How to Generate Passive Income

Generating passive income isn’t always the easiest to start, but it’s a great way to help you build wealth. It’s important to note that most income isn’t passive income. This is because most income requires someone giving their time and effort to generate the income. So, what exactly is passive income and how can you generate passive income?

What Is Passive Income?

Before we get started on how to build a passive income stream, what is passive income? Passive income is income that requires little or no effort to earn, maintain and grow that income. Passive income examples include dividends from dividend stocks, interest from high yield savings account and dividends from REITs.

There are additional activities that sometimes are considered passive income but do require more time and effort. The amount you make driving for Uber depends on how many hours or how many trips you drive for Uber. Flipping items on eBay require some time to find the items, post and price the items and then ship the items once sold. Becoming a landlord takes time to identify the right property, get the right contacts, find a renter and then both maintain the house and the relationship with the renter.

There are other activities which require upfront work but can turn into passive income. A good example is blogging or creating your own e-book. It takes quite a bit of work up front but eventually you can turn it into passive income. What are ways you’ve found to generate passive income streams?

See Also: How to Start Investing

How to Create Passive Income With No Money

Many passive income streams require money to get started. You put your money in a high yield savings account for example and every month you’ll automatically earn interest. In order to invest, you need to have money. What if you want to create a passive income with no money today? Passive income ideas with little money include selling stuff you own that you don’t use or get a cash back or rewards credit card. If these aren’t options for you, you can still start a passive income stream. However, you’ll need to put in a bit more effort to get a little extra money to get started. Starting a side hustle is the best option here.

Sell Stuff You Own That You Don’t Use

Do you have household items, clothing or other stuff you don’t use lying around? Make additional cash by selling it on Poshmark, eBay, OfferUp or another site online. Will you make as much as you originally paid for it? Likely not if you paid full price. But, if you have no use for it anymore you might as well get some cash for it and use that cash to start a passive income stream.

Get A Cash Back or Rewards Credit Card

One very easy way to start a passive income stream is to get a cash back or rewards credit card. This doesn’t mean spending additional money. What it does mean is to generate dollars, or rewards points, from the money you are spending anyways. Putting every purchase on a credit card will also help track your expenses. Sometimes with cash it’s harder to remember where exactly you spent the money. This approach won’t put actual cash in your pocket. Instead, it’ll either help reduce your spending because you can now use points to buy things or it’ll help reduce your credit card bill with cash back. Instead of spending more money, save the money you would have spent.

Make More Money Than You Spend

It takes money to make money passively. The more money you have, the more money you can make through passive income streams. Luckily you don’t need a lot of money to start building a passive income stream. Whether you increase your income or cut your spending it doesn’t matter, but you need to start saving money to build a passive income stream. Even if you only have enough money to generate $1 of passive income, it’s something. It’ll slowly grow over time, and grow quicker as you save more money to put toward your passive investments.

There are two ways to get the money to start a passive income stream. You can start making more money or start spending less money. You can make more money through advancing your career or a side hustle and eventually through your passive investments.

The other way to get enough money to generate a passive income stream is to spend less money and be smart with your spending. Ultimately you need to do a combination of both but your top focus should be earning more money. Eventually you’ll reach a point where you can’t save any more money whereas with making money the sky is the limit. It is much easier to save money to invest when you have a higher salary.

Put Your Savings in a High Yield Savings Account

The easiest way to start building a passive income stream is to put your cash in a high yield savings account. Every dollar you save, whether for investing or for an emergency fund, should be generating additional income for you. Any money you have saved for an emergency fund or for investing later should be held in a high yield savings account. Most of the online only banks tend to have higher interest rates (such as Marcus by Goldman Sachs and Ally Bank). Right now the highest interest rates are around 1.7% APY (annual percent yield). This means if you put $100 in the account in 12 months you will have made $1.70 in interest. Not sure where to put your money? Nerd Wallet shares the top 10 best high yield savings accounts.

Look for Sign Up Bonuses at Banks

Sometimes banks run promotions where you can make $100 by signing up for a checking account or savings account! Usually there are conditions like a minimum deposit amount, setting up direct deposit or holding the money in the account for a set amount of time. Money Crasher’s has a list of 31 bonuses banks are running now, with bonuses up to $300!

Invest in Passive Investments

Once you have some money to invest, you can start investing in different types of passive investments. The least amount of effort required for building a passive income stream is to select an investment with a guaranteed return. However, those options with the lowest risk and lowest effort also tend to be the lowest yielding.

There are many different types of passive investments. Passive investment examples include Certificates of Deposit, Stocks, Dividend Stocks, Mutual Funds, ETFs, Crowdfunded REITs, Private Companies and more. Stay tuned for part 2 where I go into detail about the different types of passive investments!

If you’re ready to start generating passive income, check out the ultimate list of passive income ideas to get started.