Generating passive income is one of the practical approaches to increasing one’s financial freedom. Besides, multiple income streams translate into increased savings, which will support one’s investment goals. While it is not a shortcut to get rich overnight, passive income helps one supplement their primary income and build wealth over many years. Various passive income strategies come with unique benefits and considerations. Individuals should evaluate various factors before choosing them to make financially sound decisions.
Importance of passive income
The concept of passive income generally involves earnings from one or multiple sources other than conventional employment. According to the Internal Revenue Service (IRS), passive income typically falls into two categories — rental properties and businesses where an individual has no active involvement. The latter may include book royalties and stock dividends.
While it has a “get rich quickly” appeal, passive income is not really about gaining something by doing nothing. There is work involved, most of which is typically done upfront. For example, if passive income is earned through a product, it has to be regularly maintained to stay updated with the constantly evolving market trends. Alternatively, if this income comes from a rental property, it may require frequent upkeep to create a steady income stream. But, if one commits to such efforts, then one can effectively generate extra income and have an additional layer of financial security without active day-to-day involvement.
Besides the financial freedom, passive income also allows one to diversify one’s income streams and investment portfolio, make a hedge against inflation, and plan for retirement. It can also help cover bills without relying on one’s paycheck.
Passive income ideas
While there are several ways to earn passive income, it is important to note that complete success isn’t always guaranteed since there is some level of risk associated with each strategy. Building a passive income source is often a trial-and-error process where some ideas may fare better than others.
1. Sell digital products
Such products typically include tools, assets, and services that are available and accessible only in digital formats. Streamable and downloadable files like PDFs, templates, and ebooks are some of the popular types of digital products. Selling these can be a way of earning passive income since most of the work has to be done upfront. Additionally, if the products sell, there is a high potential of generating good profits. While these products require substantial upfront work to create, they can be repeatedly sold online. Furthermore, there are no additional costs involved for inventory or storage. Since these products come in downloadable format, it eliminates the production cost involved in each sale, and as many products as required can be sold.
2. Design a course
One of the most popular ways of creating passive income is by developing an online course in video or audio format. Then, sit back and relax as the money pours in along with the product’s sale. The courses one designs can be sold and distributed through online learning platforms and websites. Another option is to adopt a freemium model. Here, one can build a follower base by offering free content. Then, one can roll out subscription options for the course created for those who seek advanced course material. For instance, if one is interested in designing language learning courses, then one can use this model. In such models, the free content is considered to be a demonstration of the knowledge and expertise of the person who designed the course. While this is an excellent income stream, a substantial amount of work is often involved in creating the course content. Plus, it is crucial to design a course that will benefit a large number of target users.
3. Write an ebook
These are relatively cheap to create and publish, primarily because it eliminates the traditional costs associated with publishing a physical book. Besides, it is easy to take advantage of worldwide distribution for the book with the help of major online retailers. Most ebooks are easy to design using various affordable or free tools. But, one must have expertise in a topic to write an ebook. The topics often focus on niche subjects, and the writer may be required to have specific expertise. Besides, writing a single ebook will not bring in much cash flow. The only way to generate consistent passive income is to build an audience and create a brand for oneself as an author by writing several books that attract more readers.
4. Rent out a property
Investing in residential or commercial rental spaces is an effective way to generate passive income. But, before purchasing a rental property, one must determine how much return is expected on the investment. One must also know the total expenses and financial risks associated with the property ownership beforehand. Taking time for proper research and financial planning is important to ensure one’s rental property will yield significant income in the long run. Additionally, changing market conditions may significantly impact property values and rent prices. So, one should thoroughly evaluate the local market conditions before purchasing a rental property.
5. Affiliate marketing
This strategy involves promoting the products or services of third parties. By embedding affiliate links to a particular product or service on one’s personal website or social media, one will earn a commission whenever someone clicks on the link and buys the product or service. The commission typically ranges from 3-7%. Individuals with a significant online following will be better placed to earn well from affiliate marketing.