Whether you’re self-employed, work at a regular job, own your own business or retired, it’s always nice to have sources of passive income.
Passive income is so attractive because, by definition, it requires little to no effort to earn and maintain. This does not mean, however, that it’s just money falling from the sky. In order to acquire sources of passive income, you must either invest your time to build them or invest your money to buy them. Either way, you must put in something upfront and that is why many people do not end up having sources of passive income.
In this article, I will share 7 passive income ideas that are both practical and accessible to ordinary people.
1. Stocks
It should come with no surprise that owning stocks is a way to generate passive income. Stocks can appreciate in value to increase your net worth or generate cash for you through dividends.
Most people reading this article should be familiar with what stocks are, but for those who aren’t, stocks are shares of ownership of a company. Each publicly-traded company has a certain number of shares, and by owning these shares, you own a part of the company. You would be entitled to attend shareholder meetings, vote for the board of directors, vote for certain company decisions, and receive the profits the company makes through dividends.
Many investors often lose sight of the basic definition of a stock and often treat it as simply a moving ticker fluctuating in value. This often leads to investment errors because informed investment decisions stem from the underlying value of owning part of the company, not from betting on the unpredictable day-to-day fluctuations in stock price. Remembering that a stock gives you a share of ownership of a company that has inherent value leads to rational investment decisions while treating a stock as a moving price is basically gambling.
Acquiring stocks is accessible to pretty much anyone. All you have to do is set up a brokerage account through a brokerage firm or a bank, and you’ll be able to buy stocks. Nowadays brokerage accounts have online trading platforms for you to make trades and access research resources. Additionally publicly-traded companies release their financial statements every quarter through SEC filings which you can find online to gain more comprehensive information from primary sources. Also, sites like Yahoo Finance and Seeking Alpha provide detailed analysis of different stocks, and business magazines and newspapers like Fortune, Forbes, Bloomberg, the Wall Street Journal, and the Financial Times also provide a lot of information for you to do research.
2. Index Funds
If you lack the time, expertise, or desire to do the extensive research necessary for successful stock selection, you can always buy index funds instead.
An index fund is a collection of stocks that matches the composition of certain market indexes, like the Dow Jones or S&P 500.
Market indexes are lists of stocks representing a segment of the financial market. The Dow Jones Industrial Average, for example, measures the stock performance of 30 large companies. The S&P 500 does that for 500 large companies, while the Russel 2000 does so for 2000 small companies. Each index tracks a certain portion of the market to show us how the financial markets are doing on the macro level.
Index funds will hold the basket of stocks of their respective index. Buying into these funds will give you a broader ownership of the stock market. It requires less work because it is far easier and less time consuming to do research on the stock market as a whole than to analyze individual companies. It is also considered safer because no one stock can really ruin your performance. On the flip side, enormous profits would also be rarer because no one stock can carry the day and earn you a spectacular amount of money.
The biggest investment success stories happen through the concentration of investment on a single company that does very well. Likewise, the worst investment losses also happen through the same concentration of investment on a single company that ends up doing very poorly. Thus, stock picking can earn you big profits if you are skilled at investment research, but index funds are the safer route for earning a more modest but reliable source of passive income.
3. ETFs
Exchange-Traded Funds (ETFs) are basically more flexible versions of index funds. They also hold a certain collection of stocks but instead of strictly tracking a market index, the ETF collection of stocks is based on certain investment strategies. Some ETFs focus on a specific industry or sector (technology, automobile, finance, etc.), others focus on bonds or commodities, and others are backed by gold or silver. There are ETFs that are more actively managed, and others that are more passive.
When investing in ETFs, you are still buying a collection of stocks, but you get a basket that can be more specific and flexible than an index fund, which is why ETFs can often be more profitable.
4. Real Estate
Owning real estate is another source of passive income that can generate cash for you through rent revenue, or appreciate in value to increase your net worth.
If you own multiple houses or apartments, for example, you can rent out the ones you are not using for extra income. With apps like Airbnb, it has never been easier to rent out homes. You can also reap the rewards of having your properties appreciate in value.
Keep in mind, however, that unlike stocks, real estate costs money to upkeep. You have to pay property taxes, utility bills, and other maintenance costs that can drain your money if you’re not collecting sufficient rent revenue. That is why I prefer investing in stocks over real estate.
One way to circumvent the costs of holding real estate is to buy REITs (real estate investment trusts). REITs function similar to stocks in that they are shares of real estate companies that own, operate, or finance income-generating real estate. They are publicly traded and can be bought through brokerage accounts. REITs allow small investors to take advantage of the benefits of owning real estate, without the constant upkeep and maintenance of managing it themselves.
5. YouTube Ad Revenue
YouTube creators who join the YouTube Partner Program can earn money from the advertisements shown on their content. At the time of writing, the split is 55/45, with creators taking 55% of the ad revenue and YouTube keeping the other 45%.
The caveat to this opportunity is that in order to join the YouTube Partner Program, you need at least 1000 subscribers and 4000 public watch hours in the past 12 months, which is no easy feat to achieve.
YouTubers who do end up reaching 1000 subscribers and 4000 public watch hours often see their channels, and ad income, grow exponentially. From what I’ve seen, those who make it to the tens of thousands of subscribers range often make a few thousand dollars every month from YouTube (enough to sustain yourself and quit your day job), and those who have hundreds of thousands of subscribers make tens of thousands of dollars every month. The top YouTubers make millions of dollars a year.
Yes creating a video may not sound passive, but once you put in that upfront effort that video will last as long as YouTube exists (assuming your video doesn’t infringe on copyrights or violate community guidelines), and you can earn passive income from the ad revenue from the video.
6. Affiliate Marketing
Affiliate marketing is the business of promoting other people’s products or services and earning commissions from their sales. For example, you could post a link to a product you want to promote, and every time someone buys the product through your link, you earn a commission, usually a percentage of the total sale.
I consider most affiliate marketing as a source of passive income because more often than not, it involves posting a link and doing the relevant promotional work (an article, video, or social media post), and from then on you get a commission anytime someone buys the product through your link.
The most popular affiliate marketing site is Amazon Associates. Signing up for Amazon Associates is free, and once you’re in you have access to product links to almost everything Amazon sells. These links are generated individually for you, and every time someone buys the products through your links, you earn a commission.
Different categories on Amazon Associates have different commission rates that you can earn. Some categories, like luxury beauty, offer as high as 10% commissions. Most categories offer commission rates of a few percentage points.
In order to stay on Amazon Associates, you need to make at least three qualified sales within the first 180 days. That’s half a year to make three sales, so it’s pretty achievable.
Moreover, you also need a platform, such as a website, YouTube channel, blog, etc., to post your links. Amazon has rules against posting links through emails and in any offline manner, so you must have an online platform to participate.
In addition to the regular Amazon Associates program, there’s also the Amazon Bounty Program. You automatically have access to the Amazon Bounty Program if you join the Amazon Associates program, and it functions similarly in that you earn a commission by posting links to Amazon’s services, such as Amazon Prime, Kindle, Audible, etc., and getting people to sign up through your link. The only difference is you get a fixed fee every time someone signs up.
There’s also the Amazon Influencer Program for social media influencers. This program gives you your own Amazon page where you can list recommended products. It is an extension of the Amazon Associates Program in that you earn the same commissions for sales of the products through your page, but it can be helpful as an additional way to drive traffic. In order to qualify you need to have either a YouTube, Instagram, Twitter, or Facebook and you have to apply. Amazon considers the number of followers and the level of engagement when evaluating applications.
So far, I’ve only used the Amazon Associates Program, including Amazon Bounty and Amazon Influencer, for my affiliate marketing business, but there are also other affiliate marketing programs you might want to check out. Programs such as eBay Partners, Shopify Affiliate Program, Clickbank, etc., for example, are all reputable affiliate marketing sites.
7. Writing
Writing is also a way to generate passive income. After you write an article or a book, you have created intellectual property that you can monetize for the rest of your life.
This could be through publishing your work through Medium, where you can earn money from the Medium Partner Program. Or it could be selling your work to a newspaper or magazine. Or publishing it through your blog which you can monetize through advertisements. In the case of a book, you can earn money from book sales.
Creating other intellectual property such as inventions, music, films, etc. can also earn you passive income in similar ways.
There are many ways to generate passive income. These are 7 that I believe are useful because they are practical and accessible for pretty much anyone.
Always remember that passive income doesn’t mean there’s no work or investment involved. In order to acquire a source of passive income you either have to invest your time up front to build it or invest your money upfront to buy it. Even if you inherit sources of passive income, maybe a business or a portfolio of stocks or real estate, someone had to put in the work to acquire those assets in the first place.
But after the initial investment of time or money, your source of passive income can generate money for you with little or no effort. You can use this to supplement your income, and if your passive income is substantial enough you can retire early and pursue whatever you want to do in life. Having passive income is the key to achieving financial freedom.
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