, market your product, and plan for more products.
“Unless you’re really lucky, you can’t even consider a single product as a business,” Tresider said. “The best way to sell an existing product is to create a better one.”
He said that mastering a business model can create a good source of income.
2. Write an e-book
Writing an eBook can be a great opportunity to take advantage of low publishing costs and leverage Amazon’s global distribution to get your book in front of millions of potential buyers. EBooks can be relatively short, around 30 to 50 pages, and because they are based on personal experiences, they are relatively inexpensive to produce.
You need to be an expert in a particular topic, but the topic can be specialized and require a special skill or ability that only a few people have but many readers need. You can quickly design your book on an online platform and then test different titles and prices in the market.
But like your course design, adding more eBooks to the mix will provide a lot of value as you attract more customers to your content.
Opportunity: Not only can eBooks provide valuable, high-quality information to your readers, but they can also be used as a way to drive traffic to other services, including audio or video courses, other eBooks, websites, or seminars of potentially higher value.
Risk: Your eBook will need to be very strong to build a readership, and it also helps to have ways to market your eBook, including promotion on your existing website, other relevant websites, media appearances, and podcasts. So, you may be putting in a lot of effort at first and getting little in return for your efforts. Especially at first.
E-books are great, but they are useful for writing more and then building a business around your book, or making the book one part of your business to complement the other parts. So the biggest risk is wasting time for little reward.
3. Rental income
Investing in rental properties is an effective way to earn passive income. However, it often requires more work than people think.
If you don’t take the time to learn how to make this venture profitable, you could lose your investment and more, says John H. Graves, an accredited investment advisor in the Los Angeles area and author of “The 7%.” The solution: You can retire comfortably.”
Opportunity: To earn passive income from rental properties, Graves says you need to ensure three things:
- How much profit do you want from your investment?
- Total property costs and expenses
- Financial Risks of Owning Real Estate
For example, if your goal is to earn $10,000 per year in rental cash flow, the property has a mortgage of $2,000 per month, and taxes and other fees add $300 per month, you will need to charge $3,133 per month in rent to reach your goal.
Risk: Here are some questions to consider: Is there a market for your property? What happens if a tenant misses a payment or causes damage to the property? What happens if I can’t rent the property? Any of these factors can have a big impact on your passive income.
An economic downturn can also cause difficulties. Suddenly, renters may find themselves unable to pay rent, but they may still have to pay their mortgage. Or you may not be able to rent on a lower income than before. Relatively low mortgage rates can cause house prices to rise rapidly, and rents may not cover the costs. You should assess these risks and create contingency plans to protect yourself.
4. Affiliate Marketing
Affiliate marketing allows website owners, social media influencers, or bloggers to promote third-party products by including links to them on their sites or social media accounts. Amazon may be the most popular affiliate partner, but eBay, Awin, and ShareASale are also big names. Instagram and TikTok have become huge platforms for people looking to grow their following and promote their products.
You may also consider building an email list to generate interest in your blog or direct people to products and services that might interest you.
Opportunity: Site owners receive a commission when visitors click on a link and make a purchase from one of their third-party affiliates. Commissions range from 3-7%, so your site will likely need a significant amount of traffic to generate significant revenue. However, if you can grow your following or have a more lucrative niche (e.g. software, financial services, fitness), you may be able to make a lot of money.
Affiliate marketing is passive because, in theory, you can make money just by adding a link to your site or social media account. The reality is, if you can’t get readers to visit your site, click on the link, and buy something, you won’t make anything.
Risk Factor: If you’re just starting out, you need to invest time in creating content and building traffic. Building a following can take time, you need to find the right formula to attract that audience, and that can take time. What’s worse is that once all that energy is used up, your audience may be tempted to run to the next popular influencer, trend, or social media platform.
5. Retail product sales
Take advantage of online selling platforms like eBay or Amazon and sell products you find elsewhere at a discount. You can arbitrage the difference between the buy and sell price and even build a personal database to track your trades.
Opportunity: You can take advantage of the price gap between what you can find and what the average consumer can find. This can be especially useful if you have contacts who can help you access discounted items that only a select few can find. Or you may find a valuable item that others have overlooked.
Risks: Sales can happen online at any time, making this a passive strategy, but you will need to do your best to find a reliable source of products. You will also need a strong source of cash to sell your products, as you will need to invest money in each product. You will need to know your market well to avoid buying at too high a price. Otherwise, you could end up with a product that no one wants or have to drastically lower the price to sell it.
6. Sell photos online
Selling photos online may not seem like the most obvious place to generate passive income, but it can boost your efforts, especially if you can sell the same photos over and over again. To achieve this, you can partner with organizations like Getty Images, Shutterstock, or Alamy.
To get started, you need to get approval from the platform and then license your images for anyone to use. The platform then pays you every time someone uses your images.
You need images that appeal to a specific audience or represent a specific scene, and you need to know where the demand is. Images can be taken using models, landscapes, creative scenarios, etc., or they can capture real-life events that might appear in the news.
Opportunity: One of the benefits of selling or licensing images through a platform is that it allows you to scale your efforts, especially if you can provide images that are in high demand. This means that the same image is likely to sell for hundreds or thousands of times more.
Risk: You can add hundreds of images to a platform like Getty Images, but they won’t sell anything. Only a few photos can generate all your revenue, so keep adding more photos as you search for the needle in the haystack.
It takes a lot of effort to get out there, take photos, process them, and attend events that can ultimately increase your profits. Staying motivated can be hard. Every next photo could be a lottery ticket, even if it isn’t.
7. Purchase of real estate using collective funds
If you are interested in investing in real estate but don’t want to do a lot of the hassle (maintenance, repairs, dealing with tenants, etc.), another option is to use a crowdfunding platform to invest in real estate. Once our experienced investment team has selected the properties, you can decide which investment and amount is right for you.
You’ll pay an annual management fee for the real estate platform, and the minimum investment amount can range from $10 to tens of thousands of dollars.
Opportunity: Access to special real estate offers that may be of interest, pre-selected by knowledgeable investors. You can check your earnings on the platform, which will give you an idea of the level and period of earnings you can expect. Investing in real estate can also help you diversify your portfolio, smoothing your returns.
Some platforms invest in stocks, while others invest in debt. In general, stocks offer higher returns with higher risk, while debt offers lower returns with lower risk. Some platforms require you to be an accredited investor with a certain minimum amount of income or assets. Popular platforms include Fundrise, Yieldstreet, and DiversyFund.
Risk: Investing directly in many crowdfunding platforms is at your own risk. So while past returns may seem good, they are not a predictor of future success. You need to decide what to buy. This means reading the prospectus for each deal you are interested in and understanding the pros and cons.
Additionally, real estate is typically financed with high levels of debt, making it more vulnerable to economic downturns. You should also understand how long your money will be held in your investment and when you can access it, especially in an emergency.
8. P2P Loans
Peer-to-Peer (P2P) lending is a personal loan made between you and a borrower through a third-party intermediary, such as Prosper. Other players include LendingClub and Upstart.
Opportunity: As a lender, you can earn income through interest payments on loans. However, since the loans are unsecured, you will get nothing if you default.
To reduce this risk, you need to do two things:
- Diversify your loan portfolio by investing small amounts across multiple loans. At Prosper.com, the minimum investment per loan is $25.
- Analyze historical data about potential borrowers to make the right choice.
Risk factors: Mastering P2P lending metrics takes time, so it is not completely passive and requires careful screening of potential borrowers. Since you are investing in multiple loans, you need to pay attention to the payments you receive. To generate income, you must reinvest all the interest you earn.
A recession can make high-yield personal loans more vulnerable to default, so if the economy worsens, those loans may default at a higher rate than in the past.
9. Dividend stocks
Shareholders of dividend-paying companies receive regular dividends from the company. The company pays dividends out of its earnings every quarter, and all you need to do is own the stock. Dividends are paid per share, so the more shares you own, the higher your returns.
Opportunity: Owning dividend stocks can be one of the most passive forms of earning money because the income from stocks is not tied to any activity other than the initial financial investment. The funds are deposited into your brokerage account.
Risk: The hardest part is picking the right stocks.
For example, a company that pays a very high dividend may not be able to maintain this ratio. Greaves warns that many beginners jump into the market without thoroughly checking out the companies issuing the stocks. “You have to check each company’s website and look at their financial statements. It takes two to three weeks to verify each company,” Greaves says.
But there is a way to invest in dividend stocks without spending a lot of time evaluating companies. Graves recommends investing in exchange-traded funds (ETFs). ETFs are investment funds that hold assets like stocks, commodities and bonds, but trade like stocks. ETFs also diversify their holdings, so if a company cuts its payout, it won’t have a significant impact on the ETF’s price or returns. Here are some of the best ETFs to choose from.
“ETFs are a perfect choice for beginners because they are easy to understand, highly liquid, inexpensive and offer much better return potential at very low costs than mutual funds,” Greaves said.
Another major risk is that stocks or ETFs can drop significantly in a short period of time, especially during times of high uncertainty, as they did in 2020 when the coronavirus crisis rocked financial markets. Economic stress could cause some companies to cut their dividends altogether, while a diversified fund might feel less pressure.
Compare your investment options with Bankrate’s broker ratings.
10. Create the application
Creating an app can be a way to invest your time initially and reap the rewards in the long run. Apps can be games or apps that help mobile users perform difficult functions. Once your app is public, users can download it and start making money.
Opportunity: Your app has a huge advantage if you can design something that will catch the attention of your audience. You need to think about the best way to generate sales from your app. For example, you can run in-app ads or ask users to pay a small fee to download your app.
As your app becomes popular or you receive feedback, you may need to add features gradually to keep your app relevant and popular.
Risk: Perhaps the biggest risk here is that you are using your time unprofitably. As long as you have some money set aside for the project (or money to spend on hardware, etc.), money shouldn’t be an issue. However, this is a crowded market, and a truly successful app must provide value or a compelling experience for the user.
Additionally, if your app collects data, you must ensure that it complies with privacy laws around the world. An app’s popularity can be short-lived. This means your cash flow may run out sooner than expected.
11. Parking space rental
Do you have a parking space that is not being used or can be used by someone else? You can trade this space for cash. It might be better to have a larger space that can accommodate multiple vehicles or is useful for multiple events or venues.
Opportunity: Parking spaces can be valuable, especially in high-demand areas or during times of high demand (such as concerts or sporting events). For example, if you live near a high-traffic area with limited parking, this could be an opportunity for you to make money. You have the best chance of making money by renting out your space to people who need it every day, rather than renting it out for one-time events.
Risks: This may not be a risky idea, but you should make sure that you are not violating any restrictions of the accommodation or other organization by renting a parking space. It may also be helpful to have a disclaimer as a condition of parking your car in the parking lot.
12. Real estate investment funds
REITs are real estate investment trusts, which is a term for companies that own and manage real estate. REITs have a special legal structure that allows them to pay little or no corporate taxes if they pass most of their income to shareholders.
Opportunity: You can buy REITs on the stock market just like any other company or dividend stock. You’ll benefit regardless of how much your REIT pays in dividends, and the best REITs have a track record of increasing their dividends every year, meaning your dividend stream can grow over time.
Like dividend stocks, individual REITs can be riskier than owning an exchange-traded fund that holds dozens of REIT stocks. These funds provide immediate diversification, are generally safer than buying individual stocks, and can still produce good returns.
Risks: Just like dividend stocks, you have to be able to pick good REITs, and that means analyzing every company you can buy. This is a time-consuming process. Even though it is a passive activity, you can lose a lot of money if you don’t know what you are doing. Like any stock, prices can fluctuate a lot in the short term.
REIT dividends are also not protected from tough economic times. If a REIT fails to generate enough profits, it will likely have to cut its dividend or eliminate it altogether. So your passive income could be severely impacted if you want it.
Finding a qualified financial advisor to guide you through the most important financial decisions of your life is easy.
Use Bankrate’s free AdvisorMatch service to quickly connect with a CFP® professional who can help you achieve your financial goals.
13. Ladder Bond
A bond ladder is a series of bonds that mature at different times over several years. The staggered maturities reduce reinvestment risk, which is the risk of reinvesting money when the bonds offer very low interest payments.
Opportunity: Bond ladders are a classic passive investment that have attracted retirees and retirees for decades. You can sit back and collect interest, and when the bond matures, you can “ladder” and transfer the principal to a new bond. For example, you could start with a bond with a maturity of 1, 3, 5, or 7 years.
After the first bond matures in a given year, there are still 2-, 4-, and 6-year bonds remaining. You can use the proceeds from the newly matured bond to buy another one-year bond or switch to a longer-term bond, such as an eight-year bond.
Risk: Placing bonds eliminates one of the main risks associated with purchasing bonds: the risk of having to buy new bonds when interest rates are unfavorable when the bonds mature.
Bonds also carry other risks. The federal government backs Treasury bonds but not corporate bonds, so you could lose your capital if a company defaults on its debt. You should own a lot of bonds to diversify your risk and eliminate the risk that one bond could ruin your entire investment portfolio. If interest rates rise overall, bonds could fall in value.
Because of these concerns, many investors are turning to bond ETFs, which offer a variety of bond funds to hold while eliminating the risk that a single bond will impact returns.
14. Promotional posts on social media
Do you have a large following on social media like Instagram or TikTok? Ask new consumer brands to post information about their products or pay you to feature them in your news feed.
However, you need to keep filling your profiles with content that will engage your audience. This means continually creating posts that increase your reach and engage your social media followers.
Opportunity: Leveraging social media is an attractive business model. Drive attention and clicks to your profile with strong content, then monetize that content by creating sponsored posts from brands that engage your followers.
Risks: Starting out in this space can be a dilemma. You need a large audience to get meaningful sponsored posts, but this is only an attractive option if you have a meaningful audience. So in the beginning, you will have to focus a lot on growing your audience without guaranteeing success. You may spend a lot of time following trends and creating content in the hope that you will get the sponsorship you want.
Even if you have a sponsored post at your disposal, you need to keep posting to keep your audience engaged and an attractive option for advertisers. This means investing more time and money, even if you have a lot of freedom over when exactly.
15. Invest in savings or savings accounts with high yields.
Not only can you earn passive income by investing in high-yield certificates of deposit or savings accounts at online banks, but you can also earn some of the highest interest rates in the country. You don’t even have to leave your house to make money.
Opportunity: To get the most out of your certificate of deposit, you need to find the best certificate of deposit or savings account in the country right away. In general, it is better to use an online bank than a local bank. Because you can choose the best exchange rate in your country. If your financial institution is backed by the FDIC, you may qualify for a guaranteed return of up to $250,000.
Risk: As long as your bank is backed by the Federal Deposit Insurance Corporation (FDIC), your capital is safe. Therefore, investing in a certificate of deposit or savings account can provide the safest returns. However, these returns may pale in comparison to inflation, which can erode the real purchasing power of your money. However, a certificate of deposit or savings account offers a better return than keeping your money in cash or a non-interest-earning checking account.
16. Rent out your house for a short period of time
This simple strategy turns unused space into a money-making opportunity. If you’re traveling for the summer, need to get out of town for a while, or want to travel, consider renting out your current space while you’re away.
Opportunity: You can list your space on websites like Airbnb or Vrbo and set your own rental terms. Your efforts will pay off with little extra work, especially if you rent to tenants who may stay for several months.
Risks: Allowing strangers to live in your home is an unusual risk for most passive investments, but the financial risks here are not too great. For example, tenants could damage or even destroy your property or even steal valuables.
17. Advertise on cars
You can earn extra money just by driving your car around town. Contact an agency that specializes in evaluating your driving habits, including where you drive and how far you drive. If you match with one of these advertisers, the dealer will “pack” your car with your ad at no cost to you. The agency is looking for new cars and drivers must have a clean driving record.
Opportunity: You have to get out and drive, but if you already drive long distances, this is a great way to make a few hundred dollars a month for little to no extra cost. Drivers can be paid per mile.
Risks: If this idea interests you, find a legitimate operator to work with. There are many scammers out there who are trying to scam you and steal thousands of dollars from you.
18. Create a blog or YouTube channel
Are you a travel expert in Thailand? Are you a Minecraft fan? Or are you just a dance person? Take your passion for a particular topic, turn it into a blog or YouTube channel, and monetize it through ads or sponsorships. Find a popular topic, even if it’s a small one, and become an expert in it. Initially, you’ll need to create a variety of content to attract an audience, but over time, as your engaging content becomes more known, you can earn a steady stream of income.
Opportunity: You can take advantage of free (or very cheap) platforms and then build a following using great content. The more unique your voice or interests are, the more likely you are to become “the one” to follow. Then attract sponsors.
Risk: You have to create content first, then create ongoing content, which can take time. And you have to be genuinely interested in the product. This will help you stay motivated to continue, especially in the beginning when your followers are still searching for you.
The real downside here is that if you have limited interest in a topic or niche, you could end up spending a lot of time and resources without much benefit. Your niche may be too niche to attract a profitable audience, but you won’t know for sure until you try.
19. Rental of useful household items
Other ways to rent out idle cars include: Start with a small selection of other household items that people might need but might be gathering dust in your garage. Lawn mowers? Power tools? Machine tools and toolboxes? Tents or walk-in coolers? Look for high-value items that people need for a short period of time but might not be worth having around. Then incorporate how customers browse inventory and how they pay.
Opportunity: Here you can start with a small project and then expand the scope of the project if you are interested in a particular area. As the weather gets warmer or colder, do you suddenly want to buy a tent for a weekend camping trip? Once you find your order, you can buy it without storing the product. In some cases, you may be able to get a refund for a product after a few uses.
Risk: There is always the possibility that your property will be damaged or stolen, but this risk can be mitigated by having an agreement that allows for replacement items at the customer’s expense. If you are starting out small here, you are not taking on much risk. This is especially true if you already own the item and do not need it in the near future. Pay special attention to liability issues, especially if you are renting potentially dangerous equipment (such as power tools).
20. Sell your designs online
If you have design skills, you can make money by selling products printed with your designs. Companies like CafePress and Zazzle allow you to sell merchandise like t-shirts, hats, mugs, and more with your own designs.
Opportunity: You can start with your own designs, see what the market is interested in, and then grow from there. You can use your keen interest in current events to design t-shirts that reflect the zeitgeist, or at least have a sense of irony. You can also create your own online store and promote your products through a site like Shopify.
Risks: Using a printing partner allows you to ship without having to invest your own money, avoiding one of the biggest risks of being tied up in capital. However, you can get better rates by investing in some of your own inventory. Another big risk here is that you can invest a lot of time for little return. However, if you already do design work for other purposes, such as personal interests, this may be an appealing path for you.
21. Building a retirement fund
Pensions can be a great place to earn a steady income. In a typical pension plan, you contribute money to a financial company (usually an insurance company). This company will provide a stream of income in the future. Annuities are paid monthly and can be structured in a variety of ways, including starting payments immediately or over a longer period.
Opportunity: Annuities can be structured in a variety of ways depending on what you need, but here’s the definition of passive income. If you want the monthly payments to start right away, you can set that up with your insurance company, or you can structure the payments to start when you retire, for example. Additionally, you can set up an annuity with a fixed rate of return or an annuity with variable payments depending on the performance of your retirement investments.
Annuities can be set up to pay out over a set period of time (e.g. 20 years) or for life. If you die, payments may stop or continue to be paid to your spouse. The options are wide.
Risk factors: Pensions are very complex, and if you set one, you can get out of it by paying a large penalty, but often you are stuck in it for a long time. Read the contract details carefully so you can understand the advantages and disadvantages of a particular contract.
You will also typically have to hand over a large portion of your money to the insurance company to fund your retirement. Every annuity contract is different and each may offer unique benefits to meet your specific needs. Therefore, it is important to understand the terms of your contract.
22. Buy local businesses
Local businesses offer the potential to generate cash flow through an established and stable business. If your business is profitable enough, you may want to hire a manager to run it while you make bigger decisions or not make decisions at all. You can buy with an attractive loan, so you don’t have to risk your own money prematurely.
Opportunity: A local business may have an attractive and profitable niche to invest in, and one that is not easily copied by competitors. You can benefit from the seller’s experience or credentials, especially in the beginning, as they gain experience. The seller may be willing to finance a portion of the sale, giving you an incentive to help your business succeed. You may also decide to base part of your purchase price on a specific profit target or other metric.
Risk factors: Potential acquisition candidates need to be screened carefully. Otherwise, you could end up working with a company that is less profitable than it appears or has a diminished audience. To get the best deal and avoid pitfalls, it may be worth working with an experienced and honest broker or hiring an advisor to help you evaluate potential deals. Also, if you hire a manager to run your store, you need to make sure that person is honest and competent. Otherwise, problems will arise.
23. Buy a blog
If you want to start blogging, consider buying a blog and skip the step of building it. You can import the previous owner’s contacts and relationships, and maybe even your own. And instead of building and hoping, you can start generating income from day one.
Opportunity: Buying a blog will get you in the game today, not tomorrow, but you should have some knowledge of the topic and already have an interest in it. And it would be even better if you have some ideas on how I can improve my blog (better content, more efficiency, lower costs, etc.) so I can leverage it to make more profit than the purchase price.
Risk Factors: Like any other business, blogging is not something that can be changed. So if you decide to switch to something more eco-friendly, you may not get what you paid for, or you may not be able to sell it at all. Of course, you have to be able to gauge your market effectively and produce content that readers want or that attracts sponsors or other revenue drivers.
24. Purchase of preferred shares
Preferred stock is a type of stock that acts like a bond and pays a large, attractive dividend every quarter. Like bonds, preferred stock may have a face value and a specified maturity date, but it can also be perpetual, meaning the company does not have to pay it back. It is usually redeemed five years after it is issued. Preferred stock is traded on an exchange, making it easy to buy and relatively liquid.
Opportunity: Preferred stock may pay higher-than-normal dividends than corporate bonds, but this comes at the expense of capital gains (unless the preferred stock is purchased at a discount to its par value). However, it can be an attractive way to earn passive income. Many REITs, banks, and other financial companies issue preferred stock to finance their operations.
Risks: Preferred stocks are traded on a stock exchange. This means that their prices can fluctuate, especially in response to changes in current interest rates. When rates rise, preferred stock prices are likely to fall, and vice versa. However, it is unlikely that the price will rise much above its face value. As with bonds, you need to carefully understand the company and its ability to pay dividends. Otherwise, the value of your investment could decline permanently.
If you don’t want to pick individual stocks, choose a preferred stock fund. You get a diversified portfolio of preferred stocks that reduces your risk.
25. Invest in closed-end municipal bond funds
Municipal bonds provide investors with tax-free dividend income in exchange for funding public projects in states and cities. Closed-end funds that focus on this area of the market own a variety of these bonds and then leverage total returns by borrowing money to buy more bonds. Closed-end funds are the most passive type of income, like investing in certificates of deposit or dividend funds.
Opportunity: Closed-end municipal bond funds can be an attractive way to earn tax-free income, which is especially helpful for those who live out of state or are in a high tax bracket. These funds typically pay better dividends than regular municipal bonds because they use leverage (which is inherently risky), but they hold a diversified portfolio of bonds, which helps reduce overall risk. Closed-end funds generally must be purchased at a significant discount to net asset value, which also helps reduce risk.
Risk: Bond prices (and bond fund prices) fall when interest rates rise (and vice versa). However, the leverage enjoyed by closed-end funds amplifies this effect, so in a recession, the average fund will fall more than the average bond. At the same time, bond funds may need to reduce their payouts to cover the increased borrowing costs, which in turn affects the price of the fund. Therefore, closed-end funds can be volatile because their prices change rapidly.
What are the best sources of passive income?
The question of which passive income stream is best depends on many factors, but the most important ones include how much you have to invest, the overall size of the opportunity, your interest and ability in the area, and your time. You have to invest, and there is a chance of success.
In general, the lower the barriers to entry, the more crowded the playing field and the lower the chances of success.
So, you need to evaluate your chances based on these factors and figure out which passive income strategy is best for you. However, having a natural ability and interest in your target field can help. Because these factors can help motivate you in the beginning when things get tougher.
There are passive income opportunities for people starting with little money and even for those who have no money to start with.
How to earn passive income without money?
If you have little or no money, you will have to rely primarily on investing your own time, at least until you can save some money. This means focusing on passive income streams that leverage the following attributes:
- Your area of expertise. Here, you can build expertise in products or services that are useful to consumers, such as software design and programming.
- Previous job opportunities required a lot of hard work. Opportunities may require an investment of time or effort, such as creating courses, building an influencer profile, or other options.
As a result, you trade time for lack of capital so that you have enough capital to expand your opportunities.
How to earn passive income with money?
Money can give you more passive investment opportunities. If you have money to invest in negative opportunities, you will not only get the above opportunities but also new opportunities. Money is a prerequisite to benefit from the following passive income areas:
- We invest in high yielding stocks, preferred stocks, and real estate investment trusts. Investing in stocks means you need money up front, but still provides you with the most passive form of income.
- Save using bonds or certificates of deposit. Another passive activity is the purchase of bonds or certificates of deposit.
Here, you can use your money to make money with little to no effort if you wish. Of course, you may spend your money with a significant investment of time to move on to a more profitable field.
How many sources of income should you have?
There is no one universal advice when it comes to creating income streams. The number of sources of income you have should depend on your financial situation and future financial goals. But having at least a few of these sources is a good start.
“You can catch more fish with multiple lines in the water,” says Greg McBride, CFA and senior financial analyst at Wright Bank. Human resources, rental properties, income-producing securities and business ventures are all great ways to diversify your income streams.
Of course, even as you work to create new passive income streams, you need to make sure that you don’t lose focus on your other sources of income. So, you need to balance your efforts and choose the best opportunities for your time.
Passive Income Ideas for Beginners
- High Yield Savings Accounts. High-yield savings accounts can be an easy way to build additional savings beyond what you can get from a checking or regular savings account. The amounts aren’t huge, but they’re a simple way to earn passive income.
- Certificates of deposit. Certificates of deposit are another way to generate passive income, but your money is tied up more than if it were in a high-yield savings account.
- Real estate investment trusts. REITs are a way to invest in real estate without having to put in all the effort required to manage a property. REITs typically pay out most of their income as dividends, making them an attractive option for investors seeking passive income.
Tax relief on passive income
Passive income can be a great strategy for generating extra income, but it also comes with a tax burden on your efforts. However, starting a business and opening a retirement account can help you reduce your tax burden and prepare for your future. However, this strategy does not work with all of these negative strategies and you must be a legitimate business to qualify.
- Register with the IRS and obtain a tax identification number for your company.
- Then contact a broker who can help you open a self-employed retirement account, such as Charles Schwab or Fidelity.
- Decide which type of retirement account best suits your needs.
Two popular options are individual 401(k) accounts and SEP IRAs. If you keep your cash in a traditional 401(k) or SEP IRA, you can get a tax break on your taxes this year. Individual 401(k) accounts are great because you can deposit 100% of your income into the account, up to the annual maximum. Meanwhile, you can only contribute 25% to a SEP IRA. You can also contribute up to 25% of your income from work through your individual 401(k).
