At first glance, many of the most popular ways to earn a passive income seem very different from one another. After all, what does owning a rental property have in common with writing an e-book or investing in the stock market? However, if you take a step back, you’ll see that almost all forms of passive income tend to fall into one of four main categories.
If you’re interested in creating a passive income stream of your own, then learning more about these categories is a helpful first step toward developing a passive income strategy that works for you. Once you have a better understanding of the main passive income categories, it’ll be easier to judge whether or not certain passive income streams are a good fit with your personal situation. Breaking down passive income by category also helps to show that just because one way to earn passive income may not be right for you, it doesn’t mean that you have to abandon the idea of earning passive income altogether.
The four main passive income categories you need to know about are:
Buying cash-flowing assets
In the world of passive income, you’ll often hear the phrase “It takes money to make money.” While this isn’t true of all passive income streams, it is for this category. If you already have money to invest, then buying cash-flowing assets is one of the most popular ways to earn passive income because it tends to be less time intensive and can potentially offer greater returns than other options.
Some examples of earning passive income by buying cash-flowing assets include dividend investing, which involves purchasing stocks that could pay out regular income in the form of dividends; and real estate investing, which can take many different forms such as participating in a real estate investment trust, or buying a property that you then rent out to tenants.
Of course, one of the main reasons why many people want to earn passive income in the first place is that they don’t already have the kind of capital needed to buy cash-flowing assets. For people in this situation, building assets is the typical way to get started with passive income. This category involves using your skills, expertise, and creativity to build something of value that can then generate income.
A few examples of building assets that earn passive income include creating an online product such as an e-book or a study guide, writing (and monetizing) a blog, or starting a podcast or a YouTube video series. As you can see, these passive income streams take much more time and effort to create and manage than the “buy cash-flowing assets” option. But if they are set up well, they can generate relatively hands-off returns for years. Furthermore, while there may be some upfront costs involved, many passive income streams in this category can be launched with little or no initial financial investment.
If you don’t have money to invest in cash-flowing assets, and you don’t have the time or desire to build assets from scratch, it doesn’t mean that passive income is completely out of your reach. This category is all about finding creative ways to generate passive income through things that you already own or control. Fortunately, today’s technology has made this easier than ever: there are now plenty of websites, apps, and other platforms dedicated to helping you find people (or “customers”) interested in assets you might have to offer.
Perhaps the best-known way to earn passive income by sharing assets is to rent out a room or other extra space in your house—a strategy that the online platform Airbnb has made extremely popular and accessible—but the same principle can apply to just about anything of value that you own or control. For example, if you’re a handy homeowner with a lot of power tools, you could rent those tools out to interested friends and neighbors when you’re not using them. If you own a car, you could allow local businesses to display an ad or decal on the side in exchange for a fee. Once you start looking around, it might surprise you to find just how many potentially value-earning assets there already are in your life.
“Reverse” passive income
This passive income category is based on the tried-and-true phrase “A penny saved is a penny earned.” It may be a cliché, but this phrase reveals an important fourth way to generate passive income: by reducing regular monthly expenses, in particular by paying off debt.
While it might seem strange to think that by paying out money, you could be earning passive income, cutting your debt can be a far more effective way to quickly boost your overall income than many of the previously mentioned passive income options. If you’re carrying a significant amount of debt—especially credit card and other high interest debt—the best place to start your passive income journey is often by reducing or eliminating that expense.