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Read any book on retiring early or achieving financial independence, and you’ll learn that there are basically only two ways to go.
The first is to save a lot of money so you can pay your bills indefinitely. The second: build streams of passive income that can replace the money you make working a normal job. Then, you can spend your time however you want, and the money just keeps coming in.
Now, saving is important; and we’ve got lots of articles on accumulating wealth through savings. But, as you probably know if you’ve taken the time to find your FI number, it takes a LOT of savings to become financially independent.
About 20 times your annual expenses, give or take.
That’s a lot of skipped Starbucks and a lot of 401(k) deferrals.
So, let’s explore the other route you can go to build your finances and achieve the independence you’ve always wanted: passive income.
What is passive income?
Passive income is money that you’re able to make with zero or minimal effort. In some cases, like CDs or bonds, this is income that requires almost no work on your part. In others, like investing in rental property, there’s still work to be done—but not very much.
The truth about passive income is that no income is truly 100% passive. Even passive income streams require some degree of work. If you do affiliate marketing, you still have to manage your website and publish regular content. If you’re investing in income-producing revenue streams, you still have to vet and choose your investments.
The goal with passive income, though, is to create and expand streams of revenue that aren’t dependent on the amount of time you work on them. They’re forms of income that require a little bit of work periodically but pay you many times for your effort.
This untethering of your payoff from the work you put in is what grants you flexibility and financial freedom to take on other projects or spend more of your time not working.
How much passive income do I need?
The short answer is: none. Not if you want to keep working, anyway.
But, if your goal is to quit working or quit working so much, then what you have to figure out first is what portion of your monthly expenses you want to be able to cover with passive income.
If you make $50,000 per year and virtually all of your money goes to pay bills, that’s about $4,200 per month.
Author’s note: No, we haven’t forgotten about taxes here—you’re still going to have to pay taxes on income that’s being earned passively rather than actively.
So, if it takes about $4,200 per month to support your lifestyle and you want to be able to cover all of your monthly bills through passive income, then that’s how much passive income you need to reach financial independence.
If that sounds like a lot, you might decide to keep working part-time each month. May you cut back to 20 hours per week and still make about $2,000 per month. Now, you only need $2,200 in passive income to make up the difference.
But, don’t forget to consider changes in expenses that will result from not working or only working part-time. Maybe you have a long commute that you wouldn’t have to make—that’s gas and car maintenance you won’t have to pay for. Or, maybe there’s money you typically have to spend on clothes that you won’t have to pay if you stop working in an office.
On the other hand, maybe you would travel more if you didn’t have to work. That’s more money every year that you’ll need to earn passively.
32 ideas for generating passive income
|Different ways to earn passive income|
|CDs||Rental property||Equipment rental||Surveys|
|Bonds||Crowdfunding||Small businesses investing
|Dividend stocks||AirBnb||Grow produce||Affiliate Marketing|
|Private loans||Land lease||Sell fresh eggs||Make downloadables|
|REITs||Billboards||Publish a book|
|Lead aggregation||Paid drug trials|
|Selling photos online
CDs aren’t sexy, but they work. Put in your $100 per week and in a few years you’ve got $20,000 saved. The best thing about CDs is that there’s very little risk. Many are actually insured by FDIC. Then, once you’ve got a chunk of cash saved up, you can use it to get started with one of our more lucrative strategies.
Also not sexy, but also effective. Bondholders don’t have the benefit of FDIC insurance, but they do get preference over shareholders if a company goes broke, so they offer more protection than conventional stock investing. Plus, the yields are higher than CDs—though still not great.
3. Dividend stocks
Stocks for utilities and other conservative industries typically offer higher-than-average dividend rates because they aren’t growth industries and have to attract investors. But, with stocks being so dependent on current affairs, there are many that you can buy for a discount during a downturn (like a pandemic or other disaster), so you can make money twice—once from the dividends, then again when prices rise.
More on recession proof investing here.
4. Rental property
Buy a property and rent it out.
Ok, so maybe it’s not quite that simple, but it’s still a great way to build passive income while also building wealth as the value of the home rises. Plus, there’s an added benefit here if you finance your property, because your interest expense is tax-deductible (as are the costs of any work you do on the property).
5. Private loans
If you like the idea of investing in bonds or CDs but hate the low yields, there are always private loans. These loans are much riskier than bonds or CDs that are insured or backed by large companies, but that’s why the yields are higher. Just make sure you vet the borrower, first.
6. Equipment rental
If you live someplace where you can store equipment or you find yourself needing various pieces of equipment, anyway, buying used equipment and renting it out can be a great way to make extra cash. Just make sure that you rent to trustworthy people, collect a security deposit, and charge enough to cover any maintenance. It helps if you’re capable of repairing or maintaining the equipment yourself.
Crowdfunding lets you invest in other people’s businesses, real estate, or other projects. The big advantage is that you can invest in many different projects, rather than putting all of your money into a single business or property of your own. And you won’t have to play any part in management—any income will be purely passive.
Real estate investment trusts (REITs) are a lot like crowdfunding on a grand scale. They’re basically big real estate holding companies with many investors, potentially including mutual funds and other institutions. Some REITs are publicly-traded, which offers investors more transparency and liquidity, but also sometimes lower returns. If you like real estate as an asset class but prefer to leave the management to professionals, a REIT may be a good option.
9. Small business investing
Are your friends or family always asking you for money to pursue a new business idea? Have you ever thought of saying “yes?” Investing in small businesses can be a great way to create new revenue streams that require very little work from you. Obviously, if you want to be a passive investor, you have to be careful not to get drawn into management. Then, the income won’t be passive—you may find yourself busier than you are already and not freer at all.
If you have a second home, a guest house, or even just a spare room, you can make extra money renting that space for three to 10 days at a time to people who are visiting your area or just need somewhere to crash. Or, if you know you want to do a little traveling as part of your FI journey, you can buy a house in an area you like to visit. That way, you have someplace to stay when you travel and still make extra money when you aren’t there.
If you decide to go this route, be sure to study up on local laws—especially those in effect because of the pandemic.
11. Grow produce
This one requires a dedicated area for growing. It can be several acres or even just the size of a kitchen table. In fact, with some potting soil and a couple of grow lights, it can be done ON a kitchen table. The only thing that will limit how much you can make is how much you can grow.
12. Sell fresh eggs
This is another one that requires a little bit of an area to dedicate—especially if you want to give your chickens some room to range (which they always appreciate). You also need to be cognizant of local laws. But, under the right conditions, a handful of chickens can yield you a few dozen eggs per week that you can sell at farmers markets or through local businesses.
Did you know that most billboards aren’t owned by the people whose land they’re on? Instead, billboard companies usually pay landowners to carve off a small parcel of property—just enough to house the supports for their board and grant crews maintenance access. As an investor, you can buy billboards that are already rented to advertisers, buy vacant boards and rent them out, or work out deals with landlords to buy small areas and erect signs yourself.
With the popularization of streaming services like Netflix and Amazon Prime, people have forgotten that it’s possible to actually get paid to watch TV using systems like Nielsens. In other cases, you can get paid for secret-shopping, assessing companies’ customer service, or testing computer programs or applications that are being developed.
Boondocking is when RVers park on private property in exchange for a small fee. From the perspective of the landlord, this is a lot like renting a spare room, except in this case the room is your backyard or driveway. How much you can make depends on where you live and what you can offer, but rates can range from $5 to $10 per night for routine rentals to over $100 per night if you live in a popular area near a beach or offer amenities like water & electric hookup.
The old saying is “if you bought it, a truck brought it.” Even in the pandemic, the demand for trucking and transportation isn’t going anywhere. If you want to capitalize, you can buy a truck, find a driver, and start bidding on loads through brokers and other platforms.
Drop-shipping through Amazon and other sites really had its heyday a few years ago, but it’s still around. We’ll be honest, this is a strategy with high profit potential, but it’s complicated. If you want to get into the space, you should be technically inclined or have the patience to learn as you go.
18. Lead aggregation
Like drop-shipping, this one is a bit technical; It also comes in many forms. But, if you have a head for marketing, you can create web pages or buy ads to gather leads for various products and services, then sell those to partners. There are a million ways to do this and some are more effective (and profitable) than others. You just have to figure out what works.
19. Land lease
Compared to things like digital marketing or drop-shipping, this one is easy. All you do is buy land and lease it. Depending on the property, you might lease it for hunting, agriculture, or raising livestock. Or, you might even be able to buy the land under buildings in big markets like New York.
Every day there are tens of thousands of new websites created. Using this strategy, you can buy the rights to websites that you think people may want to own someday. Then, just pay the annual fees to keep your ownership WHILE trying to sell them. Most domains won’t sell at a profit, though, so be strategic and make sure you make enough money selling your winners to pay for your losers.
Raising livestock is usually a better option for people who live or own property in rural areas. But, you can always buy or lease land to raise cows and other animals. However, this isn’t without risk. If you prefer to avoid dealing with land or animals, you can also invest in futures contracts, but that’s even riskier.
22. Affiliate marketing
If you like writing or creating other content, you can start a blog or other publishing platform and produce content that also generates business for partners. Depending on the partner, you can get paid per click, per qualified lead, or a commission on sales.
23. Car rental
Hertz went broke in May 2020, but so what? If you have a spare car, you can rent it to people who want to drive for Uber or Lyft. If you live in a city where not everyone owns a car, you can even rent yours to people for everyday driving or quick day trips.
24. Selling dirt
Yes, you read that right; and no, it’s not a joke. If you want to make money from real estate without having to deal with tenants or animals, you can buy land and let engineering companies excavate on your parcel. Companies often pay for the right to take fill-dirt if it’s convenient to projects they’re working on. And, later, you may even be able to fill the holes with water and sell the land to a developer, or develop it yourself.
25. Make downloadables
Lots of people make money over and over again for things they made years ago. Using platforms like Etsy, you can lay out things like bullet journals or other craft designs and charge users a small fee for each download.
26. Publish a book
Writing a book is no small task, but, if you write one that sells, you could be cashing checks for years. And, while it used to be impossible to get publishing, technology has made it substantially easier to self-publish through Amazon Kindle and other platforms.
27. Sharing economy
Not all of us were good at sharing when we were kids. But, now we have a reason to. If you have tools or other items that other people in your area may not be able to own themselves, you can make extra money renting small household items for a day or a week while people complete their own projects.
If you have fun or interesting experiences—or just have unique perspectives to share with viewers—you can create videos and monetize them with ads. Just make sure your content is fun or engaging if you want to make any money.
A podcast is like a radio show that you can do from anywhere. You can livestream or not, depending on your preferences, interview people, or discuss other interesting topics to attract listeners. Like YouTube, you can also monetize this content with ads. But, you’ll need to make sure you keep putting out fresh content regularly if you don’t want to lose listeners.
30. Sell photos online
If you have photography skills, you can sell images through Shutterstock and other sites to make extra cash. Images can be of plants, trees, animals, cityscapes, or stock images for businesses.
31. Sell plasma
Selling plasma is similar to donating blood, but some clinics will actually pay you if you meet their health criteria. This option isn’t super lucrative, but it’s still possible to make a few hundred dollars per month if you donate regularly.
32. Paid drug trials
Drug tests are top-of-mind today, with the world eagerly awaiting advancements in vaccinations and testing. But, this is an option all the time. By participating in clinical trials, you can help pharmaceutical companies test their new medicines. These trials aren’t always easy to find and you have to be healthy in order to qualify, but participants can reportedly make hundreds or even thousands of dollars for some trials.
Passive income investing
In truth, there aren’t many ways to just start making money with little work. Most of the ways to make truly passive income require upfront investment in order to pay off. And, while that may sound like a cop out, it’s typical of passive income.
In order to make money, you typically either need to invest money or time, so many of these are ideas to make money using your resources other than time. The most common ways of generating passive income involve putting money to work for you, so you can avoid spending your time working in exchange for a paycheck.
But, that also means that you need money to invest and you need to invest carefully in order to be successful.
How to make passive income
To be perfectly honest, there is no such thing as truly passive income. Generating income ALWAYS requires work—you either work now; your work later; or, you use resources that you’ve already accumulated from work you’ve done already.
But, when it comes to making passive income, there are basically two options: invest in things that will produce money for you, or find jobs that don’t take much work and can pay off repeatedly.
Building passive income is one of the best ways to achieve financial independence. But, ultimately, no income is truly passive. At minimum, you’ll need to invest your time to put the pieces in place to keep collecting checks. From there, building passive income or using passive income to achieve financial freedom is just a matter of degrees, based on how much you want to work, how hard, how often, and how much money you need to make.