Passive Income: What it is and Why You Want It
There is a lot of chatter in the personal finance world about passive income,why you need it and how great it is. But what is it and why is it such a topic of conversation?
Passive income is when you continue to get paid after the work is done. This includes royalties from books, movies, or songs and also revenue that comes from real estate investments or business investments where you don’t have to be present to earn it.
Some passive income ideas take a degree of upfront work to earn, like writing an e-book and some don’t take any effort at all, such as investing with a robo advisor.
Having passive income streams may not replace your entire salary if you were to lose your job but having something coming in is better than having nothing coming in. It can keep you from depleting your emergency fund and can help keep you from sliding into credit card debt.
Pursuing some of your passive income ideas can also speed your path to financial freedom.
How Much Can You Earn?
If you read a few stories about passive income ideas, you might be under the impression that you can start a blog or write an e-book and two weeks later you will be raking in $20,000 a week. Sorry, it doesn’t usually work that way. Creating multiple income sources is definitely not a short-term strategy.
While some people make a great living from one form of passive income, it’s more common that you will have small amounts from a few different sources coming in.
Choose a few things that sound interesting to you and try them out. Try to choose a few that do require some work as an e-commerce site and some that don’t like buying dividend yielding stocks.
Something will emerge that either you enjoy the most or is making the most money. Focus on that thing. Put some time and effort into it. We all hear stories about blogs making thousands of dollars a month but what we don’t know is how much time and effort went into that blog before it was able to break even, never mind make money.
How to find passive income ideas with this list
Each suggestion is ranked by how much effort you need to put in up front before you might start seeing some money come in. 1 is the least effort, and 5 is the most.
Remember, usually just one of these is not going to be the million dollar answer. You should try out some of the low effort passive income ideas and one or two of the higher effort ones and see which work best for you.
Investing is the ultimate and most accessible form of passive income. You can undoubtedly devote lots of time to researching companies and markets, but you don’t have to do that to invest.
Robo Advisors: Effort 1
Betterment: Betterment has been our go-to suggestion for years. There is no minimum to invest, the fees are low, between 0.25-0.40%, and you don’t have to know anything about money or investing to get started. Betterment offers automatic rebalancing and tax loss harvesting.
To make things even easier, you can set up automatic deposits from your checking or savings account into your Betterment account. We did an extensive review of Betterment and also compared it to other robo advisors.
Acorns: Acorns is a great way to start investing and building wealth. As it turns out, Acorns will pay you $5 to start investing with them for as little as $1. That’s a 500% return, plus it’s probably time you started investing for your future. They even have features like round-up and found money that allows you to get free money from places you already shop at.
Blooom: Blooom is like Betterment but for your 401k, 403b or TSP. Chances are the funds in your account are loaded with fees and that should scare you because even 1% in fees can eat 25% of your returns over 30 years.
Not only will they slash your fees so you keep more for retirement, they’ll also rebalance your portfolio based on your age and provide open-ended fiduciary grade advice.
Want to know if you should refinance your mortgage? Ask them. Should yourgrandma invest in Bitcoin? No, but still, you can ask them. Plus, they will give your retirement accounts a free analysis so if you’re of the DIY type you can simply take their advice and go implement it yourself, for free.
Personal Capital: Personal Capital has a minimum that is out of reach for many of us, $100,000. The fees they charge are also higher than some fellow robo advisors at 0.49-0.89%. Even though the minimum is high, we still want to include Personal Capital for the free tools they offer.
Personal Capital allows you track your investments and help you to monitor your budget. And the more information you have, the smarter your investment decisions will be. You can use Personal Capital to track the performance of your investments across all of your accounts.
They also have a 401k fee analyzer. We’ve talked in the past about how even seemingly small fees can eat into your retirement accounts. As low as 1% can eat up a whopping 28% of your returns over the course of 37 years!
The tool will show the impact of fees on your 401k over time. Armed with that information, you can move your money to an account with lower fees, like Vanguard which charges just 0.20% and has a record of excellent performance.
We did a full review of Personal Capital and a review of their 401k fee analyzer because we feel it’s so important.
Vanguard: Vanguard has a minimum of $50,000 and a fee of 0.3%. Rebalancing is done automatically once every quarter and tax loss harvesting is done on a client-by-client basis. We included Vanguard because clients who invest between $50,000-$500,000 have access to a team of financial advisors. Those with accounts over $500,000 will have a dedicated advisor.
If you’re looking for a place to start, these are what we think are the best vanguard funds. We also did an episode on what Vanguard is all about.
Dividend Investing: Effort 1
When you own stock in a company directly or through a fund you may receive dividends. A dividend is a distribution of a portion of a company’s profits. They are decided by the board of directors and can be issued as cash payments, like shares of stock or other property. It’s an opportunity for a company to reward shareholder loyalty.
The amount you receive depends on how much stock you own and how much profit there was to divide. Investors, mainly retired investors, like the steady income that dividend stocks provide and also like the option of reinvesting dividends to buy more shares of stock.
You can find dividend stocks using Google Finance Stock Screener which is free to use. Set the search criteria for the P/E Ratio, and Dividend yield (shown as a percentage) criteria. You can set minimum and maximum values; in the dividend yield box, set it between 2 and 100. This will search for stocks that pay dividends worth between 2-100% of the current stock price.
For the P/E box, set the values between 0-18. This will show stocks with a current price between 0 and 18 times more than the company earns in a year.
After you set the criteria, you will see a table showing the details of stocks that fall into it. You can click on Div yield (%) to sort by highest dividend yield. Now you have a good list to work with.
The S&P 500 has a fund called The S&P 500 Aristocrat Fund that has over the last five years had returns of 17.56%.
Peer to Peer Lending: Effort 2
Banks don’t lend money out of the kindness of their hearts. They do it because it’s profitable. You can get in on some of that action through peer to peer lending. Peer to peer lending matches those who need to borrow money with those who have money to lend.
The benefit for the borrowers is that they often don’t qualify for traditional loans from banks or credit unions. For the lenders, the interest they get on the loans can be higher than that of more conventional investments, sometimes averaging above 10%.
Lending Club: Lending Club brokers deals for amortized loans and these types of loans favor lenders because they receive a higher portion of interest earlier in the loan which means the lenders doesn’t care so much if the borrower pays the loan off early. Andrew did a full review of Lending Club and shared his investment strategy.
Prosper: Prosper is similar to Lending Club but has higher standards for borrowers. Borrowers must have a credit score of 640 or higher, and while there are no set requirements for income level, the average borrower makes $86,400.
Borrowers are “graded” based on things like credit score and debt-to-income ratio. The grade is what determines both the interest rate and the origination fee and is the criteria lenders look at when deciding whom to loan to.
Real estate has a significant place in the world of passive income but a lot of people just think of it regarding rental property, and that is out of reach for many. But rental property is only one passive income idea in the real estate arena.
REITS: Effort 1
A REIT is a real estate investment trust. It’s a company that owns or produces income-producing real estate. Think of a REIT as a mutual fund for real estate investing. You can invest in real estate the same way you can invest in any other industry, by buying stock.
When you own stock in a REIT, you earn a share of the profit produced by that real estate investment. It’s a way to invest in real estate without the hassle of being a property owner.
Fundrise: Fundrise allows individuals to invest in commercial real estate online through an eREIT. Their crowdsourcing model sets them apart from a traditional REIT allowing the average investor to participate in deals for as little as $500 with lower fees than typical open market REITs. Read our review here.
Crowdfunded Real Estate: Effort 2
Real estate investing used to be seen as the preserve of the wealthy but crowdfunded real estate sites want to bring it to the public at large.
RealtyShares: RealtyShares is an online investing platform that allows you to make real estate investments and a virtual space for companies who need financing for their real estate projects to find investors who will buy shares in that project. We did a full review of course.
PeerStreet: PeerStreet is a marketplace to invest in high quality private real estate loans. The minimum investment is just $1,000, but you must be an accredited investor. You can set parameters to customize your investment. Investments made with Peer Street are a real estate loan and not an investment in the actual real estate.
Rental Property: Effort 3-5
The difficulty level depends on how involved you want to be. If you ‘re going to be a hands-on landlord and take care of everything from finding a tenant to fixing a clogged sink, or flip houses – that is a 5. But there are much more laissez-faire options.
Roofstock: Roofstock is a turnkey real estate marketplace for single-family homes. The properties listed are independently screened, appraised, and certified giving investors the complete picture of the home they are buying. Some homes even have tenants already in place so the investor can cash-flow from day one. We did a full review.
Online Businesses that are Scalable aka Residual Income
E-Commerce: Effort 2
The level of difficulty depends on what you’re selling. If you are making things yourself, it’s harder than re-selling already existing items. Either way, E-commerce sites have made it easier than ever to make money selling items online.
Shopify: Selling stuff is a great way to make extra money whether you sell things you make or re-sell stuff you buy. If you want to build an online store, Shopify makes it easy. They have ready-made templates, so you don’t have to spend time designing your store.
They also have a lot of tools to help you do things like create coupons and promotions, process payments, handle returns, and share your store on sites like eBay, Google Shopping, Facebook, and several price comparison sites like Nextag, Bizrate, and PriceGrabber.
It goes without saying that Shopify is the platform of choice for drop shippers.
Start a Blog: Effort 3
We wrote this article to make money, and the way to do that is by providing value to your readers which drives traffic to your site and then monetizing it with affiliate links. Remember, the more niche your website and topics are, the better. When you’re building for residual income, the less competition the better.
If we go back to our discus aquarium example, you can provide value by writing updated information. The number 2 result on Google is three years old. You can make affiliate marketing income by linking to Amazon to all of the products you write about on the site.
Part of providing value is building trust. Don’t link to things that aren’t of good quality or people won’t trust your recommendations. The other part of making an audience is consistency. It matters less how often you post than how consistently. If you only have time to do one post a month, that post should come out on the same date and time each month.
An excellent way to stay consistent is to write several posts before you release the blog. That means if life gets in the way and you don’t have time, you have a backlog of material you can consistently publish.
We highly recommend starting with HostGator since you can get started for $2.75 so the risk is extremely minimal.
Learn How to Start and Monetize a Blog that Earns over $400k a year
How to Monetize: Affiliate marketing works well when you discuss products on your blog. For our fish tank blog, we would link to all the things you need to buy for an aquarium and then when people click on that link and buy that item (and other items they purchase with it with some exceptions) you get a percentage of the purchase. Amazon Associates is the best-known affiliate marketing program, but there are others like Impact Radius, ShareASale, Commission Junction, ClickBank and Rakuten too.
Google Adsense pays to post ads on your blog. There are two ways to make money with Adsense; impressions which give you money for every 1,000 page views and clicks which provide you with money when a visitor to your site clicks on a displayed ad.
You can sell information to your readers. If you write a travel site, for example, you could write a series of city guides and charge people to download them.
You can design courses and charge for access to those. In fact, plenty of bloggers sell classes on how to make money blogging.
YouTube Channel: Effort 5
We’re in YouTube’s golden years, growth is insane and it’s still on the new side. There aren’t nearly as many videos as articles so it’s easier to find an audience. Also, videos are much harder to make which means less competition.
E-Book: Effort 4
This is another place to find a niche, and you’ll do better writing some non-fiction like a how-to or a book on some aspect of fitness or wellness. This is not the format to try to make a splash with your “great American novel.”
Ebooks don’t have to be terribly long either, so you don’t have to write an opus to make some money. There are several places you can publish including Amazon’s Kindle Direct Publishing. Booktango, and Lulu. The essential services on most of the publishing sites are free, and you can pay for premium services like marketing and editing.
Audio Book: Effort 4
Doing an audiobook is more complicated than an e-book but you’ve alreadydone the work of the e-book so why not get it out there in another format. You don’t have to have all of the specialized equipment to do it yourself; outsource it to someone else on a site like Up work or Guru.
You can use AudioBook Creation Exchange to create and sell your audiobook.
Write a Guide or Online Course: Effort 3
The best vacation guide I had for any trip was not a book but a free site a friend recommended to me; Tom’s Guide to Paris. Tom wasn’t a travel writer he is just an American ex-pat living in Paris and knew the city well. I would happily have paid for the guide he wrote for free.
If you know anything well, a place, how to fix something, how to make something, how to do something, you can write a guide for it. You can sell your guide as an e-book, offer it as a download for a fee on your site or reach out to bloggers with similar content and ask if they will offer it as a paid download on their website (for a price of course).
If you are looking to make a course, Teachable is an awesome place to host it. They’ve done all the hard work of running the course website for you, all you need to do is make something awesome and share it with people.
Another great place to host a course is Udemy, they also have a built-in audience which could help in selling your course.
Online Arbitrage: Effort 3
Arbitrage is defined as, “The simultaneous purchase and sale of an asset to profit from a difference in the price.” Which is a fancy way of saying, buy low and sell high? This type of selling isn’t simultaneous, but the definition still fits.
Amazon: Forty percent of Amazon sales come from third-party sellers. Their merchandise stored in Amazon’s warehouses. Just checking what’s already selling on Amazon will show you what types of products are doing well.
Choose a category and then Best Sellers. Monitor best sellers for a few days or even a few weeks to help make your decision. Within those items, choose some things you have some familiarity with.
Some people find whole sellers and re-sell their products but this method can tie up a lot of your money, and unless you find a relatively unknown one or negotiate an exclusive contract with them, there is too much competition to make it worthwhile.
Much better to trawl thrift shops, post-holiday clearance sales, and estate and garage sales which can be terrific places to buy a lot of merchandise cheap. We wrote a detailed article on the process.
eBay: Some things sell better and for more on eBay than Amazon. If you have a “one of a kind” item, your grandmother’s antique lamp brought over from the old country, for example, eBay will be better.
They also accept some things that Amazon doesn’t sell, like used clothes and some used baby items. eBay is even better for large pieces, like cars and furniture. It’s more work to list things on eBay and more time consuming than to sell on Amazon though. We interviewed Jordan Malik about this.
Stuff You Already Do
Shopping: Effort 1
Earny: When you shop online, you should be comparing prices and looking for the best deal. It’s so easy to compare prices using Google Shop that there is no excuse not to. But even if you do your research and buy something at the lowest price, that might only be the lowest price at that moment.
If you buy something and the price goes down within a specific time frame, Earny works to get a refund of the difference.
Swagbucks: When you join Swagbucks you can get cash back when you buy online from more than 1,500 retailers including places you probably already shop like Amazon, Target, and Starbucks. You earn points for each dollar you spend and also get exclusive coupons and deals exclusive to Swagbucks shoppers.
Also, you can earn points when you use the Swagbucks Yahoo search engine, and when you watch exclusive videos, Swagbucks has put together. You can redeem your points for gift cards or get cash back through PayPal.
Ebates: This is a site that gives you cash back when you shop online. It’s not a shopping portal but an affiliate of more than 2,000 stores including Amazon, Macy’s, and Bed Bath and Beyond. Each store shows what percentage cash back you get when you shop with them.
Your money is paid out four times a year to your Pay Pal account or sent by check.
Eating Out: Effort 1
Seated: Probably part of the reason you need $100 fast is that you spend so damn much money going out to eat. That’s why you need Seated. This is probably the best thing on this list. It sounds too good to be true, but I know it works because Andrew and I both use it.
It’s an App that you use to book restaurant reservations. Every time you complete a reservation, you get a gift code for $20-$50 for Amazon, Uber, or Starbucks. Amazing! The rewards are available within 24 hours of your completed reservation. We exclusively use this to eat out as it often reduces the bill by 10-20% for us.
Spending: Effort 1
Rewards and Points Cards: There is a ton of competition among credit cards, and one of the ways they try to entice new customers is a sign-up bonus. Some cards will give you as much as $150 back in the form of statement credits when you spend a certain amount of money on the card within a set time frame.
Do not spend money you wouldn’t ordinarily spend to get the bonus, or you aren’t making money.
Cash Back Cards: Cashback cards give you a small percentage back for every dollar you charge to the card. Some give back on only specific categories like groceries or gas, and some offer cash back on all purchases.
Driving: Effort 2
Uber: The hourly pay after expenses varies from city to city, but you can expect to make around $10 an hour. In larger cities, it will often be much more and in smaller cities, sometimes a little less.
The appeal of Uber is that you can set your schedule and there is no commitment. You can work your regular job and make your $100 in just a few hours on a weekend or some evenings.
Buy a Small Business
Americans spend an average of five hours watching TV every day. Use a few of those hours to make some money while you’re at it.
Buy a Blog: Effort 3
Flippa: You can also buy an existing blog that is already making money. People sell successful blogs for all sorts of reasons; they’re tired of doing it, they no longer have time to do it, it’s not making enough money, or your offer was too good to refuse.
It takes some research to find a blog worth buying though, kind of like choosing the right rental property. There are some minimum criteria that should be met before you delve further.
The blog should be at least 12 months old and get at least 10,000 visits a month with at least half those coming from search engines (meaning the site’s SEO is pretty good), and it should be under-monetized meaning the current owner isn’t fully exploiting the potential.
You can then choose to take over the blog yourself or make an offer to keep the founder on as a writer and perhaps the face of the blog too while you collect the income generated. You can peruse sites for sale at Flippa, and some can be had for just a few dollars.
Buy an Existing Business: Effort 3
The barrier to buying an online business is much lower than purchasing a brick and mortar business. They can be had much more cheaply, and there aren’t a lot of any physical assets to deal with, and there isn’t much overhead.
You can find online businesses for sale on sites like BizBuySell.
Buy Royalties: Effort 2
Had no idea this was a thing! Music ownership is managed via royalties. Having ownership of those rights means the holder earns money on the earnings of that music. Royalty rights are not affected by financial markets and provide a steady stream of passive income.
You can bid on royalties on the site Royalty Exchange.
Buy and Sell Domain Names: Effort 3
Internet domain names can be valuable! That’s why famous people rush to trademark their children’s names because if someone is going to pimp out a baby, it’s gonna be Beyonce and Jay Z and not some internet nerd.
There is some luck involved in choosing a good domain name to buy, but there are also ways to research what might be a good one. You want to look for hot keywords and buy a name that in the future, a business would want to buy. You can purchase domain names at Flippa. We interviewed Adam Dicker about this process.
Brick and Mortar Businesses
The right brick and mortar business can be a good investment, but there are much more overhead and more moving parts. Therefore much more research has to be done than you needed to invest in an online business.
Invest in an Existing Business: Effort 3
Starting or buying a business indeed isn’t passive, but you can invest in the business as a silent partner. For some of us, this is harder than it sounds. When you agree to become a silent partner, you have to stay silent which can be hard when it’s your money on the line, and you think things should be done differently.
You can search sites like Angel Investors Network for additional revenue stream opportunities.
Rent it Out
You can make money renting out lots of things.
Rent a Room: Effort 2
A lot of places are cracking down on renting out an entire house or apartment, but there aren’t restrictions on renting out a room in your home. You can do this on sites like Airbnb if you don’t want a full-time roommate or Roommate Finder if you do.
Rent Your House: Effort 3
Airbnb: If you live in a desirable place, a big city, a charming hamlet, the chances are that someone would like to stay in your home for a few days. And they’ll pay you! Airbnb connects those with space to rent to those looking for a place to stay. We wrote an article on the process.
Rent Like a Champion: Do you live near a college campus, famous golf course, race track, or other venues where major sporting events are held? You can rent your home out to people attending those events through Rent Like a Champion.
You set the price and availability of your rental. Most rentals are from Friday evening to Sunday afternoon, and the site says the average host earns $1,100 per weekend. The company provides up to $1,000,000 in insurance coverage which acts as your primary insurance policy for the time your home is rented out.
The policy covers liability, structural damage, and damage to items and property. You are paid via direct deposit 5-6 business days after the guests check out. The site currently has listings in 25 cities in the US.
Rent Your Stuff: Effort 2
Peer Renters: Are you one of those people who decides to start a new hobby, buys all the stuff you need to partake in that pastime, do it once and then realize you hate it, and now you’re stuck with all this expensive shit?
Or maybe you do use your stuff, but you probably aren’t using it all the time. You can rent out things like your camping gear, sports equipment, camera equipment, and tons of other stuff to people who had more sense than you and didn’t buy them, at Peer Renters.
Storage Facility: Effort 3
If there is one thing Americans have a lot of, it’s crap in their houses, garages, and sheds. And even that isn’t enough room for all the stuff we buy, so we need more storage space. There is almost no maintenance for storage units, and they don’t require the same level of management as a rental property.
The units are self-serve. People let themselves in and out of their units. If they don’t pay the rent, the stuff is sold off, and the unit rented to someone else. You can peruse storage facilities for sale at LoopNet.
If you don’t have the money to buy or build a facility, you can invest in a REIT that specializes in them like Public Storage or ExtraSpace Storage Inc.
A pyramid scheme is a form of investment where each person involved recruits others to join. Money made by the new members funnels up to the older members. Herbalife and Amway call themselves multi-level marketing companies but both have been accused of being pyramid schemes.
There are a lot of lazy people who don’t want to get real jobs but want to pretend to have a career. These are the kinds of people you can recruit for your very own pyramid scheme.
Start One: Effort 3
Decide on a product to sell. There are lots of fat people who want to be thin but who don’t want to eat less and move more, so some kind of magical weight loss product like a shake or a body wrap are two good ideas.
Make all kinds of crazy claims about your product, with regulatory agencies gutted, who’s going to stop you? This shake will help you lose ten pounds overnight! This wrap will eliminate cellulite in just two weeks!
It helps if you are good looking, fit, and charismatic. Even very dumb people will sometimes have a moment of credulity, so you need to be able to overcome that with your charm. Now you have to recruit stupid people for your scheme.
Where do you find them? Anywhere and everywhere. You can’t swing a cat without hitting a moron so you won’t have any problems here. For maximum recruiting, go to a Trump rally and take your pick.
Set a minimum purchasing requirement for your product. If people want to get in on this once in a lifetime opportunity, they must pony up $X. Let them know that while this product is guaranteed to sell itself, the real way to make money is to recruit others. Not only will they make more money, but they’ll get to be someone’s boss!
They go out and rope their equally dumb family and friends into this, and you sit back and watch the money roll in.
Join One: Effort 2
Admittedly, starting a pyramid scheme is a lot of work. Much less work just to join an existing one. You need the same skills listed above, good-looking, charismatic, but you don’t have to develop a product, just get dummies to sell it for you.
You won’t want these dullards living with you or even near you in your new haven so if it were me; I’d buy a piece of property whose roads flood, get snowed in a lot, etc., throw some used trailers on it and store them there. Probably still an upgrade from how they were living so you can feel good about that!
Not all of us are going to get rich from our jobs. Soon some of us may not havejobs given that so many are set to be eliminated through automation. If we want to achieve a level of financial independence, we are going to have to start earning passive income.
This list should give you a few passive income ideas. Pick one and get started. But put some effort into it. We did a month-long series on starting an online business that will earn $1,000 a month within a year. Front load the work or the investment now so you will have a stream of passive income within a few years.