10 Popular Passive Income Ideas

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If you’re striving to be financially independent, I’m sure you must have heard this: “The average millionaire has at least 5 or more income streams”

Put differently, if you’d want to either retire early, quit your 9-5 or heck just work for yourself, you first need to reach a point in life where you no longer rely on a single source of income.

Imagine a time in your life when the money you’ve invested works for you (even when you don’t) and keeps generating more income for you consistently?

YEAH! That is very much possible!

So, how do you get there?

One of the popular ways is through generating PASSIVE INCOME!

What Is Passive Income?

In the simplest terms, passive income is any income source that generates income without any active effort. In other words, passive income is income that requires very little to almost no time and effort once set up.

How To Generate Passive Income?

So, how do you make money without actively working to do so? There are plenty of options available today. All you need to do is to identify the 2-3 sources to begin with and work on building your wealth.

A piece of advice would be to NOT bite more than you can chew. Start slow, learn, and invest the time to set up your sources and later on, expand.

Look, making money is never easy and you will have to put in the time and effort required!

Even if passive income makes you money when you sleep, there is a lot of time, effort, and investment on your part during the early stages.

Passive income is synonymous to a farmer sowing the seeds and reaping the benefits later on. Also, generating passive income takes time and it is NOT a quick road to making millions.

Anyone telling you otherwise is not telling you the truth!

Below is a list of 10 passive income ideas that will help you get started. Choose the 2-3 ideas that you are comfortable to start with and later on you can tackle the others.

1) Certificate Of Deposits (CDs)

CDs is one of the popular passive income ideas, especially if you are looking for a safer option. With CDs, you cannot lose money, unless you withdraw before the end of the term.

When you invest in a CD, the bank promises to pay you an agreed upon interest rate for the specified time.

Remember, there might be penalties associated with early withdrawal from CDs, so make sure you are aware of the rules. Commercial banks generally issue CDs, and the best part is that the Federal Deposit Insurance Corporation (FDIC) insures them – generally up to US$250,000/individual.

The difference is that you can withdraw funds instantly from your savings account without any penalties compared to the savings account. You can earn a higher interest rate compared to the savings account.

Pros

• They are a safer investment option
• CDs from banks and credit unions that are federally insured are backed by the trust of the US government up to $250,000/individual
• They provide better returns than a savings account
• The interest rate and term are pre-defined and fixed. This leaves no room for ambiguity
  

Cons

• Your funds are locked for the specified term
• Early withdrawal from the CD will most likely result in penalties
• The return is relatively lower compared to stocks
  

2) Mutual Funds

Mutual funds are also called “pooled investments.” As the name suggests, mutual funds take money from the investors and allocate into stocks, bonds, and alternative (other) investments. The fund’s prospectus will call out the investment vehicles you can invest.

Investors who are risk-averse, prefer mutual funds as one of the top-rated investments. It will spread out your dollar across different types of investments, and this allows the fund to diversify instantly.

Investing with mutual funds is a little different from stocks. It is very difficult to invest in a mutual fund today and make double-digit returns the next month.

When mutual funds increase in value, the profit increases and the investors receive the distribution.

Investors can re-invest this profit and in turn, earn a higher return on the re-investment. The key to making money with mutual funds is to invest consistently over a long period of time.

Invest in funds that have proven track record and those with better returns (above average vs. competitors)

To invest in a mutual fund, you have couple options:

1. You can buy the funds directly from the company that created them (like Fidelity, Vanguard, etc.)
2. You can buy it from your brokerage firms that offer a wide range of buying options.
   

According to US News, here are the best mutual funds to invest.

Pros

• Your investment is diversified across numerous stocks
• Low-risk investment – safer option than investing in individual stocks
• Easy to buy and sell
  

Cons

• You do not have control over the capital gains payouts
• Trade execution is not the smoothest
• Higher fees that can reduce your overall return
  

3) Annuities

According to Investopedia, “an annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future”

This type of passive income idea offers a continuous stream of income typically during retirement. Also, the accrual of funds is tax-deferred. Similar to 401(K) you can withdraw after age 59 1/2 in the United States.

There are 3 types of annuities:

• Fixed
• Variable
• Indexed

Fixed annuities will pay you a guaranteed return. The downside of this is the returns are modest.

Variable annuities offer the most returns in an annuity but it comes with a higher risk.

Indexed annuities offer returns somewhere in between fixed and variable annuities. The payments are tied to the performance of an index, such as the S&P 500.

Pros

• You can receive regular monthly payments
• Your contributions grow tax-deferred
• If you are looking for a guaranteed return, fixed annuities offer that option
  

Cons

• The returns are far lower than if you were to invest in stocks
• There are high fees associated with managing annuities and given the modest return on annuities, your return on investment is not significant
  

4) Invest In Stocks

A stock is also known as an “equity” or “a share” in the financial market. It is a type of security that gives the buyer the opportunity to own a proportion in the issuing company. In exchange, the issuing company gets money based on the number of stocks purchased.

Stocks are one of the most commonly traded securities in the financial market. They are very popular both with banks and retail investors (like you and me) because of the ease of transacting. Stocks can be traded on exchanges like DOW, NASDAQ and NYSE and both the buying and selling happens online.

As they say, investing is both an art and a science. It is right in the case of stocks individually. People buy and sell shares based on the company’s health and performance (fundamental analysis) and(or) by looking at charts, historical trends and price movements (technical analysis).

Investing in stocks yields higher returns in lesser time than most other forms of investing (depending on a lot of factors though). For this reason, investing in stocks is one of the most popular types of investments for beginners across the globe.

So, what do you need to get set up for trading stocks?

• Clearly defined risk appetite from above – you can use Low, Medium and High to start with
• A brokerage account
• Funds set aside (no matter how small the amount) apart from your savings and emergency fund

For brokerage accounts, look at Fidelity, TD Ameritrade, Etrade, Charles Schwab to set up your account. Your focus should be to have a brokerage account that not only allows you to trade cheaper but also provides learning tools, webinars, and easy to use trading platforms.

I use Fidelity, TD Ameritrade, and Etrade.

I highly recommend you choose at least a couple of brokerages accounts. This will help you understand the pros and cons of each, and you can ultimately make one of them your primary one.

Stocks can be classified into 3 categories:
a) Growth Stocks
b) Value Stocks
c) Income Stocks

What Are Growth Stocks?

Growth stocks are stocks of those companies that have significant potential for future growth. The pace at which these companies grow is faster than the other companies in the market.

From a revenue standpoint, growth companies attribute their current revenue toward future expansion. They also focus on reinvesting their profits back into their business to promote innovation and advancement.

Examples of Growth stocks:

–Alphabet (Google) – GOOGL
–Facebook – FB
–Netflix – NFLX

What Are Value Stocks?

Stocks that are undervalued and have more value than currently perceived are called undervalued stock. This means that the value stock is currently trading at a price lower than where it should be based on the company’s financial position.

Also, there could be a one-off operational or business related issue with the company that led to a temporary drop in stock price.

Value stock carry less risk vs. Growth stocks and investors who do their homework realized the upside and buy the stock.

Examples of Value stocks:
–3M – MMM
–Aflac – AFL
–Bank of America – BAC

What Are Income Stocks?

As the name implies, income stocks are those that provide steady and regular dividends (income.) Most of the income stocks have low volatility vs. the overall market and they offer higher dividend yield (return.)

If you are a conservative investor, income stock could be a good addition to your portfolio. Income stocks are less riskier vs. growth and value stocks.

Examples of Income stocks:
–BP – BP
–Citigroup – C
–Walmart – WMT

Pros

• The return on a stock is higher than any of the above options mentioned under “Safe investment.”
• You can quickly diversify your investment by investing in as many numbers of companies. This will spread your risk across different companies
• Most of the stocks are traded on an exchange and hence the liquidity is very high; meaning, you can buy and sell quickly
• Some companies also offer dividends (for, e.g., $1 for every share you own). Let’s say you own 100 shares of a company; you tend to earn an additional $100 just for owning the stock
  

Cons

• They are riskier than any of the safe investment options discussed above
• The stock price can be very volatile especially during bad market days and you could potentially lose all your investment if the company goes bankrupt
• You need to spend some time researching and analyzing the company before you buy stocks
  

Related Article: How To Start Investing In Stocks

5) REIT (Real Estate Investment Trust)

According to Investopedia, REIT is a company that owns, operates, or finances income-generating real estate. It is similar to a mutual fund and it pools in capital from investors. This is one of the reasons why REITs pay decent dividends and is one of the popular passive income ideas.

One of the key aspects of REITs is that investors can invest in commercial real estate. This was made possible after an amendment from US Congress in 1960.

An REIT portfolio will allows you to invest in apartments, condominiums, office facility, hotels, restaurants and even infrastructure in the form of office buildings, storages, malls, retails outlets, etc.

From a trading standpoint, many REITs are publicly traded on the stock exchange and it is considered a liquid investment (meaning, it is easy to buy and sell)

Pros

• An excellent form of portfolio diversification
• Liquid asset
• Offers stable cash flows in the form of dividends
• Returns are risk-adjusted
• They perform well when real estate markets are doing good
  

Cons

• REITs suffer when real estate markets suffer
• The growth potential is not as high as stocks
• Dividends are taxed as regular income
• Higher management fees can eat into the returns
  

6) Refinancing Your Mortgage

Refinancing your mortgage is one of the best options to save money out there in my view. The amount of money you save (passive income to you indirectly) in the long term is significant.

You should always be on the lookout for better rates to refinance your mortgage.

When the interest rates are lower, refinancing is generally at its peak. This leads to competition among mortgage lenders and will result in better options for homeowners.

You can leverage this market demand and supply and get a better refinance rate and save significant $$ monthly.

Pros

• You receive lower interest rates on your mortgage
• The rates are locked in for approximately 60 during the process of refinancing
• The rate is fixed for the mortgage term
  

Cons

• There are fees associated with refinancing
• You might have to pay closing costs (though you can negotiate to pay $0 at closing)
  

7) Invest As An Angel Investor

One of the popular passive income ideas is to invest in small businesses as an angel investor. The difference between an angel investor and other types of investor is that you can invest and wait for the investment to grow.

You are not involved in the day to day functioning of the company as an investor. Although, you do have a say in how the business is run. This makes angel investing a prime candidate for passive income.

Angel investors invest in start-ups either to help them get started or expand. Angel investing is a form of equity-financing: you provide cash to the start-up in exchange for an equity percentage of the company.

Pros

• If the start-up is successful, returns are huge
• Your money works for you to generate higher returns
• You have a say in how a business is run
  

Cons

• The risk of losing your investment is higher
• Most of the start-ups and early-stage companies don’t make it past their 3rd year
• It’s a long term passive income strategy
  

8) Rent Extra Space

From basements to garages to extra storage spaces – another popular passive income idea is to rent your space!

The storage industry is worth $38 billion – YES, thats a B with a billion!

So, why not use the demand in your favor? If you have additional storage space you don’t utilize, just rent it out and make money! Also, did you know that almost 1 in 13 Americans pay for extra storage?

So, needless to say, you can make a decent amount of passive-income by renting out your space.

Pros

• You are offering convenience to your customers
• It offers flexibility from business hours standpoint – you can set your own hours
• Help out local businesses, shops and even neighborhoods
  

Cons

• Your location will dictate the amount of business and occupancy
• Competition is high since there are a lot of options
• Due to the higher supply, price competition is fierce
  

9) Start A Delivery Business

Another popular passive income idea is to start a delivery business. If you are planning for a steady passive income stream, this is a great option.

Why?

Because now more than ever, people are pressed on time and value convenience!

Both Amazon & Walmart are e-commerce giants going head to head in expanding their delivery services and are wooing customers with 1-day delivery. So, in order to ensure 1-day deliveries, they need a lot of local drivers that they can rely on to deliver packages the next day. You can take advantage of this business expansion and work flexible hours over the weekend and make quick extra cash (pays $15-$20/hour on average).

Alternatively, you can tie up with both and deliver packages in your city/town or even expand to neighboring cities/towns.

Also, you can expand your services to deliver pizza, groceries, etc.

Pros

• This service addresses your customers NEED – make life more convenient
• You can build your business network quickly
• After the initial setup phase, most of your business will be through referral/word of mouth
  

Cons

• Initial setup cost
• Seasonality issues
  

10) Cashback Rewards Cards

Another popular passive income idea is to earn rewards and cash back on your credit cards. If you use credit cards for purchases, make sure you use a cash back rewards credit card.

Then, you can redeem those rewards for a cash back and earn passive income. The higher your credit card usage, the higher the passive income you’ll make through cash back.

If you have a cash back rewards card, you can earn cash back on literally every purchase you make. You can earn cash back on gas, groceries, shopping, and travel. Typically, the cards offer anywhere from 1% – 3% cash back for every purchase you make through the card.

However, I would caution against extensive use of credit cards if you can’t afford to pay the monthly balance in full.

Related Article: How To Use Credit Card Wisely

Pros

• You get paid to use your credit card
• The cash back can be used for other expenses or could be used as investments
  

Cons

• If your finances don’t allow you to pay the monthly credit card balance in full, don’t use this option
• Cash back rewards cards come with a higher interest rate
  

Final Thoughts

If you want to build multiple income streams, passive income is crucial to that strategy. Earning passive income can be really handy especially if you lose your job or your business is not successful. So, it is imperative you start early.

In addition, setting up your passive income stream takes time. Also, you need to weigh the pros and cons of the options you choose. Remember, passive income is all about deploying your money to work for you and generate consistent returns.

Another key aspect of success with passive income lies with your monthly budget. How? If you are able to save money, you can reallocate those savings and invest in different options that help generate passive income.

So, plan on having a clear plan about the source of cash/money you’ll use to generate future passive income.

What are your thoughts on passive income ideas? What process do you follow? Please share your experience, thoughts, tips, and ask away any questions in the comment section below!