Passive Income: What It Is and How to Make It - NerdWallet (2024)

What is passive income?

Passive income is a money stream that you can generate with minimal continuous effort or engagement.

Unlike active income, which you earn as you work, you make passive income after some upfront money or effort — or, more often, both. The idea is that eventually, you’ll have a relatively steady stream of funds without the need for much ongoing work.

Passive income is sometimes confused with the term “side hustle,” which is money earned on the side of a full-time role. However, the terms aren’t synonymous: many side hustles, like gig work, require active engagement, whereas the goal with passive income is to continue increasing your net worth while eventually working less.

The amount of money you can make with passive income runs the gamut. Depending on what kinds of income streams you develop, you could earn anywhere from a little extra cash flow to enough for retirement.

Benefits of passive income

Earning extra money with little ongoing effort is possible, as long as you can afford the initial investment of money or time required to set up a passive income stream. It may be hard to land steady full-time work in an uncertain economy. Even if you have a job you enjoy, preparing for unexpected circ*mstances that can interrupt your temporary or permanent employment, is an important money management skill. That’s why it’s smart to generate several other sources of income, so if you lose one, you can still maintain financial independence.

Passive income ideas in Canada

Here are six examples of ways to earn passive income in Canada.

Choose passive income investments

Earning passive income from investments is likely one of the most popular and easy ways to make extra cash, though you’ll need some funds before you start investing.

Dividend stocks, which pay company earnings to investors regularly (often quarterly) are an especially good option, as investors make money without needing to sell the stock. You can reinvest your dividends, which gives you more cash-generating potential, or take the money as cash.

If you don’t feel comfortable picking and choosing individual stocks on your own, you can opt for index funds or exchange-traded funds that hold dividend stocks. Since these types of investments carry a selection of stocks, they tend to balance portfolio risk.

You can choose a robo-investing company that will create an investment portfolio for you based on your needs or an even more hands-off approach suitable for investing beginners.

If you’re planning on saving the passive income you earn for a long-term goal, park those dividend investments in the right place. Consider holding them within a tax-free savings account (TFSA) or registered retirement savings plan (RRSP) so your earnings grow tax-free.

Try peer-to-peer lending

If you want a unique way to invest extra cash, consider peer-to-peer lending. Professional lending platforms, like Lending Loop, help individual investors loan money to vetted Canadian businesses in exchange for monthly interest payments. You’ll need to have some money available to start this passive income stream and be comfortable with a certain amount of risk.

Open a high-interest savings account

For reliable, slow and steady (if small) returns, you won’t do any better than a high-interest savings account, which will let your money sit and grow for years. However, you’ll notice that even the top rates from online-only banks may not approach inflation rates, making this a low-effort but low-return passive income option.

Rent out real estate

Possibly the most traditional and well-known form of passive income, owning a rental property can be lucrative to earn extra cash. You might choose to rent a secondary property to long-term tenants or rent a room in your home to overnight visitors through an online service.

Unfortunately, this option can be challenging as buying a property usually requires a large upfront payment and a lot of legwork. Then you’ll have ongoing expenses like property taxes, maintenance, insurance, and potentially a local business license. But if you’re ready for the realities of being a landlord, renting out real estate can be a great way to earn passive income.

Become a blogger

Making money online is one of the best ways to generate extra funds. If you enjoy writing about an area of expertise (such as personal finance or travel), try to build up an audience. Eventually, you can make money by displaying ads or sharing affiliate marketing links. Once you become an authority in a given area, you could even use your blog to promote your services, like courses, e-books, speaking engagements, freelancing, and more.

However, while it’s often touted as passive income, starting a blog and attracting readers requires a great deal of hard work both at the outset and as you continue to create new content.

Start an e-commerce site

Popular e-commerce platforms like Shopify make it easy to start a small business where you can sell your products or services. If you have a unique product or service to sell, you can open an online store. You may even want to consider dropshipping, which is when you sell a product but rely on a supplier to store inventory, process your orders, and ship items.

If you don’t want to manage an e-commerce site on your own, you can sell handcrafted creations through an online store like Etsy. Again, this option technically falls into the category of passive income, but, since it requires you to start a small business, it still requires a fair amount of work.