Best Ways to Earn Passive Income

The best ways to earn passive income aren’t only the purview of the wealthy. With a modicum of startup time and capital, anyone can create a passive income stream. Whether you have a full-time job or are a retiree seeking extra cash, passive income ideas are available to increase your cash flow. Passive income isn’t literally money without effort, but more akin to money with less effort. Some passive income strategies, like owning dividend-paying stocks or bonds, require less work than owning rental real estate. This guide covers how to get started, how much passive income you can earn, the required effort, and various passive income investments. 

Best Ways to Make Passive Income in 2024

15 Passive Income Ideas:

1. Dividend stocks
2. Dividend exchange-traded funds
3. Bonds
4. Bond exchange-traded funds
5. Certificates of deposit
6. High-yield savings accounts
7. Money market funds
8. REIT investing
9. Peer-to-peer lending
10. Real estate crowdfunding
11. Real estate debt investing
12. Affiliate marketing
13. Digital product sales
14. Placing ads on your car
15. Drop shipping

How to Generate Passive Income

There are scores of passive income sources and ways to start earning passive income. Before you begin, you’ll need to figure out how much effort and money you want to expend. Then choose a passive income idea that fits your capital, skills, and interests.

Step 1: Choose passive income streams. Decide whether you want to invest for passive income or run a side gig that generates some cash. Either way, it typically takes some time to build up a decent cash flow. 

Step 2: Choose the platform that fits your needs. If you’re seeking passive investment income, there are many financial brokerage firms, apps, and banks that will suffice. However, there are other measures you can consider. For instance, you can learn how to make passive income online by selling products and services. With a social media account like TikTok, Instagram, YouTube, or a website, you can market products and services quite effectively. These are among the best ways to earn passive income, and the required effort is greater in the beginning and diminishes as time passes.

Step 3: Set your expectations. Earning passive income from investing involves predicting your return based upon the investment amount. A $5,000 investment in a dividend fund that pays a 6% yield will provide $300 per year, while successful affiliate websites might earn $1,000 per month or more. 

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Best Passive Income Investments

The best passive income opportunities often involve balancing human capital, financial capital, and time. Investing in financial markets involves banking and financial products like stocks and bonds. Buying banking products like certificates of deposit and high-yield cash accounts is less risky, but has lower upside potential than investing in financial market assets. 

Passive investing in dividend-paying stocks or interest-paying bonds provides cash flow but requires a larger investment to realize meaningful monthly income. Crowdfunding investment apps also enable the public to buy shares in farmland, large and small real estate projects, wine, art, and more to receive ongoing cash flow. 

There is a range of risk levels when investing in financial assets. The lowest-risk cash flow-producing assets are money market mutual funds, high-yield savings accounts, and bank certificates of deposit. Investing in dividend-paying stocks or stock funds carries the risk that the dividend will be cut and also that the principal value of the investment might fall. Interest-paying bonds and bond funds will vary in price as well, but the interest payments are rarely cut. Individual bonds, held until maturity, will return the par or full value of the investment. But bonds sold before maturity and bond funds might be sold for less, or more, than your original payment amount. 

Crowdfunding apps that invest in real estate, farmland, startups, art, wine, and more carry additional risks. Many require long lockup periods before you can withdraw your money. Others are not as closely regulated as traditional financial assets. With newer platforms, there is a greater chance of asset defaults and business closures.

Dividend Stocks

Buying dividend-paying stocks is a path to owning a portion of a publicly traded company. Many stocks pay a portion of their earnings to shareholders in the form of cash dividends, which are usually paid quarterly. You have the option to reinvest the cash payment in additional shares of stock or to take the cash dividend payment.

Long-term investors who build up a portfolio of dividend-paying stocks or funds have one of the best ways to earn passive income. Investing in dividend-paying stocks is a passive income idea with both cash flow and capital growth potential. 

Dividend Exchange-Traded Funds

A dividend exchange-traded fund (ETF) is an investment vehicle that owns many dividend-paying stocks. You can buy one investment, such as the SPDR S&P Global Dividend ETF (WDIV), and receive access to a portfolio of dividend-paying companies. The WDIV ETF owns global companies that frequently pay higher dividends than U.S. firms. Many dividend ETFs also screen for companies with a history of increasing dividends. 

The dividend ETF is another passive income investment that provides regular cash payments along with an added bonus of capital appreciation potential. Consider management fees when choosing a dividend exchange-traded fund, as higher fund fees can detract from returns. 

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Bonds

Bonds are back in favor as interest rates are higher than they’ve been in decades. Unlike stocks, bond investments are loans that you make to a company or government entity. In exchange for the loan, you receive regular coupon interest payments.

Bonds are among the best ways to earn passive income because if you buy a newly issued bond at par, usually $1,000, and hold it until maturity, you’ll receive regular cash interest payments and a return of principal at the bond's maturity. Bonds with lower credit ratings typically provide higher interest payments and greater cash flow, while government bonds and highly rated corporate bonds will offer lower interest payments. 

Bond values can rise and fall, so you might receive more or less than your initial price, should you sell before maturity. The bond’s credit rating suggests the bond’s likelihood of default, with lower-rated bonds carrying a higher risk of default. Investors can also invest in diversified bond mutual or exchange-traded funds to build passive income without lifting a finger.

Bond ETFs

Bundle together a group of individual bonds, and you have a bond fund. With differing bond maturities and investment styles, there are multiple ways to generate passive income with bond funds. Those comfortable with a risky asset can purchase a high-yield bond fund like the SPDR Blmbg ST HY Bd ETF (SJNK), which has a current 7.73% SEC yield.

More conservative investors can buy a diversified government bond fund and receive regular interest payments that are exempt from state and local taxes. Unlike buying an individual bond, both the coupon or interest payment and the fund value will vary. 

Certificates of Deposit

Certificates of deposit (CDs) are banking products that you can buy at most financial institutions. You invest a specific amount of money, typically $100 or more, and leave the money invested for a period of time. CDs typically pay a pre-specified interest rate and are usually issued for terms from three months to five years or more. 

There are a variety of CD types, including fixed and floating variable interest rates. Investors seeking regular cash flow and a stable principal value can create a CD ladder and buy CDs at regular intervals. As one CD comes due, you reinvest the proceeds in a new certificate of deposit. Ladders are among the best passive income investments to increase cash flow when you expect interest rates to rise. 

High-Yield Savings Accounts

A bank high-yield savings account pays higher interest payments than a typical savings account. The required minimum balance can be greater than that of a savings account.

If you’re wondering how to make passive income, a high-yield savings account is a good choice. For passive income from money that you need for near-term expenses and emergencies, a high-yield savings account is a sound choice and keeps your funds liquid. 

The process of opening a high-yield savings account is similar to opening a traditional bank account. Simply click on the “open an account” button on your preferred bank’s website and answer several personal questions, such as address, Social Security number, and type of account. To verify your identity, you might need to supply prior addresses, debts, and employment details.

Money Market Accounts

A money market mutual fund is an investment vehicle that owns short-term commercial debt. This investment is distinct from a money market bank account, which is similar to a high-yield bank savings account. Like a typical mutual fund, money from many investors is pooled to invest in short-term debt and cash-equivalent instruments. The allure of these accounts is that the share value is pegged at one dollar, and yields are among the highest of the high-yield cash equivalent group. 

You’ll need to invest in a money market fund within an investment brokerage account. These investments are liquid, and the money can be withdrawn within a few days. The interest from money market funds can be withdrawn for cash flow or reinvested to grow for the future.

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Alternative Passive Income Ideas

You’ll find a laundry list of alternatives to stock, bond, and cash passive income ideas. Some of these choices are more passive than others. Real estate investing is frequently touted as a response to the question, “What is the best way to earn passive income?” But real estate investing takes many forms, and requires varying amounts of effort.

Owning and managing real property requires a chunk of capital and is a passive endeavor until a pipe breaks or the renter doesn’t pay their rent. Then it is a lot of work. Real estate crowdfunding apps or investing in real estate investment trusts (REITs) are more passive. Once you purchase the securities, you wait for the cash flow.

Another popular way to earn passive income online is by creating an affiliate website, but this involves more work than meets the eye. An Airbnb rental is only semi-passive if you hire a team to manage the property. Cash-back credit cards and shopping sites might be considered a passive income idea, yet you’re spending in order to receive the cash. That’s not a net-positive endeavor. 

Other alternatives to passive income involve digital property sales, like e-books, courses, apps, and other online goods. For all of these passive income ideas, there is a hefty startup time commitment and some upfront cash as well. You’re also less certain of receiving a return on your investment if the sales miss expectations. Evaluate these alternatives to passive income to learn whether there's a strategy for you. 

REIT Investing

A real estate investment trust or REIT is an investment vehicle that owns a pool of commercial real estate. There are REITs that provide broad diversification across the real estate landscape. Or you can buy niche REITs that own senior housing, student housing, warehouses, commercial property, mortgages, shopping malls, data centers or many other varieties of property. The benefit of REITs for cash flow is that they are required by law to pay out 90% of their taxable income to shareholders.

Peer-to-Peer Lending

Debt investing is popular, with many platforms that enable everyday investors to be the bank and lend money to others. Peer-to-peer lending offers various types of loans for various reasons. Platforms match borrowers with lenders for various cash needs. 

These peer-to-peer lending apps offer higher interest payments than other traditional stock, bond, or cash vehicles. But they are riskier as potential loan payment defaults can eat into your returns. To minimize that risk, you can choose to invest in higher-quality loans and diversify by owning many loans.

Real Estate Crowdfunding

Real estate crowdfunding allows investors to finance real estate projects through online platforms with the goal of profiting either from capital appreciation or passive income. There are a range of real estate crowdfunding websites offering small to large investors an entry into commercial, industrial, single-family, and apartment building investing. 

Fundrise is our 2024 best real estate crowdfunding website. It provides investment access to real estate and startup venture capital funding with only a $10 minimum.   

Real estate crowdfunding can deliver a higher interest rate than REITs, but it has less liquidity, less government oversight, and a greater risk of default. 

Real Estate Debt or Note Investing

Real estate debt or note investing puts you in a banker's seat. You lend money to those seeking to buy new real estate, remodel existing property, fix and flip, and a variety of other types of real estate investors. 

Apps like Groundfloor provide investors the opportunity to lend to real estate buyers. The allure of lending to real estate borrowers is that your investment is secured by real property. Some of the larger real estate crowdfunding apps also deliver real estate note investing. 

A drawback to real estate note investing also makes it one of the best investments for passive income. Unlike publicly traded securities, you can’t immediately redeem your shares, but may need to wait several months or more for a return of your principal investment. The lack of liquidity can also lead to higher investment returns. 

Affiliate Marketing

Affiliate marketers sell products and services on their websites or social media accounts and receive a commission from the brand for the sale. Affiliate marketers frequently write reviews to draw visitors to their websites. The setup for affiliate marketing is not passive and involves creating a website or social media platform, developing contracts with companies who pay affiliates, and creating content to draw visitors to the website.

The passive aspect of affiliate marketing is that once the content is written and a website develops a stream of visitors, your work is diminished. That’s only partially true, as you’ll need to write new content and update old content in order to maintain and increase website traffic. Additionally, it can take months or more to begin to generate cash flow. We place affiliate marketing on the higher-effort step of the passive income ideas ladder. 

Digital Product Sales

Creating digital products or content, such as online courses, is among the best ways to earn passive income online. Similar to affiliate marketing, you’ll sell your digital products online through a variety of outlets, such as an Etsy store, social media platform, YouTube, or a website.

Align your digital products with your area of expertise. Sample types of digital products include printouts, e-courses, e-books, webinars, and more. This is not the best passive income idea for beginners with limited free time. Making passive income with digital product sales initially requires market analysis, product creation, and marketing before realizing decent passive income flow. 

Advertise on Your Car

Drivers with cars can get paid to wrap their cars in advertisement banners. We found firms that paid from $100 to $500 per month just for driving with an advertisement on their car. For anyone wondering, “What is the simplest way to make passive income?” Car wrapping is not without its limitations. 

Car wrapping scams exist and, unfortunately, are abundant in the industry. Don’t pay money upfront for access to advertise with car wrapping. You’ll also need to accept the advertiser's stipulations of mileage, and other factors. Finally, making passive income by advertising on your car means that you need to drive around with an ad on your car. To put this in perspective, the ad can be simply placed on the door or hood of your car, or it can be wrapped around the entire vehicle. Make sure you understand what’s needed before signing a binding contract. 

Create an Online Store with Drop Shipping

Creating an online store with drop shipping can answer the question, “How can I passively make $1,000 a month?” After setting up your product inventory, payment system, and marketing strategy, drop shipping is among the simplest ways to make money online. Select products from manufacturers or wholesalers and sell them as your own inventory. The supplier handles the inventory and shipping, so you can grow your brand and market the shop.

Like most passive online income strategies, after setting up the business, you’ll need to devote a lot of time to marketing. You can market your store through a website and/or social media. Once you’re up and running, with brand recognition and customers, maintaining an online store with drop shipping is a good form of passive income. 

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Factors to Consider When Choosing Passive Income Streams

Capital 

All passive income ideas require startup capital. To develop a meaningful passive income stream from financial assets like cash equivalents, stocks, and bonds, you’ll need a decent account balance. With $100,000, an investment paying a 5% dividend or interest payment provides $5,000 per year cash flow.

Although affiliate marketing requires a small cash outlay to potentially obtain cash flow, you’ll pay more with your human capital or time.

Risk 

All investments carry a degree of risk. Certificates of deposit and high-yield cash investments don’t risk the principal value of your investment, but they could lose purchasing power over time due to inflation. Investing in higher-risk dividend-paying financial assets involves the potential to lose principal and decrease cash flow should dividends be cut. Crowdfunding passive income investments are less regulated and can tie up your money for longer periods with added risks of defaults and platform failures.

Taxes

With the exception of tax-exempt municipal bonds from your state of residence, all income is taxed by the government. After-tax income is what really matters, so understand how your investment is taxed, and your specific marginal tax bracket. Dividends and interest payments may have their own tax rates.

Key Differences Between Stocks and Alternative Investments

Frequently Asked Questions (FAQs)