Create passive income: Top 10 ideas to build wealth | Facet (2024)

Key takeaways

1. Passive income is income or cash flow that requires little or no ongoing effort to maintain
2. Creating one, or several, passive income streams requires proactive planning, proper saving and investing, and sometimes additional education to learn the necessary skills
3. Although passive income may require some upfront work, the programs once started require less work than a full-time job
4. There are many passive income options, including investments, real estate, online content creation and teaching
5. Passive income strategies are completely under your control - you decide how much time and effort you’re willing to spend

Income you don’t have to work for on an ongoing basis sounds like a dream come true, and for many Americans, it is. The Census Bureau estimates that 20% of Americans earn passive income.

A passive income stream can help cover daily expenses or even build wealth. It can be a great way to increase your earnings while putting you in control of where you spend your time and energy. Done right, you’ll have more free time, greater work and location flexibility, potential tax benefits, and an ongoing income stream that requires relatively minimal investment to put you on the path to financial independence.

Here are ten of the best ways to make passive income.

What is passive income?

Passive income is income or cash flow that requires little or no ongoing effort to maintain. The goal for many is to find a way to “make money while you sleep” or to at least make money without having to be actively engaged in day-to-day work. This is in contrast to active income, which most people earn working for someone else as either contractors or employees.

The reality of passive income is that it is generally a progressive endeavor – it’s not something you achieve overnight but rather over time. Creating one or several passive income streams requires proactive planning, proper saving and investing, and in some cases, additional education to learn the necessary skills.

Top 10 passive income ideas to help you build wealth

Here are 10 ways that could help you earn passive income with much less effort than a full-time job.

Earn money through your savings

1. High-yield savings and CDs

For more conservative investors, putting your money into a high-yield savings account or certificates of deposit (CDs) at a bank can create a steady stream of income with almost no effort.

• Pros: They’re virtually risk-free up to a certain amount because of FDIC insurance, easily accessible, and normally take only a few minutes to set up.
• Cons: During low interest rate environments, this strategy is unlikely to provide the income you want or need.

2. Peer-to-peer lending

Peer-to-peer (P2P) lending is lending money directly to another person, essentially becoming a private bank for a borrower. As with a conventional loan, the borrower agrees to pay you interest at a predetermined rate and to repay the loan at some time in the future. You can create the loan through a P2P lending site, such as Prosper or LendingClub.

• Pros: Loans will yield more than a bank savings account or CD, and establishing an account and finding opportunities is easy.
• Cons: Loans are not insured, so there is a risk that the lender may fail to repay all or some of the loan.

Generate passive income through your investments

3. Dividend stocks

Perhaps the best passive income investment is a dividend stock. A dividend is a cash distribution from a company that you invest in by buying its stock. These companies pay a share of their earnings to their shareholders. You can create passive income through dividends by either investing in individual stocks of companies that pay dividends, or you can invest in a more diversified portfolio using index mutual funds or exchange-traded funds (ETFs).

• Pros: Typically, dividend-paying stocks provide more income than the broader market or growth-oriented stocks - which tend to pay little or no dividend.
• Cons: A dividend strategy concentrates your investments in one type of stock, missing the benefits of broader diversification - which include managing risk and potentially missing out on growth opportunities.

4. Investing in bonds

Another one of the best passive income investments is a bond. Bonds, also called fixed income investments, are debt issued by companies or government agencies. They use the debt to fund their operations and in return make cash payments to bondholders. There are many options including purchasing individual bonds, or investing more broadly in a mutual fund or ETF. Investors in higher income tax brackets may consider investing in tax-free municipal bonds.

• Pros: A bond strategy can be customized to meet your income needs, desire for risk, tax sensitivity and level of diversification. They will generally provide greater levels of income than high-yield savings accounts and CDs.
• Cons: Bonds tend to follow prevailing interest rates, so current yields are low unless investors take on more risk by buying high yield or “junk” bonds.

Passive income through real estate

5. Rent out your home

Through sites such as AirBnB and VRBO, you can rent out an extra room in your house for extra cash. By setting up an account on their websites, people can sign up to rent your room for one, or several nights.

• Pros: You control rates and available dates, and setup is easy and usually free.
• Cons: Managing the cleaning and maintenance for the property is a lot of work and requires time and money. Paying a third party to manage the property can be costly.

6. Invest in rental property

Rental properties can include condos, townhomes, beach houses, multi-tenant properties and other residences, which can be rented short or long-term.

• Pros: Rental properties can generate healthy rental income and provide many tax benefits compared to other forms of income.
• Cons: Managing rental properties is not a hands-off project. You need to be mindful of the all-in costs and time for repairs and maintenance, and understand how to handle disputes with your renters. To lighten the workload and make it truly passive income, you’ll need to pay a third-party property manager to handle ongoing issues.

7. Invest in Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are similar to mutual funds, but instead of a mutual fund that invests in many stocks or bonds, REITs own multiple properties. REITs invest in different types of properties (apartments, commercial buildings, storage facilities). You receive income payments based upon the cash flow generated by the REIT’s operations.

• Pros: REITs offer a way to diversify your real estate investments to a lower overall risk relative to investing in one rental property. Publicly traded REITs have low investment minimums and don’t require your active involvement in the day-to-day management of the properties.
• Cons: REITs have management teams and can carry significant operating costs which will eat into potential income. As with all investments, you’ll need to research which REITs are right for your strategy, understand the risks, and maintain proper diversification.

Create income streams through content creation

8. Affiliate marketing

This is one of the more popular passive income business strategies in the age of social media and influencers. Companies pay content creators (bloggers, influencers) to market their products or services and creators are paid when their followers click through a link and make a purchase.

• Pros: Because companies pay content creators (bloggers, influencers) to market their products or services and creators are paid when their followers click through a link and make a purchase, the risk is typically low.
• Cons: Requires an upfront and ongoing investment in time to create continuous and relevant content.

9. Sponsorships

A company will pay you to market their products or services and payment isn’t based on purchases. Instead, the company is paying you for advertising and “air time” on your radio show, podcast, or other platform.

• Pros: Sponsorships are generally paid upfront and you can handpick the sponsors you want to work with. As your audience grows so will the number of potential sponsors.
• Cons: You must do ongoing work to produce content and grow your audience in order to keep your advertising clients.

10. Online classes

In an increasingly digital world, anyone can create live or recorded classes using an online platform such as Udemy, Teachable, LearnWorlds, and others, or even on their own website. People can sign up for individual classes or entire courses and you’ll get paid when they do. Recorded classes can be a great way to create recurring income without additional work.

• Pros: You can leverage the knowledge and skills you’ve already gained to generate income. Teaching can be emotionally rewarding and as you gain more students you can earn additional income from those students as you build more content
• Cons: You have to invest time and money to create your course, and you’ll have to create additional courses to keep your base engaged and to attract more students.

How to choose a passive income strategy

Creating a truly passive income strategy takes time, proactive planning, an appropriate savings and investment strategy, and a clear objective of what you are trying to achieve. Making the right decision is a balance between your goals, where you are in your personal, professional, and financial life, the amount of time you can commit, and the level of risk you can take.

A good starting point to building a strategy is to ask yourself these questions.

• Do you have expertise in a given area?
• Are you willing and able to make the upfront investment in time, energy, or money?
• How involved do you want to be in building and running your income streams?
• Do you want one passive income stream or multiple?
• How does your passive income strategy align with your broader financial plan?
• What trade-offs will be necessary to start investing in passive income strategies today?

Almost half of all Americans depend on a side hustle for extra income. A passive income strategy can offer flexibility, control, another income stream, extra cash in retirement or even a replacement for a full-time job.

To learn how a CFP® Professional at Facet can help you determine if a passive income strategy makes sense for you and how an ongoing financial plan can help you achieve financial independence, get in touchtoday.