What Is Passive Income? Work Smarter Not Harder (2024)

Ready for a truth most people won’t tell you? No matter the state of the economy, current politics or world events, you control the amount of money you make.

Current job not creating enough income? It’s time to get serious about passive income.

Tony says, “If you want to change your life you have to raise your standards.” This applies to relationships, career and finances alike. One way to raise your financial standards is with passive income ideas, which allow you to add to your income with minimal effort. You can learn how to make passive income and take charge of your financial future even in uncertain times. You can rise above and thrive – by creating a new you for the new world.

What is a passive income?

Passive income is money you earn without having to make a daily effort. Don’t be fooled by the word “passive” – most passive income ideas involve work, especially up front. Passive income isn’t about getting something for nothing. It’s about having a second, reliable source of income to help you create more financial freedom. While you’ll be doing more than kicking back and letting the cash roll in, once you’re set up, your passive income strategies will involve less work than your primary job.

What qualifies as passive income?

If you spend more than 500 hours of your time per year on that business or activity, that counts as material participation. If your participation makes up the majority of time anyone spent on the activity, or if you’ve participated for more than 100 hours and your participation is equal to other individuals’, that also counts as material participation. Both of these mean that the income from that business or activity is not passive income. What is a passive income is any activity that does not meet these thresholds but still provides you with regular earnings.

Types of passive income

According to the IRS, there are two types of passive income:

1. Trade or business activities in which you don’t materially participate during the year
2. Rental activities, even if you do materially participate in them

Within this definition, you can also break passive income down into three categories: investing, asset building and asset sharing. Investing is an example of an activity in which you don’t materially participate: passive income investments, like dividend stocks, real estate investment trusts or money market funds can make money without you lifting a finger. Building a real estate portfolio that you then rent out is also an example of investing.

Asset building and asset sharing are ways to have passive income in which you are materially involved. In asset building, you spend time building or gathering an income-generating asset, like music, photos or digital products, then create passive income by selling it. Asset sharing means using something you already own to make passive income. Airbnb is the perfect example of this type of passive income.

Getting started with passive income

For those wondering how to make passive income, it’s common to believe that you need a lot of money to get started. This is true for some passive income, such as real estate rentals or investing in or starting a business (although you can absolutely start a business with no investment). But there are plenty of passive income ideas that don’t require much money up front and are ideal for getting started.

If you’re wondering, “What about passive income for beginners?” it’s important to recognize that, beyond coming up with the perfect idea to make a passive income yourself, your psychology plays a massive role. Tony often says that business is 80% psychology and only 20% skill. Overcoming your limiting beliefs, eliminating fear of failure and working on your negotiating skills are just as essential as learning how to read financial statements. As with any business venture, when you start with your mental and emotional state, these passive income ideas are much more likely to succeed.

10 passive income ideas

The key to how to make passive income is to match your initial investment of time and energy to your risk tolerance level. (And of course, always do your research and consult an expert before making an investment or opening a new account). Here are some passive income ideas to get you started.

1. Real estate investment trusts (REITs)

REITs are one of the best passive income strategies and an excellent way to get started in real estate investing. They are low risk and don’t require a lot of money up front: you may be able to invest in an REIT for as little as $500. You buy shares in publicly traded real estate portfolios, and the REIT does the rest.

2. Real estate rentals

Rental activities are sometimes called semi-passive income because there is still work involved in being a landlord. However, once you’ve purchased a building and established regular tenants, you likely won’t be doing enough work to put you over the material participation threshold.

3. Money market accounts

Money market accounts are one of the best low-risk passive income investments for beginners. They’re similar to savings accounts, but their annual percentage yield (APY) is higher, and you’ll earn a better APY the more money you have in your account.

4. Index funds

Index funds invest in market indexes, which are broken down by company size, country, industries or styles, like fast-growing companies. Index funds aren’t the most exciting passive income investment, but they are easy to understand and reliable, making them another great option for beginners. Exchange-traded funds are a similar option with an even lower minimum investment required.

5. Dividend stocks

Dividend stocks require more research than money market accounts or index funds, but they can be one of the best ways to earn passive income. Dividend stocks come from publicly traded companies that share their profits on a regular basis. Many people own dividend stocks through retirement accounts, but you can also buy them through brokerage accounts.

6. Business investments

If you have a bit of money to invest, look into becoming an equity partner in an existing business that needs capital. You can also start a semi-passive business like a laundromat, car wash or vending machine installation. Once set up, these businesses don’t require much involvement from upper management.

7. Using your expertise

There are passive income ideas that don’t involve investing – like using your expertise to create and sell content. Make a guide or an instructional video explaining a complicated product or topic, or create a course and post it online. You’ll receive income every time someone buys your video or signs up for your course, with no further effort required.

8. Creative pursuits

If your expertise is creative, you’re in luck. Discover how to make passive income by creating and licensing music, selling stock photography or writing a book or ebook. Turn your artwork into digital files to sell online. Create and sell T-shirt designs. You may be surprised how you can monetize your talent.

9. Affiliate marketing

Affiliate marketing is a way to get paid for promoting products, similar to influencer marketing. For this passive income idea, you’ll need a website or blog. You can create one on your own or, with a little negotiation, purchase an existing blog for about $1,000 to $3,000. Then choose products to review and promote – every time you make a sale, you’ll get a commission.

10. Renting out your home or car

Did you know that Airbnb and Vrbo qualify as passive income? Renting out your spare room – or your entire house ­– can provide you with regular income for little effort. You can even rent out your car or your RV for temporary use. Just keep wear and tear in mind, and make sure you have the right insurance coverage.

Take a look around you – what skills or assets do you already have that you can leverage for income? What could you easily create? With the right mindset and a little creativity, you can come up with even more passive income ideas.