Financial Wellness
Passive Income: What Is It & How to Earn It
When you think of how to earn an income, your first thought may be about working for an hourly wage or an annual salary. But there are other ways to bring in extra money besides a traditional job.
Setting up a passive income stream can provide supplemental income (that doesn’t come from a standard paycheck) which in turn can offer your more financial security and help reduce financial stress. Plus, bringing in additional money can help you reach your financial goals, whether that’s saving for retirement, going a family vacation every summer, or buying a home.
Passive income definition
Passive income is income typically generated through sources other than a direct employer or contractor.
It can usually be earned through three methods: investing, asset building, and asset sharing.1 When you invest, you’re buying an asset with the idea of it generating income over time. Asset building is the gradual accumulation of assets, and asset sharing is when you sell or rent out your assets to make a profit.
“Passive” implies you can sit back and watch money come in, however, many passive income streams do require a level of time, money, and effort to get started, as well as some monitoring and upkeep along the way. Plus, it can take time for passive income streams to pay out, and there’s always the possibility they won’t.
Passive income examples
There are various ways to earn a passive income and generate additional cash flow. Here are a few examples:
Property rentals
Buying property and renting it out is one way to bring in passive income. Keep in mind, you would need to maintain the property (or pay someone else to), handle tenants and fill units as they become available. Be sure to consider the time, expenses and ongoing work that maintaining rental properties would require.
Dividend stocks
Investing in stocks that pay dividends could earn you additional income. Dividend stocks distribute a portion of a company's earnings to investors at regular intervals. Some companies increase their dividend payments over time, and typically the more shares you own, the bigger the payout.2 You can use the money to reinvest in more company stock or cash it out for instant income.
Remember that investing in the stock market comes with risks. For example, dividend stocks are subject to market fluctuations, which means certain events can impact their value. Consider consulting with an expert, like a financial advisor, to better help you navigate investing.
High-yield savings account
Placing your money in an interest-bearing account, like a high-yield savings account, can help you earn money. These types of accounts pay interest on the money contributed, and they often earn an interest rate that’s higher than the national average.3
If your bank is backed by the Federal Deposit Insurance Corporation (FDIC), investing in a savings account is generally considered a safe investment since the FDIC insures investments up to $250,000.
Online content creation
If you’re already active on social media and having a following, you could leverage your reach for paid opportunities with advertisers. There’s also an opportunity to earn money through affiliate marketing, where you can earn commission if someone clicks on a link you share and purchases something.
It takes time and effort to create engaging content and gain a following. But once you’re able to do so, it can be an opportunity to turn your passions into an income stream.
Is passive income taxable?
Many forms of passive income come with tax liability. If you earn money from a passive income stream, you may want to consider consulting with a tax professional who can help you navigate possible liabilities.
Why passive income?
If you have the money and time to dedicate to it, building passive income streams can help you achieve your financial goals. That said, it requires time, money and effort to do so. You have to put in money upfront and need to make sure you’re making the best decisions for your finances.