Warren Buffett, the famous investor, once said that "if you don't find a way to make money while you sleep, you will work till you die." The promise of passive income is one of the driving forces that push forward the capitalist economic model that we all live in.
It is why people store their money in savings accounts, it is why people invest in the financial markets, it is why people purchase pension funds, and it is even why people produce content on the internet.
Whoever you are or where ever you live, if you aspire to have a life free from the financial shackles placed on you at birth, you must find a way to produce an income without much (or any) sustained effort.
What is passive income?
We can define passive income as any income acquired through minimal effort. However, as we will see throughout this post, not all passive income streams are created equal, and the amount of effort required to acquire this income will fluctuate over time.
Why should you earn passive income? Beyond the natural urge to accumulate luxuries with negligible amounts of effort, all of us would like to retire one day.
Although the day may seem far in the future now, sooner or later, our bodies will tire, and we will grow old. As that happens, working to secure an active income will become more and more difficult. We will work until we die if we do not have any form of income beyond what we receive from our sustained employment or private business efforts.
Further, as recent times have shown us, life is anything but certain. The Covid pandemic rendered untold numbers of people unable to work for sustained periods, many of them losing their jobs entirely and some even losing their homes. In a world filled with this much uncertainty, passive forms of income are a necessary security blanket to help keep us afloat during the most turbulent times.
How to make passive income?
Some passive income streams are more passive than others, and whether we like to admit it or not, all passive income streams require some initial work to get their momentum going. The basic concept behind building passive income is straightforward: purchase an asset today that will provide sustainable revenue in the future.
There are many ways to approach developing these passive income streams, although a common thread will run through them all: effort. To build these passive income streams, you will need to take some risks and consistently keep to your strategy over time.
Let's take a look at some of the most popular passive income ideas below.
Passive income ideas
While this list is by no means comprehensive, below are the most popular assets and business ventures that most people use to develop their passive income streams.
These passive income ideas will range from currencies and securities that you purchase in the hopes of selling them at a profit later to online business ventures on popular websites like YouTube or SkillShare.
The dawn of cryptocurrencies has presented individuals interested in building passive income streams with a new frontier in which to seek their fortune. With the cryptocurrency space's infrastructure growing in its sophistication with each passing day, crypto investing has become an increasingly popular avenue for younger generations to begin building their wealth.
Much like investing in securities, there are essentially two ways for a person to make passive income with cryptocurrencies: capital gains and staking.
Capital gains is an excellent example of a complicated term being used to describe a simple concept. Essentially, this means that you purchase an asset for X and then sell it for X +1. The value of X has increased over time without you needing to expend any effort beyond the initial purchase and sale, so the +1 is your passive income.
For example, you purchase a Bitcoin for $20,000 and then sell it a year later for $25,000. The value of the Bitcoin you purchased has increased by $5,000 without you needing to expend any effort beyond buying and selling. As a result, you have secured $5,000 in passive income, congratulations! The concept of capital gains is not exclusive to cryptocurrencies. You can apply it to any assets that increase in value over time.
Staking is a slightly more complicated mechanism, and it goes beyond the scope of this post to fully explore this activity in any meaningful depth. Simply put, staking is a process whereby individuals monetize cryptocurrencies they already own by placing them in liquidity pools and locking them in for specific periods.
These liquidity pools are then used to support that specific blockchain network and confirm any transactions that are taking place on the network. In exchange for providing this liquidity, you will earn a certain amount of interest on the cryptocurrencies they have locked into these liquidity pools for the duration of the lock-in period. The amount of interest will fluctuate depending on the network, cryptocurrency, time, and the amount you choose to stake.
The interest rates that are paid for staking your cryptocurrencies will also increase with the amount of risk involved. Higher interest rates are typically offered to entice individuals to stake their currencies in higher-risk projects. Cryptocurrencies with less risk, such as Bitcoin and Ethereum, will pay comparatively lower rates for staking their tokens as their networks and projects are significantly more developed than other more exotic cryptocurrencies.
Individuals who choose to utilize this method of generating passive income should fully explore and understand the risks involved when staking any specific cryptocurrency. You should not lull yourself into a false sense of security by comparing these staking pools to other financial products like certificates of deposit.
A favorite among passive income seekers of any generation is the good old-fashioned stock market. Individuals who choose this avenue will have three ways in which they can make some passive income. Let's explore these now.
The first method of securing passive income in the stock market is no different than the one previously explored with cryptocurrencies above; capital gains. Individuals can purchase securities in the hopes of selling them for a profit at a later date. Keep in mind that the stock market is not limited to just the individual stocks of specific companies but rather to a versatile range of securities that include ETF's, mutual funds, REITs, and SPACs.
Secondly, you can purchase the shares of companies that pay dividends at specific times throughout the financial year.
For those of you who are unaware, a dividend is a distribution of a company's profits to its shareholders. Essentially, a company makes a profit and pays you a portion of that profit for being an investor in the company.
The amount you receive will depend on the number of shares you own, the dividend yield of that company, and whether or not that company has made a profit.
Dividends are a fantastic way of securing some regular passive income and are relatively less risky when compared against other passive income ideas on this list.
Lastly, we have the lesser-known passive income stream that can be generated by lending out your shares through your brokerage account. Not every brokerage will afford their clients this option, and the terms of engaging in this practice will differ depending on your specific brokerage. However, you can participate in a share lending scheme whereby your brokerage lends your shares to third parties and pays you a certain amount of interest for having agreed to allow them to do so.
While this income will be negligible compared to the returns promised by dividends and capital gains, it is still an entirely viable form of passive income that you should not discount.
Amid the most conventional ways of generating passive income sits the traditional savings account. This passive income idea does not need much explanation; individuals store their money in a savings account that generates a modest interest, thereby providing them with passive income.
Specialists claim that savings accounts are usually a risk-free opportunity to safely generate passive income while storing your money in an easily accessible financial vehicle. Despite the pleasant fiction, they are selling to would-be savers, the reality is that this is simply not true.
In practice, individuals who store their money in a savings account will actually lose money over time. This is due to an economic force present in all debt-based economies known as inflation. Inflation slowly eats away at the purchasing power of your money at a rate of approximately 2-4% per year. This means that unless your bank provides you with an interest rate above 2-4%, you are losing money to inflation over time.
However, for those of you who may be nearing retirement or simply wish to keep some cash in a secure location for a short period, all is not lost. While it is true that the interest rates offered by traditional banking solutions are often not consistent with inflation, the rise of the increasingly popular neobanks has provided passive income seekers with an alternative to traditional banking.
The term neobanks refers to the recently created internet banks that have begun to disrupt the banking industry over the last five years. Since these neobanks have no physical locations and a skeleton staff compared to their high street cousins, they can keep operating costs at a minimum. The cost efficiencies associated with their lack of physical presence allow these neobanks to provide clients with higher interest savings accounts than the local high-street alternatives.
Although we cannot guarantee that these higher rate interest accounts will keep your money from losing its value to inflation, they are certainly a better option for those of you who choose to digitize your banking solutions.
A bond is a loan that is given to either a company or sovereign government in exchange for a fixed rate of return on the loaned sum over a predetermined period.
Long-term government bonds typically yield approximately 5% per year, making them a great place to protect your wealth from inflation while generating some passive income.
This method of generating passive income is especially popular among the older generations as they will be less inclined to take on the risks associated with other forms of passive income, such as cryptocurrencies or the stock market.
Typically, retirees will store most of their wealth in a combination of high-interest savings accounts, bonds, and some well-regarded dividend stocks with a long payout history and robust business model.
90% of all millionaires become so through owning some form of real estate. With statistics like that widely available online, it is no surprise that "rents" form part of our passive income ideas 2021 list.
Capital gains are the obvious way of earning some passive income with real estate. If you had purchased these properties after the 2008 subprime mortgage scandal, then you're probably doing very well for yourself.
However, the most popular way of earning passive income through real estate is by renting these properties out. As we noted at the outset of this post, some income is more passive than others. Renting properties is not entirely passive as one needs to deal with the tenants who are renting these properties. This means dealing with any late rent payments, property maintenance, contractual agreements, insurance companies, and the regrettable reality that you may one day need to evict one of your tenants.
Although you can indeed outsource all these tasks to property managers, this will cut into the amount of passive income that you receive, and you will, of course, still need to keep track of the property manager.
Lastly, we briefly alluded to investing in REITs earlier on in this post. The acronym REIT stands for Real Estate Investment Trust. You can purchase REITs on stock exchanges in the same way as other securities. They provide a source of passive income in the same way that dividend stocks do. REITs invest in properties and then rent those properties out. Part of the rent from those properties is then paid out to investors in the form of a dividend. REITs are a great way for investors to get exposure to the real estate market without owning any physical real estate themselves.
Peer-to-peer (P2P) lending has grown in popularity in recent years. P2P refers to the practice of lending money to individuals or businesses through the use of online services that are created to match lenders with borrowers. The lenders are rewarded for the loans the same way as traditional banks would be, with interest payments.
Naturally, there is always the risk that the borrower defaults on the loan, and so individuals who choose to develop some passive income streams through P2P should be aware that the practice is not risk-free. You can passive income through P2P lending on websites like Kiva, Peerform, or Mintos.
A royalty is a sum of money that is paid to the owner of some form of intellectual property as a reward for allowing the use of that intellectual property. Royalties are commonly paid in creative industries like music, films, and books.
If you are interested in earning some passive income from royalties, then there are generally two options. You can either create an asset yourself and then allow others to use it in exchange for annual royalty payments or, you can purchase the rights to different assets and thereby be entitled to receive the royalties that are payable from those assets.
For those of you who are interested in purchasing royalty-producing assets, there are online royalty market places where individuals can do this.
In the age of social media, this method of creating passive income has exploded in popularity. Affiliate marketing is a commission-based form of passive income whereby an arrangement is made between a marketer and an online retailer to pay the marketer a commission for any sales made due to their marketing efforts.
Much in the same way as rental properties, this is not an entirely "passive" form of income as the marketer needs to put in the work to actually market the product or service. You can do affiliate marketing through social media accounts, YouTube channels, blogs, personal websites, and any other digital medium with access to some form of audience.
Affiliate marketing typically works in unison with other forms of both passive and active income. You will usually see social media influencers, YouTubers, and Bloggers taking advantage of any opportunities in affiliate marketing by using already established audiences.
Passive income ideas
The digitization of education began years before the pandemic, although not many people seemed to notice. A number of popular online course sites began to spring up as early as 2010, offering individuals the opportunity to create and take courses on their platforms.
Sites like SkillShare and Udemy give individuals the chance to share their expertise with the world and be paid for doing so. You can share any expertise you may have, whether to improve your photography or how to make the perfect grilled cheese sandwich. If people purchase your online course, you'll earn a portion of the fee.
Of course, you will need to have some desirable knowledge to share to create an online course, so this option may not be available to everyone. Similarly, since you need to expend the effort to create the course yourself, the income derived is not entirely passive. However, if you are capable of creating a successful online course, it has the potential to produce passive income for years to come.
This form of passive income, much like affiliate marketing, works well when it is used in conjunction with other forms of income. You may have already noticed popular Youtubers, Bloggers, and other kinds of social media influencers leveraging their existing audiences to promote their online courses.
Blogging/vlogging refers to the art of writing (or recording) your thoughts and experiences to share them online for entertainment or educational purposes. You'll likely be wondering, how could you possibly earn passive income from doing this?
Sharing your experiences online through your blog's website or sites like YouTube can help you to build your audience. Individuals around the world will be able to share in your experiences and feel as though they know you and, to some extent, trust you.
In much the same way as other forms of passive income listed above, individuals can leverage these audiences to monetize their experiences and secure some form of income.
This monetization can be done in any number of ways. You could place ads on the website or earn money through the advertisements that Youtube plays at the beginning of your video.
Alternatively, you can promote other passive income channels, like affiliate marketing or online courses, directly to your audience.
Lastly, some individuals receive sponsorships from companies that promote their products or services through the blog/vlog.
Again, this form of income is not entirely passive. It will require you to continuously produce content for the blog/vlog to ensure new traffic.
Passive income is crucial for those of us who one day hope to become financially independent. However, building enough passive income to support your lifestyle is certainly no easy task and often takes years of hard work and commitment to achieve.
If there were one last piece of parting advice that we would give, individuals should not rely on a single revenue stream. Focus on developing multiple income streams so that you are never reliant on a single one.