‘Earn money while you sleep’ and ‘make your money work for you’ are just two of the famous phrases linked to passive income. But how does it work?
Read on to find out more about how to make passive income streams, types of passive income, and the best passive income ideas.
What is passive income?
When we earn money through a salaried job, this is known as ‘active income’. On the other hand, ‘passive income’ is a way of earning money without having to work for it every day.
Most passive income streams require some work or investment up front, but if you’re successful you can keep earning an unlimited amount of money over time.
Rental property income, royalties, affiliate marketing, and investments are some of the most popular passive income streams.
Earning passive income is appealing as it’s less labour intensive and the earning opportunity is unlimited. However, it’s likely to take a while to earn enough money to live off and the market is increasingly competitive.
How to make passive income
If you want to earn smart passive income, here are some of the first things you’ll need to do:
research your options – work out which passive income stream best suits your skills and circumstances
invest the necessary time and money to get started – you’ll usually need to invest startup cash or time before you can start earning from passive income sources
don’t expect immediate results – most passive income ideas take time to start making money, so you’ll need to be patient
keep your day job – although it may be tempting to quit your job, it’s best to keep earning active income while setting up your passive income streams
diversify your income streams – if you have the time and/or money, it could be worthwhile to work on more than one passive income stream so you can still earn if one idea doesn’t work
Types of passive income
There are two main types of passive income stream: low investment and high investment.
Low investment income streams will need less money to get going and are likely to be lower risk. However, your earning potential will be limited and it could take longer to start making money.
Blogging and affiliate marketing are two of the most common types of low investment passive income streams.
In contrast, high investment income streams will need more money at the start. The earning potential is higher, but there’s also a greater risk.
The most rewarding high investment passive income streams are buy-to-let property and dividend-paying stocks.
How much can I earn from passive income?
It depends what type of income stream you choose. It could take longer to start earning money from a low investment option, such as blogging, and your income is likely to be lower.
You can earn more from a high investment income stream such as property investment, but you’ll need more capital to get started and the risk is higher.
The key thing to remember is that unlike active income, there’s no limit to how much you can earn from passive income. That’s why people find it so appealing.
Some people manage to make a living from passive income, but it’s useful in the early stages to keep active income from a regular job as there’s no guarantee you’ll earn enough money to live off.
Passive income ideas
It doesn’t matter how much you have to spend or where your expertise lies, there are plenty of options for making money through passive income.
Here’s an overview of some of the best ways to make passive income:
It’s a high investment strategy, but buying a property and renting it out is one of the most reliable and profitable ways to make passive investment income.
When you enter the world of property investment, you’ll need to think about things like rental yield (your return on investment), compliance (such as meeting electrical safety rules), and finding the right tenants.
Unless you pay for a letting agent to manage the property, it’s likely to be more hands-on than some passive income streams.
Read our useful guides to help you get started:
Making money from YouTube
A very popular way of making passive income online is to publish videos on YouTube. Once your videos are uploaded, you can generate revenue for years to come.
The most common way to monetise a YouTube channel is to include ads in your content. However, you can only start doing this once you’ve got 1,000 subscribers and more than 4,000 hours of your content has been viewed in the last 12 months.
As well as ads, you can make passive income through your YouTube channel by promoting other brands’ products (known as affiliate marketing), selling merchandise, or charging a membership fee to subscribers.
Read our guide on how to make money on YouTube to help you get started.
Sell stock photography
If you’re a keen photographer, you can make passive income by selling your photos to stock image sites such as Shutterstock and Depositphotos.
All you need to do is build up your portfolio and then sell your work to the platforms.
Depending on which platforms you work with, you could earn either a one-off fee or a commission percentage each time the image is licensed by a customer.
Once your photos are available for people to licence, it becomes a great way to earn passive income as the platform handles all the admin and communication.
Become an influencer
If you become an influencer, there are lots of ways to make passive income. However, you’ll need to create a personal brand and lots of content, which can be labour intensive
Here are some of the ways you can make passive income as an influencer:
Invest in stocks and shares
Much like investing in property, investing in stocks and shares is a great way to earn regular passive income.
It’s usually a high investment income stream as the more you put in, the higher your returns are likely to be.
However, you’ll need to do your research and be aware of the risks that come with investing in other companies.
To make your investment completely passive, you could pay a fund manager to look after your portfolio.
Starting your own blog takes time and effort, but once it’s up and running with a good level of traffic you can start making passive income.
Bloggers make passive income through Google Adsense, which generates revenue by placing ads on your site.
You can also use your blog to set up affiliate marketing partnerships and sell backlinks to other companies.
Another way to make passive income from blogging is to buy existing blogs. By improving and updating the content, you could increase the passive revenue income stream significantly.
Sell your own products
Selling products online has become a popular side hustle in recent years.
Whether you start your own clothing brand or launch an arts and craft business, it’s an effective way to make passive income after you’ve put in the initial work.
As well as the time and effort it takes to make the products, you may need some startup cash to buy materials and equipment.
Whether you decide to sell on Etsy, Amazon, or eBay, our guide to starting an online shop can give you an overview on listing products, returns policies, and delivery.
It’s not as common, but some people are able to make a substantial passive income from royalties.
For example, if you write a book or release some music, you can earn money if a publisher wants to distribute and sell your work.
It’s important to remember that getting a book published or music released is difficult – and that’s on top of the time and effort you’ve put into creating it in the first place. However, if you’re lucky enough to start receiving royalties for your work, you can generate passive income for years without having to do anything.
Create an online course
If you’re an expert in a specific field, such as media or recruitment, you can create an online course.
You can sell the course through your own website if you have lots of people visiting your site or if you’ve built a big following on social media.
On the other hand, you could use a platform like Udemy.com to sell your course and benefit from their established network of over eight million users.
To create a successful online course, you’ll need video content, checklists, tests, and lectures. You can sell different packages for different prices.
Once the course is available, you can earn passive income each time someone purchases it. The more regularly you update and expand your course, the more income you could generate.
Do I need insurance if I make money through passive income?
Having the right insurance can cover the risks associated with your work, such as damage to your equipment, or your products causing harm to the public.
Read our guide to business insurance to find out what type of cover you might need and how it can protect you.
Or if you’re thinking about renting out property, you’ll need specialist landlord insurance to protect your investment.
Do I have to pay tax on passive income?
Once you start generating passive income, you can earn up to £1,000 tax-free if you already have a job. This means you’ll need to pay tax on anything you earn above £1,000.
Read our guides on second job tax if you have a side hustle and going self-employed for further guidance.
If you don’t have another job, you can earn up to £12,570 before you start paying tax (based on tax year 2021/22).
You’ll then pay:
20 per cent on anything between £12,571 and £50,270
40 per cent on anything between £50,271 and £150,000
45 per cent on anything over £150,000
Read our comprehensive guide to self-employed income tax for a full overview.
What are your top tips for earning passive income? Let us know in the comments below.
Photograph 1: TheVisualsYouNeed/stock.adobe.com
Photograph 2: Stocked House Studio/stock.adobe.com
Photograph 3: Rido/stock.adobe.com