Practically everyone dreams of the day they can retire and live off their investments and other money they have saved. For many, retirement is the end of earning active income, focusing entirely on passive income. Passive income — the money you make that is mostly independent of the work you put into it — is an excellent way to build wealth and provide income security.
Fortunately, there are many ways to earn passive income, and almost anyone can find at least one method that works for them. With this information, you should have a better understanding of passive income and how you can incorporate it into your life.
What Does Passive Income Mean?
In order to know how passive income works, it is wise to know the distinction between active and passive income. Active income is your price or wage for work completed. If you make and sell a product or provide a service in exchange for payment, you are engaging in active income-earning. By definition, active income is tied to activity. The moment you stop working in an active income stream, you stop earning.
Passive income describes the money you earn based on an investment you made at an earlier point, whether that investment is time or money. It is easiest to understand in the context of a savings account. You put money into a savings account that provides a certain percentage of interest back to you as income. The longer you leave the money in the account, the more you earn. You do not have to do any more work to keep earning interest on the income, even if you leave the account alone for decades.
How Does Passive Income Work?
There are many forms of passive income, and they are not all created equal. Some passive income streams require you to invest money. You can start by putting even a few dollars into a savings account. You may also decide to invest into stocks or bonds. It is important to keep in mind that passive income may not be guaranteed in these methods. Although investors often gain value in their investments over time, it is not uncommon to lose money. That is why experts recommend diversifying your investments and minimizing the amount of risk you take on your investments overall.
Other passive income streams involve time or work you previously expended that will eventually generate money for you. Authors or musicians may earn royalties on their works years after they have released it for consumption. Some passive income streams call for a little time and money. If you buy a property that is ready to rent and then act as a landlord, you will be investing some of your time and money to make an income.
What Are the Benefits of Passive Income?
The most immediate benefit of passive income streams is security. If you should lose your main source of active income, you would not be left completely destitute while you look for another job. Eventually, as you start to accumulate money and experience, you may feel more comfortable relying on passive income as much or more than you do a regular job.
Retirement is the goal for most people. In order to retire, you must be able to live entirely off your passive income. You may need several years or even decades to build enough wealth so that you can achieve it.
How to Build Passive Income Streams
There are dozens of passive income streams you could choose from. The right one for you depends on your interests and ability to participate. If you are not sure, you can always start with what you know or pick the ones with the simplest requirements.
Invest Your Money
If you have money that you can invest, putting it into stocks, funds or certificates may earn you a reliable rate of return. Those without a lot of experience may want to focus on investments that never lose money, such as a certificate of deposit. Investing in managed funds spreads out your risk so that you have a more predictable rate of return. Additionally, compound interest in your investments should allow you to gain momentum on your earnings over time.
Turn Knowledge Into Income
If you have a wealth of knowledge or experience in a certain field, you might consider writing a book or creating a video series with useful information or tips. Then, you could sell copies of the book or access the videos without having to invest additional work into it. If you have a blog or social media channel as a hobby, you could also monetize it to earn income from advertisements.
Rent or Sell Your Property
Owning property gives you a head start on earning passive income. If you own a home with an extra bedroom, you could rent it out to a regular tenant or to travelers looking for a short-term stay. Although people mostly think about renting real estate, you could also rent out a vehicle or boat. You can generate income from the rental, which you can apply to your expenses to maintain the property.
Virtually anyone can earn money in passive ways, as long as they have money or time to invest. By considering these tips, you can start to build wealth that will help to provide for you over time. For more passive income ideas, check out the accompanying resource by Renovo Financial.