Imagine being able to sit back, enjoy your life, and not have to worry as money came rolling into your checking account every month. That's the dream, and it's what many people think about when they hear the term "passive income." But is that really possible? And if so, is it attainable?
Here's what you should know.
What is passive income?
Passive income is money that's earned without having to do active work. By this definition, passive income is limited to earnings like dividends and interest. Although you don't have to do anything to boost your personal finances in this way, you do have to work to save for the initial investment so you can start making this type of income.
Often, however, the definition of passive income is stretched to include options that do require work upfront, and then can be turned into income streams. For example, if you were to write a book, that would require a lot of work before you'd ever see a dime.
But once it's published, you have the opportunity to see sales, even if you aren't necessarily actively working on selling the book. (Usually, of course, you do need to market options like this, but this is simply for illustrative purposes.) Ultimately, however you go about it, there is some form of work required to earn "passive" income.
Although it might seem like a long shot, 20% of Americans currently earn at least some passive income via dividends, interest, or rental properties, according to a Chamber of Commerce study. And the median passive income earnings is $4,200 per year.
Passive income opportunities
There are many ways to earn passive income -- if you're willing to use that stretched definition and do the groundwork. Here are a few options you might want to consider.
Dividends
Some companies will pay out dividends regularly to shareholders. So the more you own, the more you can earn. The historical dividend yield for these stocks is 2.90%, though that is by no means a guarantee of a minimum return.
CDs
Certificates of deposit provide a guaranteed rate of return in exchange for depositing a sum of cash in that account for months or even years. After that time, you'd get the original investment plus the interest. Just be sure you can afford to leave that cash alone for the term, as withdrawing it ahead of schedule often means paying a penalty.
Real estate
If you're willing and able to purchase a rental property and pay a property manager to deal with the day-to-day operations, that can result in a significant form of passive income. Of course, this requires a large upfront investment and there is risk if your tenant isn't able to pay rent or you can't find a renter for weeks or months.
Online courses
Those who have a lot of expertise in a given field and have a knack for teaching that information should consider creating an online course. This would usually involve planning and filming lessons, creating quizzes and tests, and creating supplementary materials to support students.
The key here is to make sure that the information you're providing isn't all publicly available for free. Getting feedback from others in the field before bringing a course live is the best practice here.
Digital products
If you have an idea (and the expertise) to create a digital product that could provide real value, you may be able to find a platform that will allow you to sell that product to a pool of key buyers. This can be anything from a downloadable piece of art to a specialized spreadsheet to help run a business. The limit is truly a matter of your imagination, capabilities, and demand. However, you may have to be willing to invest time and money into marketing those products.
Passive income isn't always as passive as it might sound. But if you're willing to do the work ahead of time -- by saving money or creating a product -- you can set yourself up to boost your income with relatively little effort.
