Best Ways to Earn Passive Income

The best ways to earn passive income aren’t only the purview of the wealthy. With a modicum of startup time and capital, anyone can create a passive income stream. Whether you have a full-time job or are a retiree seeking extra cash, passive income ideas are available to increase your cash flow. Passive income isn’t literally money without effort, but more akin to money with less effort. Some passive income strategies, like owning dividend-paying stocks or bonds require less work than owning rental real estate. This guide covers how to get started, how much passive income you can earn, the required effort, and various passive income investments. 

How to Start Earning Passive Income

There are scores of ways to start earning passive income. Before you begin, you’ll need to figure out how much effort and money you want to expend. Then choose a passive income idea that fits your capital, skills, and interests.

Step 1: Choose passive income streams. Spend time determining if you want to delve into investing for passive income or if you want to run a side gig that throws off some cash. Either way, it typically takes some time to build up a decent cash flow. 

Step 2: Choose the platform that fits your needs. If you’re seeking passive investment income, there are many financial brokerage firms, apps, and banks that will suffice. Selling online products or starting an affiliate website begins with creating a website or social media platform. The required effort is greater in the beginning and diminishes as time passes.

Step 3: Set your expectations. Earning passive income from investing involves predicting your return, based upon the investment amount. A $5,000 investment in a dividend fund that pays a 6% yield will provide $300 per year, while successful affiliate websites might earn $1,000 per month or more. 

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Best Passive Income Investments

The best passive income investments involve balancing your human capital, financial capital, time, and skills. 

Investing in financial markets spans banking and financial products like stocks and bonds. Buying banking products like certificates of deposit and high-yield cash accounts is less risky, with lower upside potential than investing in financial market assets. 

Passive investing in dividend-paying stocks or interest-paying bonds provides cash flow, but requires a larger investment to realize meaningful monthly income. Crowdfunding investment apps also enable the public to buy shares in farmland, large and small real estate projects, wine, art, and more to receive ongoing cash flow. 

There are a range of risk levels when investing in financial assets. The lowest-risk cash flow-producing assets are money market funds, high yield savings accounts and bank certificates of deposit. Investing in dividend-paying stocks or stock funds carries the risk that the dividend will be cut and also that the principal value of the investment might fall. Interest-paying bonds and bond funds will vary in price as well, but the interest payment is rarely cut. Individual bonds, held until maturity will return the par or full value of the investment. But bonds sold before maturity and bond funds might be sold for less than your original payment amount. 

Crowdfunding apps that invest in real estate, farmland, startups, art, wine, and more carry additional risks. Many require long lockup periods before you can withdraw your money. Others are not as closely regulated as traditional financial assets. With newer platforms, there is a greater chance of asset defaults and business closures. 

Dividend Stocks

Buying dividend-paying stocks is a path to owning a portion of a publicly traded company. Many stocks pay a portion of their earnings to shareholders in the form of cash dividend payments. Dividends are usually paid quarterly.  You have the option to reinvest the cash payment in additional shares of stock or you can take the cash dividend payment. Long term investors who build up a portfolio of dividend-paying stocks or funds have one of the best ways to earn passive income. 

Investing in dividend-paying stocks is a passive income idea with both cash flow and capital growth potential. 

Dividend Exchange Traded Funds

A dividend exchange traded fund (ETF) is an investment vehicle that owns many dividend-paying stocks. You can buy one investment, such as the SPDR S&P Global Dividend ETF (WDIV), and receive access to a portfolio of dividend-paying companies. The WDIV ETF owns global companies which frequently pay higher dividends than U.S. firms. Many of the dividend ETFs screen for companies with a history of increasing dividends as well. 

The dividend ETF is another passive income investment which provides regular cash payments along with an added bonus of capital appreciation potential. Consider management fees when choosing a dividend exchange traded fund, as higher fund fees can detract from returns. 

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Bonds

Bonds are back in favor as interest rates inch upwards. Unlike stocks, bond investments are loans that you make to a company or government entity. In exchange for the loan, you receive regular coupon interest payments. Bonds are among the best ways to earn passive income because if you buy a new issue bond at par, usually  $1,000, and hold it until maturity, you’ll receive regular cash interest payments and a return of principal at the bond's maturity. Bonds with lower credit ratings typically provide higher interest payments and greater cash flow, while government bonds and highly rated corporate bonds will offer lower interest payments. 

Bond values can rise and fall, so you might receive more or less than your initial price, should you sell before maturity. The bond’s credit rating suggests the bond’s likelihood of default, with lower-rated bonds carrying a higher risk of default. Investors can also invest in diversified bond mutual or exchange traded funds to build passive income without lifting a finger.

Sample bond types:

• Government
• Government agency, such as mortgage-backed bonds
• Corporate
• High yield (sometimes called junk bonds)
• Tax-exempt

Certificates of Deposit

Certificates of deposit (CDs) are banking products that you can buy at most financial institutions. You invest a specific amount of money, typically $100 or more, and commit to leaving the money invested for a period of time. CDs typically pay a pre-specified interest rate and are usually issued for terms from three months up to five years or more. 

There are a variety of CD types, including fixed rate and floating variable interest rate. Investors seeking regular cash flow and a stable principal value can create a CD ladder and buy CDs at regular intervals. As one CD comes due, you reinvest the proceeds in a new certificate of deposit. This is a good strategy for increasing cash flow when you expect interest rates to increase. 

High Yield Savings Accounts

A bank high yield savings account pays higher interest payments than a typical savings account. The required minimum balance can be greater than that of a savings account.

If you’re wondering how to make passive income, a high yield savings account is a good choice.  For passive income from money that you need for near-term expenses and emergencies, a high yield savings account is a sound choice and keeps your funds liquid. 

The process to open a high yield savings account is similar to opening a traditional bank account. Simply click on the “open an account” button on your preferred bank’s website and answer several personal questions, such as:

• Type of account (single or joint)
• Address
• Social Security number
• Prior addresses to verify your identity
• Current and possibly past employer
• Debts

Money Market Accounts

A money market mutual fund is an investment vehicle that owns short term commercial debt. This investment is distinct from a money market bank account, which is similar to a high yield bank savings account. Like a typical mutual fund, money from many investors is pooled to invest in short term debt and cash-equivalent instruments. The allure of these accounts is that the share value is pegged at one dollar and yields are among the highest of the high yield cash equivalent group. 

You’ll need to invest in a money market fund within your investment brokerage account. These investments are liquid and the money can be withdrawn within a few days. The interest from money market funds can be withdrawn for cash flow, or reinvested to grow for the future. 

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Alternative Passive Income Ideas

You’ll find a laundry list of alternatives to stock, bond, and cash passive income ideas. Some of these choices are more passive than others. Real estate investing is frequently touted as a response to the question, “What is the best way to earn passive income?” But real estate investing takes many forms, some more passive than others. Owning and managing real property is passive, until a pipe breaks or the renter doesn’t pay their rent. Then it is a lot of work. With real property investing you’ll also need a chunk of capital to begin. Real estate crowdfunding apps or investing in real estate investment trusts (REITs) are more passive. Once you purchase the securities, you wait for the cash flow.

Another popular way to earn passive income online is by creating an affiliate website, but this involves more work than meets the eye. An Airbnb rental is only semi-passive if you hire a team to manage the property. Cash-back credit cards and shopping sites might be considered a passive income idea, yet you’re spending in order to receive the cash. That’s not a net-positive endeavor. 

Other alternatives to passive income involve digital property sales, like e-books, courses, apps and other online goods. For all of these passive income ideas, there is a hefty startup time commitment and some upfront cash as well. You’re also less certain of receiving a return on your investment if the sales miss expectations. Evaluate these alternatives to passive income to learn whether there's a strategy for you. 

REIT Investing

A real estate investment trust or REIT is an investment vehicle that owns a pool of commercial real estate. There are REITs that provide broad diversification across the real estate landscape. Or you can buy niche REITs that own senior housing, student housing, warehouses, commercial property, mortgages, shopping malls, data centers or many other varieties of property. The benefit of REITs for cash flow is that they are required by law to pay out 90% of their taxable income to shareholders.

Peer-to-Peer Lending

Debt investing is popular, with many platforms that enable everyday investors to be the bank and lend money to others. Apps like Groundfloor provide investors the opportunity to lend to real estate buyers. Other platforms match up borrowers with lenders for a variety of cash needs. 

These peer-to-peer lending apps offer higher interest payments than other traditional stock, bond, or cash vehicles. But they are riskier as the loan payment defaults can eat into your returns. To minimize that risk, you can choose to invest in higher quality loans and diversify by owning many loans. 

Affiliate Marketing

Affiliate marketers sell products and services on their website or social media accounts and receive a commission from the brand for the sale. Affiliate marketers frequently write reviews to draw visitors to their website. The setup for affiliate marketing is not passive and involves creating a website or social media platform, developing contracts with companies who pay affiliates, and writing content to draw visitors to the website. 

The passive aspect of affiliate marketing is that once the content is written and a website develops a stream of visitors, your work is diminished. That’s only partially true, as you’ll need to write new content and update old content in order to maintain and increase website traffic. Additionally, it can take months or more to begin to generate cash flow. We place affiliate marketing on the higher-effort step of the passive income ideas ladder. 

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Factors to Consider When Choosing Passive Income Streams

Capital 

All passive income ideas require startup capital. To develop a meaningful passive income stream from financial assets like cash-equivalents, stocks, and bonds, you’ll need a decent account balance. With $100,000, an investment paying a 5% dividend or interest payment provides $5,000 per year cash flow. 

Although affiliate marketing requires a small cash outlay to potentially obtain cash flow, you’ll pay more with your human capital or time. 

Risk 

All investments carry a degree of risk. Certificates of deposit and high yield cash investments don’t risk the principal value of your investment, but could lose purchasing power over time due to inflation. Investing in higher risk dividend paying financial assets involves the potential to lose principal and also decreased cash flow, should dividends be cut. Crowdfunding passive income investments are less regulated and can tie up your money for longer periods with added risks of defaults and platform failures. 

Taxes

With the exception of tax-exempt municipal bonds from your state of residence, all income is taxed by the government. After-tax income is what really matters, so understand how your investment is taxed, and your specific marginal tax bracket. Dividends and interest payments may have their own tax rates..

Key Differences Between Stocks and Alternative Investments

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