Passive income has the potential to make you money while you sleep, and as living costs rise, it may sound like the perfect solution for bringing in extra cash.
The good news is there’s a growing number of passive income options aside from the traditional sources such as investment income or rental income from a buy to let. However, building even a small cash stream from passive income isn’t necessarily easy, and it’s unlikely to be the path to riches that some are led to believe.
Here we explain what passive income is, the different types, and what you need to consider when you’re hoping to earn some extra cash this way.
What is passive income?
As the name suggests, passive income refers to money you earn without needing to commit your time and effort on an ongoing basis. While you might need to do some initial work to set up a passive income stream, the idea is that ultimately it will provide a self-sustaining source of income.
The term was originally used to describe income from savings, investments and property. However, there are plenty more ways to earn passive income these days, provided you’re willing to do the initial work, as we explain below.
Can passive income really make you money?
Making money with little to no effort might sound too good to be true, and for most people, it will be. While passive income sources can make you money, they usually won’t provide your main source of income, unless you have a substantial pot to invest in buy to let property or a business, for example. However, it’s possible to receive a small amount of money to supplement your income from, for example, side hustles, savings or investments.
What are some common sources of passive income?
An online search for passive income sources will return plenty of ideas, but not all of these are realistic options, so here are some ideas that could produce extra income for people on any budget, without a specific skill set.
Earning interest on your savings is easier than ever at the moment, as interest rates have continued to rise in recent months.
The best easy-access savings account is currently paying 4.63%, so if you have £10,000 in this account, you could earn £463 in interest over the course of the year. If you are able to lock your money away for a year or longer, you could take advantage of fixed-rate savings accounts that are currently paying more than 6%. You can read more about this in our article Best instant access savings accounts and Fixed rate savings bonds explained.
If you’re fortunate enough to have any spare cash to save, it’s definitely worth making the most of the rates that are available at the moment.
Generally, investments may have the potential to provide higher returns than cash savings over the long term and could provide a stream of passive income.
Investment income is received in the form of dividends, which are a portion of profits paid by companies to their shareholders. Dividends are usually paid once or twice a year, but they aren’t guaranteed, and these payments may be put on hold during difficult economic periods.
The yield shows the return you may receive on an investment, and you may receive an income in this form from shares, funds, or investment trusts. If you’re seeking an income from your investments you’ll want to invest in funds or shares that pay an attractive income. For example, this may include shares listed on the FTSE100 index of Britain’s biggest companies, or equity income funds. At present, you could receive a dividend yield of between 3% and 5% from a UK equity income fund, for example. Investment trusts are also a popular option for income-seekers, as they are able to retain a cash reserve to pay dividend during difficult market conditions. Read more in our guide Investing – the basics.
However, it’s really important to remember that investments can fall in value as well as rise. So, while investments can offer greater returns on your money than a general savings account, there is some risk involved and you need to be comfortable with the possibility of losing some or even all your money. You can read more about this in our article Is investing right for you?
Buy to let property
This popular passive income source requires a significant amount of capital investment and comes with plenty of strings attached. However, if you’re in the financial position to invest in a buy to let property, then this could become a solid source of income.
Remember, though, that there are particular responsibilities that come with being a landlord, and taking on this role can require more time and effort than you might think. You will need to maintain the property, as well as deal with any repairs, and periods when you might struggle to find tenants, for example. The reality is that a lot of work goes into buying a property, so whether rental income is truly a passive income source is debatable. There are also tax implications, as rental income (after mortgage interest and maintenance costs) is taxed the same way as any other income, and the expenses you can deduct have reduced in recent years.
Rent out your spare room
If you have a spare room, then you could make additional income by using the government’s Rent a room scheme, which enables you to earn up to £7,500 tax-free each year by renting this out.
There are certain criteria you’ll need to meet to be able to use the scheme, but if you’ve got the space, then it’s really worth considering. This is one of the simplest and most profitable passive income sources currently available to homeowners. You can read more about this in our guide: Renting out a room – What you need to know.
Other passive income ideas
There are plenty more passive income sources aside from savings, investments and property that you might want to explore, but they usually take some effort and skill to get off the ground.
If you have a particular passion or interest in any of the below ideas, though, they could be a good way to generate a form of passive income as they may not feel like work.
Create online content
If you’re passionate about a particular hobby, a specific subject, or you’re an expert at something, then creating online content could be a way to bring in extra money. Eventually, this could lead to a passive income stream from advertising, sales, or royalties, for example, but this usually requires plenty of time and effort.
Some types of content you could create include:
- A blog
- A YouTube channel
- A Podcast
- An e-book
- An online course
- A social media account with a specific interest
Sell your opinion
Plenty of websites will pay you to complete surveys on an array of topics. They’re usually not too tricky, and some are simple enough to do while watching TV in the evening. Therefore, some people believe that completing surveys is a form of passive income.
The amount you can make for each survey will be small, and many sites require you to earn complete a certain number of surveys before you can access any cash earned.
Sell your photos and videos
If you’re a photography enthusiast with a portfolio of images and videos sitting on a hard drive, you might find that you could earn a little money by uploading these to stock websites such as Adobe Stock or Shutterstock.
These websites charge people who want to access royalty-free images, and if you upload your photos and/or videos, you could earn a small amount each time someone downloads them. If they’re regularly downloaded then you could start seeing your earnings tick up.
Of course, as with any of these passive income ideas, volume is key to making more money, so if you’re able to upload lots of great quality photos on a regular basis then the chances that you’ll make extra cash will increase.
Sell things you make or own
If you love to knit, paint or creating things, for example, then why not put your hobby to work and sell whatever you create?
You could try selling your items on online marketplaces such as Etsy or Notonthehighstreet, or if you’re confident about selling directly to consumers (without fees) then Facebook Marketplace is a useful platform.
You can also make some money by selling things you own that you don’t want anymore. From clothes that don’t fit anymore to old electronics, selling your clutter can make you a tidy sum. Have a look at our article How to make money from your clutter for more information.
What are the pros and cons of passive income?
The main benefit of passive income is the potential to make some extra money for relatively little effort. For most people, savings and investments are the simplest sources (alongside government schemes such as Rent a Room). there are a number of catches in general to generating passive income:
- Whether it’s time spent researching or using your existing knowledge and skills, you’ll usually need to put some time and effort into kickstarting any passive income stream.
- Some of the relatively new passive income sources such as online marketplaces rely on people buying your time or skills, which isn’t always an easy process. So you might find you make a little money one month and none the next, which means you won’t have a reliable income stream.
- To make a lot of money from a passive income source, you may need lots to start with, as this could involve buying property, or building a business and brand, for example.
Passive income sounds great and while it may make you some extra cash, it’s unlikely to pave the way to riches.
If you’re looking for other ways to boost your income, then have a look at our article 24 ways to make extra money and boost your income.
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