Passive income is a type of income that requires little to no effort to maintain. Learning how to build it is the key to financial freedom.
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Table of contents
What is passive income?
There are several ways to make money. You can earn active income, which is trading time for money, or earn passive income, which frees up your time.
Related: 15 ways to make extra money
Chances are, you’ve heard of people making money while they sleep. It sounds incredible, but how do you get to that point? What do you need to do?
While it sounds great, it’s not easy. It takes time and a lot of hard work up-front. It’s a long-term strategy, not a quick fix.
In order to earn long-term residual income, you need to make the right decisions and sacrifices now.
What makes it attractive is that it can be supplemental or replace your salary. The amount is up to you and how much work you’re willing to put in.
If you can get to a point where you earn residual income, you’re able to do other things with your life, things you truly love.
For example, think about what an extra $1,000 a month could do for you. You can give to charities and organizations that you’re passionate about, or take your family on a vacation.
Now, think about earning a full-time salary with little to no effort. You can enjoy your life with residual income because of the hard work and decisions you’ve made to get there.
The following are several benefits of passive income:
- Gives you the opportunity to retire early.
- Build your emergency fund and retirement accounts.
- Protects you from unexpected events.
- Allows you to give generously.
- Enjoy life with your friends and family without worrying about money.
- Financial security and peace of mind.
Remember, the goal is to build long-term wealth and security. It’s not a way to get-rich-quick, so accept that it’ll require up-front hard work and patience.
Ideas for building passive income
If you want a lifestyle that earns passive income, you can either build or acquire it.
According to the Internal Revenue Service (IRS), passive income is earned through rental properties or a business that you don’t actively participate in.
The following are ideas to help you build a residual income stream:
Stocks, bonds, index funds, and other investments can take time to grow. However, they can provide residual income from growth and dividends.
Dividend-earning investments will pay you monthly, quarterly, semi-annually, or annually. It’s a great method because you’ll get ongoing payments from a one-time investment.
With your investments, you’ll have two separate types, your retirement, and individual investment accounts.
When you invest your money, all you have to do is be patient, contribute money, and watch it grow.
2. Real estate
In addition to the stock market, you can invest in real estate. To invest in real estate, you can purchase a home and rent it out to tenants.
Becoming a landlord is an excellent way to earn residual income because you’ll earn money from rent payments, and you can enjoy property value growth, which can be beneficial if you’d like to sell the home.
The downsides are that there’s a possibility of tenants not paying rent, you’ll have to do repairs, pay property taxes and insurance.
If you don’t mind handling maintenance emergencies and finding trustworthy tenants, owning rental properties can be an excellent financial decision.
If not, there are other ways to invest in real estate that have a more hands-off approach.
For example, a Real Estate Investment Trust (REIT) is a method where you invest a relatively small amount of money into a company that owns or finances income-producing real estate.
The only downside of investing in a REIT is that another company pools your money and makes decisions about the properties. Therefore, you don’t have much control.
As long as it makes sense for your financial picture, real estate can be a great source of passive income and a long-term investment.
3. Sell digital products
Digital products require a lot of work and time up-front. However, you only need to create it once.
After you’ve created the product you can sell it, and since it’s digital, you won’t have to spend time fulfilling or shipping anything.
The only time you need to spend is maintenance, customer service, and creating more digital products.
The following are examples of digital products you can create and sell:
- Online courses.
- Digital guides.
- Digital art.
- Worksheets or tracking sheets.
- Digital magazines.
One of the best parts of selling a digital product is that they’re scalable and there’s no limit. You’re not limited to the number of products, which means you’re income potential is also uncapped.
4. Start a blog or YouTube channel
If you can grow a blog or YouTube channel, you may be able to earn income from ad revenue. It takes a lot of time and work, but if you can be consistent and get your content to rank, you’ll grow your audience.
In addition to ad revenue, you can earn affiliate income. In your blog or the description of a YouTube channel, you can insert affiliate links to products or companies that you’re an affiliate for.
Although the earnings are small, when there’s a large volume, they add up and can produce significant income.
Both methods take time, research, and hard work. However, making the right decisions and being consistent can lead to great results.
5. Peer-to-peer lending
Peer-to-peer lending is also known as P2P, social or crowd lending. If you use it as an investor, people will borrow the money you invest, and you’ll earn a return based on the interest rate and fees.
This type of lending and investing is relatively new, as it started in the early 2000s. The number of P2P companies has grown substantially since then. Common companies include LendingClub, Peerform, and Prosper.
Frequently asked questions
Passive income in the sense of doing nothing to make or maintain money doesn’t exist. However, there are plenty of ways to build income that requires very little effort to maintain.
If you don’t have any money, creating digital products is the cheapest way to develop residual income.
You can start by investing and creating digital products. As you grow, you’ll be able to tap into other methods.
The ability to continue making money with little to no effort in maintenance will give you time to enjoy a life that you love. It takes hard work to build. However, being able to create passive income is the key to becoming financially free.
Featured image courtesy of Unsplash.
About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.