Passive Income: What It Is and How To Earn It


It’s instilled in us from a young age that we will one day have to earn a living. We’ll be required to wake up to the alarm clock’s chime, pour a tall cup of coffee, and get ourselves to work. Active income is important and necessary to survive, but having a job and generating income isn’t necessarily the same thing. That’s where passive income comes in.


Passive income is a set-it-and-forget-it income stream that has the potential to grow your wealth with little long-term effort. With enough of it, you can achieve more financial freedom.

What is passive income?


You spend your entire career working hard for a paycheck and putting in the hours to generate income. But there are only so many hours in a day. Even if you wanted to work a dozen jobs, you would eventually run out of resources (i.e., your time and energy), which puts a cap on your earning potential.


To increase your income without having to work for every single dollar, you need passive income. Passive income provides a revenue stream that is (mostly) hands-off, and it can help you build wealth and plan for the future.

Passive vs. active income


I would imagine everyone reading this is at least somewhat familiar with active income. As teenagers, we babysit and mow lawns to earn spending money. As young adults and beyond, we work full-time jobs paying hourly rates, salaries, or commissions in exchange for our efforts each week.


We may even throw in a side hustle if we’re looking for ways to make extra cash each month.


Because these earnings depend on — and are directly correlated to — our continuous efforts, they are considered active income. If we were to stop going to work, making sales, or completing jobs, that income would also stop.


On the other hand, we can create income streams that allow us to earn money regularly without any continuous, active effort. These are referred to as passive income.


Common types of passive income include investing in real estate, earning interest through a high-yield savings account, and holding cryptocurrency. Although some active income ideas take less effort than others — and some passive income ideas may still require occasional work — passive income mostly happens in the background.

Examples of passive income


Here’s a look at some of the most popular (and lucrative) passive income streams and how powerful they can be for you and your finances.

Dividend stocks


If you’re new to learning how to invest money or are intimidated by the idea of getting started in the stock market, we recommend giving dividend stocks a try.


These stocks are often purchased through established and financially secure companies. When the company does well, its shareholders are rewarded with dividends or regular cash payouts.


Essentially, you’ll be paid just for holding the stock and supporting the company. In good times, these regular dividend payments can become a reliable source of passive income.

Bonds and bond index funds


Putting your money in bonds or bond index funds is one form of passive investing worth looking at.


Bond investments, though not entirely free of risk, are typically much safer and less volatile than traditional stocks. They provide investors with predictable growth in addition to regular interest payouts, usually twice a year.

High-yield savings accounts


Choosing where to put your savings is important if you want it to work for you and steadily grow over time. By putting your money in a high-yield savings account earning a better rate than a traditional savings account, you’ll both keep it safe and give it room to grow.


Although the interest earned from high-yield savings won’t make you rich, it can earn you considerably more than if you left your savings sitting in a traditional checking or savings account or tucked your emergency cash beneath the mattress. In fact, some online banks — like CIT Bank and Barclays — offer far above the national average interest rate of 0.42% (as of 12/16/24).

Rental properties


Investing in rental property has the potential to be one of the more time-consuming income streams but also offers great opportunities for passive growth.


There are many options when it comes to real estate investing. You can:

  • Purchase residential property and self-manage or hire a property manager.
  • Invest in commercial real estate on your own or through a crowdfunding platform.
  • Invest in industrial space.


Each of these can provide you with monthly payments in the form of rental income. You will also build equity in your rental investment over time.

Learn insider secrets from the experts to help you get started with real estate investing.

Real estate investment trusts (REITs)


A REIT, or real estate investment trust, is a vehicle that allows you to invest in a number of different properties at the same time, as a way of generating income. Examples of these are Crowdstreet and Diversyfund.

REITs act similarly to exchange traded funds in that your investment is spread across many different properties and even different sectors. These properties are managed by someone else so you don’t have to worry about the ins and outs of that. However, you should enjoy steady dividends on your investment.

Peer-to-peer lending


Banks lend money to borrowers as a way of generating passive revenue by charging interest. So why shouldn’t you be able to do the same?

Peer-to-peer (P2P) lending platforms allow everyday people like you and me to loan money to borrowers across the country who are seeking funding for a variety of purposes. If you invest, these platforms let you choose which borrowers you’d like to fund, as each comes with their own risk levels and accompanying returns.


As a P2P investor, you’ll enjoy passive income through the interest earned on your loan. Plus, you can often get started with as little as $1,000 through platforms like LendingClub.


Visit LendingClub | Learn more in our LendingClub review

Selling your knowledge


One great way to create long-term passive income is to sell your creativity, knowledge, or skills as part of an evergreen package requiring minimal up-front effort. You can do this by writing a book (or e-book), creating an online course, doing audiobook narration, or developing some other downloadable purchase, such as a template for someone starting a blog.


The investment for this is primarily your time in creating the product and setting it up on the sales platform of your choosing. Once that’s done, the active effort required is usually minimal, while your products can continue to generate hands-off, passive income for years to come.

A few things to know about passive income and taxes


When you hear the phrase taxable income, you probably first think of your paycheck. However, the Internal Revenue Service (IRS) won’t forget about your alternative income streams just because you aren’t actively working to earn them each month.


How your passive income is taxed depends on where and how it’s earned. Some may be considered ordinary taxable income, such as the sales from an online e-course or interest payments received from a peer-to-peer loan. This means it will factor into your adjusted gross income (AGI) and taxes will be calculated based on the income bracket in which you fall.


On the other hand, taxes may be calculated differently for money earned in a savings account, on dividends received throughout the year, or in the form of capital gains. In some cases, you may be required to make estimated tax payments throughout the year for the taxable interest you’re receiving.


Depending on where you live and what you invest in, you may be exempt from certain state and/or federal taxes on your passive income. Certain categories of income are taxed at lower rates than ordinary earned income, as well.


The safest approach is to consult with a financial advisor or tax professional if you want to learn more. That way, you can make informed decisions about your tax planning and future investments, as well as ensure you are paying taxes correctly for both your active and passive income streams.

Bottom line


Active income should, of course, be kept front of mind. We need to eat, and the easiest way to make sure your bills stay paid is to have a reliable source of active income. However, it’s passive income that really has the potential to completely transform your finances.


Passive income can come in many forms, and whether you choose to invest in dividend bonds, create a product that others will buy for years to come, or simply want your savings to safely grow interest each year, creating the right passive revenue streams can help you build wealth for life.



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2025-01-08 20:27:34

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