What Is Passive Income? (With Definition and Ideas)

By Indeed Editorial Team

Published 4 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Passive income ensures more financial freedom and releases you from the traditional workday to provide alternative investment opportunities to make money. It can also help you focus on worthwhile financial goals, such as securing funds for retirement. It can serve as a backup income in case you decide to quit or suddenly lose your job. In this article, we answer, 'What is passive income?' explain why it is important and share a few ideas for building a passive income.

What is passive income?

The answer to the question, 'What is passive income?' is that it is money you earn regularly with minimal or no effort and does not come from an employer or contractor. Examples of passive income include royalties from books, percentages of sales made from links on your website, rent from property or interest earned from your savings accounts. Passive income is the steady flow of cash that builds security over long periods of time. In comparison, active income encompasses your wages, salary, tips or commission earned from services with material participation.

A consistent paycheck earned by a teacher or accountant and payments for services like plumbing are examples of active income. The earner works on a continuous and consistent basis. If you are currently earning an active income but have dreams of an easier or happier life, you may benefit from building a passive income. Whether this means starting a blog or renting out a property, there are plenty of passive income options that can help you achieve your monetary goals in a more enjoyable and efficient way.

Related: 20 Side Jobs For Generating Additional Income

Why passive income is important

Passive income is a way to have your money work for you while you passively benefit from the work you have already done, the commitments you have made or the investments you chose. Here are five reasons why passive income is important and can benefit your life:

Provides work flexibility

When you are not required to worry about earning a monthly salary, you have the freedom to work according to your convenience. Your passive income creates flexibility in your life that other modes of earning money may not create. The opportunity to work part-time without having to worry about working a fixed number of hours provides you with the time to travel or pursue other activities to enjoy your life while still maintaining your standard of living.

Allows you to pursue passions

When you have free time, you may choose to invest that time in activities of your choice. Once you earn a passive income, you may have the time to pursue your passion, which may lead to a better quality of life. This may also give you the opportunities to make meaningful connections with the people around you.

Related: What Does Freelance Mean? Definition, Tips And Popular Jobs

Frees up time

Time is considered one of our most valuable assets. Unlike money, you cannot earn time, and it is a finite resource. You may not be free of all responsibility, but passive income allows you the flexibility to spend your available time doing things you want rather than only completing tasks to pay the bills.

Provides financial stability

The financial stability passive income provides may help you retire early or comfortably, and it allows for financial growth. Passive income allows you to focus on growing wealth rather than simply maintaining your current quality of life. This helps you set ambitious financial goals and achieve them.

Reduces anxiety and stress over the future

Passive income serves as financial security and helps ease the worry of being unable to pay bills. Passive income provides financial support and future stability. This often gives you a sense of financial freedom and helps you effectively manage yourself, your time and your assets.

Related: 20 Part-Time Jobs That Pay Well

Passive income ideas

Earning a passive income takes an investment of either money or time upfront. You can begin earning a residual income through several outlets, and it is important to choose one that fits your lifestyle and skills. Here are a few ideas to consider:

Create an e-book

Selling an e-book involves identifying and analysing demand and then effectively creating an e-book on a topic where you can provide real, meaningful information to the readers. The initial investment of time and effort is a considerable commitment, but you can earn a passive income with this method. You can list this e-book for sale on one or more of the popular e-commerce websites. As your book keeps selling, it may end up amounting to a large source of passive income with time.

Invest in high-interest checking and savings accounts

There are several options for online savings and checking accounts that offer more than the average interest rates. Having money in these high-interest accounts is an amazing way to earn a passive income with little to no risk. It takes time to begin showing any benefits, but you may consider this option for its simplicity.

Rent out your property

You can earn a passive income by renting out a property you already own or by investing in new properties. It can take a lot of time to learn how to make it a profitable venture, so you might consider hiring a management company to monitor the property and communicate with renters. Rental income is an ideal option, especially in areas where the property prices are affordable and the rents are on the slightly higher side.

Related: What Is Self Employed? Benefits, Types And Examples

Advertise on your car

Driving around in your car is another easy way to earn a passive income. If you have a clean driving record, you can contact an advertising agency that can analyse your habits and driving area and match you with appropriate advertisers. They provide you with a "wrap", a magnet or vinyl decal that is safe for your paint job to place on your vehicle. You can then earn money while you drive.

Some agencies pay by trip or time commitment, while others track your mileage and pay per mile. They may provide you with other perks as well, such as a monthly allotment of money to reimburse the price of fuel.

Related: How To Become A Freelancer In 8 Steps: A Complete Guide

Do affiliate marketing

If you run or are considering running a blog or website, affiliate marketing may be an effective source of passive income for you. Essentially, website owners or bloggers can promote a third party's product by linking it to their blogs or websites. This requires you to have a platform to promote other companies or affiliates. If you do, it can be an easy way to earn money passively.

When a link from your website or blog is used to purchase a product, you earn a small commission. This process entails you building a following of trusted users and then using your credibility and their trust in you to promote your partners. Once your website or blog starts generating considerable income, you can hire a virtual assistant or content manager to maintain them for you. This way, you do not require working actively on your blog or website, and you keep earning a substantial passive income.

Create social media posts

You may choose to create social media posts or videos on the social media platform or video sharing platform of your choice. Once your posts or videos start gaining viewership, then there are several ways in which you may monetise them to get steady passive income. You may get money when ads show up in your videos on many video-sharing platforms. You may also start partnering with brands when you have a substantial follower count on your social media accounts. Such partnerships let you have a steady income for posting from your social media accounts for a specified time period.

Create online courses

There are several online platforms available where you can create an online course in something you are knowledgeable about and then sell that course. These platforms give you a share of the sales value of the course. The initial effort in creating a course is going to be significant, but once you create the course, you can simply host the course at one of these platforms and keep receiving a commission every time your course sells.

You do not require to actively work on the marketing of the course. These platforms can do it for you. You can just work on creating the course and then let the platforms work for you to provide you with a regular stream of passive income.

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