What Is Passive Income—and How Can You Earn This Easy Money Now?

Gone are the days when making money required punching a clock. These days, it’s the dream to pull in cash while you sleep, or take a vacation while your business runs itself. Passive income makes all this and more possible. But what is passive income, exactly, and is it only for people who are already wealthy?

“When people think of passive income, they [often] think of real estate or investing,” says Niki Puls, a Nebraska-based passive-income mentor who earns $30,000 a month working just five hours a week. “But it’s definitely possible for stay-at-home moms and people who don’t have a lot of time.” Puls is now teaching others how to make money fast with tons of unique side hustles that can become passive-income streams over time. That extra money, of course, can go toward your expenses, bulk up your savings account and even help you retire early.

According to the most recent U.S. Census data, about 20% of Americans earn passive income, with those households bringing in about $4,200 per year through these streams, though some earn much more. All signs point to that number growing, and the sky is the limit when you have the knowledge about where to start. In fact, it’s one of the secrets that millionaires know—and you will soon too.

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What is passive income, exactly?

There’s not a single passive income definition, but the idea is basically that it’s the kind of work that runs itself. “Passive income is income that takes little effort to generate compared to active income, and it’s money you earn outside of a traditional employer or contractor,” says Courtney Alev, a consumer financial advocate at Credit Karma.

One way to think of passive income is to assess whether that money stream could still come in even if you weren’t around to oversee it. For example, Steve Davis, CEO of Total Wealth Academy, once owned 4,000 rental units that were generating passive income for him. Davis never had a key to any of those properties, and he never saw them in person; he simply owned them and let others manage them while he cashed in. That’s a true passive-income stream, and real estate isn’t the only way to do it.

Is passive income the same as a side hustle?

No. A side hustle is more like a second job—one you can do in addition to your full-time work. Side hustles are a way to generate more income “on the side” to supplement your full-time job. They aren’t usually lucrative enough to replace your full-time work, but some people manage to turn their side hustles into full-blown careers, if that’s the goal.

Passive income is similar to a side hustle in that the income it generates supplements your full-time work, but the key difference is how much time and attention you need to spend on passive-income streams in order to keep them working. Ideally, passive-income streams operate in the background, with minimal effort once you’ve done the work to set them up. With passive income, you can literally make money in your sleep, whereas side hustles require hands-on work on a regular basis.

What are the benefits of passive income?

Earning passive income helps you bring in more money while working less or while working a full-time job. For many people, it frees up time and helps them to become financially independent with income that doesn’t rely on holding a job for a company that might have layoffs or pay cuts at any time. As a result, they end up happier at home.

Puls was working a regular 9-to-5 job when she decided she wanted to spend more time at home with her family. Her first foray into passive income was an e-book centered around intentional living, teaching other moms how to slow down and prioritize their families. She spent hours writing the book and designing it for free using Canva, then began selling it for $35 a pop. Soon, she was making about $5,000 a month in book sales. Then she expanded into other books, courses, templates and social media, and she now works about five hours a week while earning $30,000 a month. “Before passive income, I would only see [my family] for a few hours a day,” she says.

Davis points out that passive income also gives his clients a sense of stability, since having multiple income streams can protect them from job loss or a turn in the market. One thing the pandemic taught many Americans is how problematic putting all your eggs in one income basket can be. At the height of the pandemic in May 2020, 49.8 million Americans reported not being able to work or working fewer hours. And while the situation is much better today, as of April 2023, 5.7 million Americans are currently without work.

Even if you aren’t facing job loss, generating passive income can help you save toward other purchases. Think: new cars, vacations and even college expenses for your kids. “If you’re able to budget for all your normal expenses with your primary salary,” Alev says, “anything additional you earn can go straight into savings for your goal.”

How much money can you make through passive income?

There really is no cap when it comes to passive income. Puls didn’t expect to make a ton of money when she first got started, but soon she had outpaced her salary. The bottom line: You could make a few extra dollars a month, a few thousand or a few million. It really boils down to what you’re doing and how successful you are at it.

For example, blogging and affiliate marketing can bring in great money, but real estate can generate a lot more, Davis says. And the best part about passive income is that it requires so little ongoing work that you can easily set up multiple passive-income streams to increase your earning potential.

“And for those who are lucky enough to get their source of passive income working like a well-oiled machine,” Alev says, “it’s money you’re earning with minimal effort.”

What are some good passive-income ideas?

the_burtons/Getty Images

Now you know the answer to the question: What is passive income? The next logical question, of course, is: How can I make this kind of money for myself? For some types of passive-income ventures, you need money to make money. But there are plenty of options where this isn’t necessary. Just keep in mind that there is a ramp-up period, and you may have to learn to walk, so to speak, before you can run.

1. Real estate

For this passive-income stream, you’ll need an upfront investment for the property, and this can range anywhere from thousands to tens of thousands of dollars. From there, many investors will find tenants and pay a company to manage the property. If you own real estate but act as a superintendent, the money you earn would be considered active income. When you pay a company to manage the property for you, chances are you’ll be checking in on your properties on a weekly or monthly basis and dealing only with major problems, such as repairs or missed rent payments, if your staff cannot handle them.

2. Blogging

Blogging offers tons of ways to make passive income, and it starts with a website that you create content for. From there, you can get sponsorships and earn money through affiliate marketing. “I earn affiliate income by placing referral links on my blog to products that I recommend,” explains Michelle Schroeder-Gardner, the founder of Making Sense of Cents. “If someone purchases the product through my link, I then earn a commission from the company. For example, I may link to a book from Amazon on my blog.”

Just keep in mind that you’ll need to do a lot of work upfront before you can start cashing in. You have to build a site, YouTube channel or other platform, and grow your audience. “The income from affiliate marketing can vary greatly,” says Adrian Tamminga, the co-founder and business manager at Iron Embers. “It depends on factors like the size and engagement level of your audience, the products you promote and the commission rate. Some people make a few hundred dollars a month, while others make thousands or even tens of thousands.”

3. Downloadable digital products

The internet has made it possible for anyone to sell a product online to a buyer without ever physically exchanging goods. Downloadable digital products can include everything from digital templates for journaling and meal-prep lists to downloadable art, templates for wedding invitations or custom party decorations. You’ll find loads of these on Etsy, though that’s just one venue for selling these items.

“You create the product, and then you can sell it an unlimited amount of times because customers are either printing or downloading the product to their computer,” says Schroeder-Gardner. “You don’t have to ship a thing.”

4. Create an online course

Both Puls and Schroeder-Gardner have had success in this arena. Once you set up the course, customers can pay to access it and take that digital course on their own time. Just be aware that you’ll have to do a significant amount of work upfront before you start counting your Benjamins.

“Creating a course is not the easiest of these passive-income ideas, but it can be a great way to earn an income around the clock,” Schroeder-Gardner writes on her site. “Most of the work is done in the very beginning, and then there is some maintenance along the way to keep the course updated, help students and so on.”

5. Dividend stocks

With a regular growth stock, you can’t make money until you sell. With dividend stocks, you’ll get payments through regular distributions the company pays to its shareholders, without having to sell the stock. “In plain English, when you buy dividend stocks, you’re buying a small piece of a company,” says Tamminga. “As the company makes a profit, it shares a portion of that profit with its shareholders, which is you. These payments are called dividends.”

To get started, you’ll need a brokerage account, which you can set up with an online broker who will place trades for you. You can also invest in these stocks on your own, if you don’t want to pay a financial planner to help you. “You can definitely do it yourself,” Tamminga says, “but it’s essential to do your research and understand the company and the industry you’re investing in.”

6. E-books

Self-publishing an e-book is another long-term way to reap the benefits of sales. Even better? Unlike writing a full-blown novel, e-books can be short pamphlets explaining a skill set you’re already well versed in. Plus, Alev points out, “you don’t need any physical inventory, and you don’t need to worry about shipping costs.”

Aside from actually writing the book, however, you’ll also need to do some maintenance to advertise the book.

7. Car rentals

Platforms such as Getaround and Turo let you rent your vehicle anywhere from a few days to a few months. According to Turo, their car owners make about $10,516 a year on average renting a single vehicle on the side. One thing to note: Turo hosts, as they’re called, do have to purchase a third-party liability insurance plan to allow renters to use their vehicles.

8. High-yield savings

Are you building up your nest egg? Good … but it would be even better if you moved your funds to an account that will do a little more work for you. “Certain banks and financial services companies will pay you just for having cash there,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. This is one of the secrets of people who are great at saving money.

How does this translate into real-world math? If you put $1,000 into a regular savings account, you might grow it an additional 10 cents after a year. A high-yield savings account might go up $5. This is one of those passive-income streams that works best with larger chunks of money if you have it.

And here’s another bonus, according to Tamminga: “While the earnings from a high-yield savings account might not seem as substantial as other passive-income sources, they offer a lower risk level and provide a secure way to grow your savings.”

9. Renting your space

“Through homesharing, you can earn an average of $10,000 a year to put toward living expenses, mortgage payments, retirement savings or that upcoming vacation,” says Amy Ford, VP of Silvernest. “That’s about the same as you’d make with a part-time job.” This might entail getting a roommate or renting short-term to vacationers or to professionals traveling for business through Airbnb.

Ford also suggests renting out your unused garage space as storage for people looking to stow their vehicles or boats. You can offer these services through sites like Craigslist or Facebook Marketplace, but if you want to be a little more official about it, try a platform such as Stow It, where users report making $4,000 a year on otherwise unused garage space.

10. Buying vending machines

This one is pretty specific, but buying vending machines and spending a couple hours a month to restock them and claim your earnings is another simple way to sell products with minimal effort. You can earn a few thousand a month depending on how many vending machines you purchase.

How much work does passive income require—really?

The most common myth around passive income is that it requires no work. But experts warn there is certainly upfront work, as well as a certain amount of maintenance required to oversee this kind of income stream. “As with anything in life, if it were too easy, everyone would be doing it,” Alev says. “Getting a business started—even if it’s passive income—takes some time and often money, so be prepared to invest in your business at first in order to get it to a good place.”

Puls spends about five hours a week maintaining her social media, answering customer questions, sending email campaigns and updating her website. But when she got started, she was spending a lot more time on the side, in addition to working her full-time job, to get things going.

Schroeder-Gardner agrees. “One common misconception about passive income is that there is no work involved. However, that is not always the case. Sometimes you need to do work and spend time in order to build and maintain the passive-income stream,” she says. “Plus, some passive-income streams are more passive than others. For example, typically dividend paying stocks are less work than being a landlord with rental property.”

How is passive income taxed?

Like all types of income, passive income is taxed. The difference is you’ll likely have to report those earnings yourself in order to pay the taxes on them each year.

Be sure to consult a CPA, especially when you’re getting started, to avoid any mistakes when reporting your income. You might find that at a certain point you’re earning enough money through passive income to be paying quarterly taxes, for instance, and you’ll want to stay on top of that.

“Your source of passive income should be by the book and follow any relevant tax laws,” Alev says. “Make sure to save for any estimated taxes so that you’re not surprised when it comes time to make payments.”

Mistakes to avoid when launching a passive-income plan

• Don’t underestimate the workload. “The internet makes it seem like it’s some magical thing where you don’t have to do anything, it just flows,” Moss says. “But the reality here is just a varied amount of either lots of upfront work, or at least a little bit of ongoing maintenance.”
• Follow the rules. While there might be a learning curve to generating passive income, you shouldn’t try to get the hang of the tax side of things as you go. Instead, consult with a tax accountant at the outset.
• Change your mindset. An abundance mindset is key, but Davis also says you must believe the idea that multiple income streams are best. You don’t want to wait until you’re unhappy with your job or you get fired. Instead, change your mindset now from “I should have another income stream” to “I must have another income stream,” and you’ll be in a much better position in the long run.

Sources:

• Niki Puls, 30-year-old mom living in Nebraska and working as a passive-income mentor
• Chamber of Commerce: “Cities Whose Residents Make the Most Passive Income”
• Courtney Alev, consumer financial advocate at Credit Karma
• Steve Davis, CEO of Total Wealth Academy
• Adrian Tamminga, co-founder and business manager at Iron Embers
• Amy Ford, VP of Silvernest
• Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors
• Michelle Schroeder-Gardner, founder of Making Sense of Cents