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What Is Passive Income, and How Do I Build It?

Do you dream about retiring early? How about earning enough side income to cover your needs so you can afford more of your wants? Yeah, those are some great dreams. And guess what? You can make them come true—with a good plan in place.

The good plan we’re talking about here is called passive income. What is passive income? There are many different ideas of what passive income is and ways to earn it, so let’s get right to it.

What Is Passive Income?

First off, let’s bust a common myth about passive income. Passive income is not an easy way to earn a lot of money quickly while you sit on your butt. You’ll need to put in the work—at least at first.

So, what is passive income? It’s a way to earn steady money with little to no daily effort. But the keyword there is daily. Some passive income ideas—like building a blog or an app—take work (and sometimes money) to get up and running. But they could (eventually) earn you money while you sleep.

Why Build Passive Income?

Your income is your greatest wealth-building tool—a tool that typically requires you to clock in five days a week. Even if you love your job, we're willing to bet you wouldn’t mind earning some extra income without the blood, sweat, tears and time commitment of another job. Here’s what building a passive income can do for you:

  • Increase your wealth
  • Allow you to retire early
  • Protect you from a complete loss of income if you lose your job
  • Provide an additional source of income if you outlive your retirement fund

How Much Money Can I Make?

Passive income generally won’t make you wealthy overnight, so forget about any get-rich-quick schemes you’ve heard of. But steady and profitable passive income options can build some serious money over the long haul. We’re talking anywhere from a few thousand dollars to hundreds of thousands of dollars—depending on which option you go with.

How to Build Passive Income

Passive income can be built in so many ways, and if we were to list them all, you’d be here all day. So, we’ve narrowed it down to eight solid options to earn passive income:

  1. Investing in Funds
  2. Investing in Real Estate
  3. Storing People’s Stuff
  4. Renting Out Useful Items
  5. Starting a Blog/YouTube Channel
  6. Selling Digital Products
  7. Using Affiliate Marketing
  8. Advertising on Your Car

1. Investing in Funds

When some people hear "passive income," they tend to think of investing because it can produce the largest results with the least amount of work. And that’s true! Compared to the other options on this list, investing may be the easiest way to kick back, relax and earn. But we want to be clear about one thing: Investing works best as a long-term strategy.

Be confident about your retirement. Find an investing pro in your area today. 

Investing in a 401(k)—with a company match—in addition to other tax-favored plans like a Roth IRA are great options for earning passive income . . . for retirement. Don’t forget that you’ll have to pay taxes and penalties if you try to withdraw money before a certain age. With these types of investment accounts, the idea is to let your money grow and stay in it for the long haul.

If you’re in your 20s or 30s, the idea of waiting until you’re 65 to touch your money might sound terrible. But remember, with the right investment strategy, you can build up enough wealth to retire well before 65! In fact, in our National Study of Millionaires, 8 out of 10 millionaires said they reached a million-dollar net worth through their employer-sponsored retirement plan, like a 401(k). Hard to argue with that!

If you’re out of debt and want to start investing, work with a trusted investment professional. Don’t get all wrapped up investing in stocks when you have no idea what you’re doing—that’s a fast way to lose all of your cash.

2. Investing in Real Estate

One way to build passive income (after you’re debt-free and have some cash saved up) is to buy real estate and rent it out to tenants. But before you buy rental property, pay off your own home first and purchase your investment property with cash. Don’t ever go into debt to buy rental property.

It’s also worth saying: A rental property can be a great source of extra income, but it isn’t the most passive choice. You’ll put a lot of time and effort figuring out how to rent out the property and how to manage it—unless you hire a property management company, but that would mean less income for you. We suggest buying a property somewhere that’s convenient for you to visit so you can personally keep an eye on it. Find a real estate agent who knows your area well and knows what will attract renters.

If you go the rental property route, you need to be in control of your property. Steer clear of real estate investment options—such as a real estate investment trust (REIT)—that pool your money into properties. A REIT is basically a mutual fund that buys real estate instead of stocks. And while that might sound like a good idea, there’s no way for you to know if the people in control are making smart decisions with these properties (and your money). It’s extremely unpredictable and overall not a smart way to invest in real estate.

On the other hand, if you still have some debt to pay off or can’t afford to take on a whole rental property, consider renting out a spare room. Having a roommate or the occasional Airbnb guest is a great way to sit back and add extra money to your budget—if you don’t mind sacrificing some privacy.

3. Storing People’s Stuff

People have a lot of stuff—and they’re always looking for inexpensive ways to store it. If you have some space in the basement or the garage, what could be easier than having people pay you to store their stuff? You’ll just need to make sure their items are safe and secure. Check out websites like Neighbor or Store At My House to get started.

4. Renting Out Useful Items

Do you have any items you don’t use all the time that others would like to borrow? Things like a truck, trailer, trampoline, kayak or even your own yard or backyard pool could earn you passive income as rental items. Hop on your favorite social media site or explore popular rental websites like Fat Llama (yes, that’s really the name). All you have to do is upload pictures of your items, set a price, and tell the world they’re ready for rent.

5. Starting a Blog/YouTube Channel

If you have a brilliant idea that appeals to a specific audience, you could create something like an educational blog or a YouTube tutorial series that doesn’t require constant new material to generate online traffic. If your content is engaging and it sees enough daily traffic, you could sell ad space on your blog or ad spots on your channel. After you put in the heavy lifting, you can sit back, relax, and enjoy streams of passive income for every set of eyeballs that watches your content. Not bad!

6. Selling Digital Products

If you’ve discovered how to create content that produces enough traffic to host ads, think about how you could turn that content into a product. It could be anything from a simple e-book or meal prep guide to a complete online course or an app.

You could also sell something that taps into your creative skills. For instance, if you’re a good photographer, sell stock photos on sites like Foap or create preset photo editing filters for people to download. If you dabble in music production, license your tunes and sell them to YouTubers and podcasters to use for their content.

7. Using Affiliate Marketing

Have you ever bought something really awesome and gushed about it to your friends, family, co-workers and the store cashier? You think to yourself, Man, I should get paid for all this advertising. Well, you can! It’s called affiliate marketing.

To put it simply, affiliate marketing is when a company pays you money to publicly brag about their products. If you’re on social media, you’ve probably seen hundreds of people doing this by posting a special link or discount code under a photo of them using a certain product. Don’t worry, you don’t have to be an influencer with thousands of followers to be an affiliate marketer (although, that would help you make more money). Amazon, eBay and Target are just a few of the hundreds of companies that offer affiliate marketing programs.

8. Advertising on Your Car

Getting paid to drive your own car? It doesn’t get any easier than that! If you don’t mind slapping a giant logo on your car (or maybe wrapping the entire car or riding with one of those big cans of soda on the top), sites like Wrapify will set you up to get paid for using your car as a mobile billboard. Sure, you might lose some cool points for driving a slightly ridiculous-looking vehicle, but you’ll win easy money—without sacrificing time, effort or investment. The average person who does a full wrap on their car makes about $264–452 a month for driving to places they already need to go to. That’s not half bad!1

Passive Income Tips 

Like we said, the list of passive income ideas could go on forever. As you search for the best fit for you, you’ll want to ask yourself these questions:

  • Do other people make money doing this?
  • Does this idea show a positive long-term track record?
  • Has this idea ever come back to bite someone who tried it?

Don’t fall for any passive income ideas that promise a quick return or require huge amounts of money up front—like vending machines or opening a laundromat. Things like that require way too much time and money to be considered passive and will ultimately sabotage your financial goals. Look for ideas that are steady, profitable and trustworthy. Do your research. And never go into debt!

Don’t fall for any passive income ideas that promise a quick return or require huge amounts of money up front.

Build Wealth That Lasts

Did any of these ideas for building passive income spark your interest? Want a clearer picture of how to build wealth? Connect with an investment professional who will help you create a game plan to start building wealth. Having a financial pro in your corner is the best way to create a plan that meets your specific needs. 

Find a SmartVestor Pro today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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