What is passive income?

Passive Income
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You’ve got to work hard for your money, right? Not necessarily. If you’re clever, you can create streams of income that can generate massive amounts of cash with hardly any effort required. It’s called passive income, and it’s always an attractive choice for anyone who wants to make extra money with minimal additional work.

There are plenty of methods that generate an impressive make passive income but, equally, there are lots of pitfalls too. And when you’re moving your money around and dealing with your financial future, it’s essential to be aware of every opportunity and risk.

We’ve explained passive income right here, and we’ve highlighted those potential problems too. And we’ve also explained some of the key methods that people use for earning extra cash.

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What is passive income?

The idea behind passive income is simple: earn money with as little actual work as possible. That’s great, but it’s important to remember that passive income doesn’t start that way – you might have to spend some time setting up your passive income stream before the cash starts to flow. Once that’s done, though, your money will hopefully increase with minimal effort needed.

If you want to start generating passive income, then you’ve got to be aware of some fundamental rules of thumb beforehand. You’ve got to do your research so you can figure out what kind of passive income stream would work best with your time, talent, and situation.

You’re probably going to need a decent sum of money to get started, and it’s always worth staying in your conventional job while you build up your passive income stream – after all, it might take a little while for the cash to flow, or the income stream you’ve chosen may not be particularly lucrative, despite your best efforts. In those situations, it’s vital to maintain any income stream at all.

It’s always worth speaking to a financial advisor before you make these sorts of decisions – the more knowledge you can acquire before investing the better. Also remember that you’ll often have to pay tax on your passive income and you may have to take out extra insurance, too – all the more reason to talk to the experts.

There are loads of big benefits to passive income beyond the obvious financial rewards. If you earn cash using passive methods, then you may have to work less – so you’ll get more free time.

There are potential tax benefits that depend on what kind of passive income you want to generate, and if you’re less tied to a conventional job you’ve got more freedom when it comes to travel and living arrangements. You could also use passive income to achieve financial independence or pay off debts.

Passive Income

(Image credit: Graphic Farm / Shutterstock)

Types of passive income

There are plenty of different ways to earn passive income, and the vast majority of those fit into two categories – low and high risk.

There are pros and cons to both methods. As their name suggests, low-risk passive income streams are a safer option, and they generally require a smaller amount of initial cash to get started. That makes them a great choice for people who want to start earning passive income without a huge initial outlay. Negatively, though, these lower-risk investments often earn a smaller amount of cash and sometimes take longer to start producing results.

If you’re more experienced or have more cash to invest, it’s worth considering a higher-risk income stream. These schemes can earn more money – and they generally generate profits more quickly, too – but more things can go wrong.

The best ways to earn passive income  

There are loads of ways to earn passive income, from low-risk options that require a minimal initial investment to expensive and risky schemes that could net you huge amounts of cash.

If you’ve got a large amount of money to spend up-front, then it’s always worth considering investing in property. It’s one of the most popular passive income streams around, and with good reason. Rental properties are one of the most reliable passive income streams you’ll find anywhere, and if you’ve got more than one property, you can quickly generate enough cash to replace a salary. And, if you contract a letting agency to manage your portfolio, you’ll have even less to do.

This is another large investment, but you could also buy a company. If it’s a profitable firm, you can earn money without doing anything – simply let the specialists at the firm do their thing.

If you don’t want to buy a whole organization, consider stock and share investments – they’ll hopefully earn money by becoming more valuable over time, and many of them pay annual or quarterly dividends too. If you’re not experienced with investing, apps like Plum, Moneybox and Chip offer ways to invest without a huge amount of knowledge thanks to curated selections of companies that are designed for new investors to use with minimal risk.

Those aren’t the only investments you should consider, either. It’s also possible to invest in music, film, and trademarks in order to earn money from the royalties they generated from listens, plays or publishing deals.  

There are loads of other methods that you can use to generate passive income. You could consider switching some of your money to a high-yield savings account, although be aware that the account’s terms and conditions might make it tricky to access the money quickly.

If you’ve got a spare room or even a spare parking space at your house, you can rent those out to people using services like AirBNB and JustPark.

You could also use your expertise in a particular subject to sell online courses – once you’ve built the course it should be able to earn cash with only minimal updates.

Similarly, you can leverage your knowledge on a blog where you can sell advertising space, run sponsored posts or use affiliate marketing schemes for people who want to buy products through your website. Also consider licensing your photos or videos if you’re a creative type – people will pay for high-quality creative content.

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Mike has worked as a technology journalist for more than a decade and has written for most of the UK’s big technology titles alongside numerous global outlets. He loves PCs, laptops and any new hardware, and covers everything from the latest business trends to high-end gaming gear.