What is a passive income?
Passive income is money that comes into your account without you actively working to earn it. Passive income will continue to come in when you’re not working, while you’re on vacation, sick, or even retired.
Let’s be clear, a side hustle like Uber or Deliveroo is not passive income. It is just income. As soon as you stop doing it the money stops coming in.
But nothing is completely free. To get passive income you need to invest time and money into the asset that will pay you back.
Passive income ideas:
Looking for insight on how to generate a passive income? While there are many passive income opportunities out there, but it generally comes down to two main categories: financial investment and royalty income.
Both of these methods can be largely executed from the comfort of your own home.
Financial Investments
In the first passive income strategy, you put money towards an investment which, in turn, pays you back a small return at regular intervals. There are three main sub-categories. Experts often suggest a mix of the following methods in order to diversify your risk.
One of the best ways to compare your options is to think about yield. The yield is the percentage of your original investment that you get back every year. For example, if I invest £10,000 upfront and get £350 of income from it each year, that is a yield of 3.5%. (£350/£10,000 = 3.5%)
1. Interest income from bonds or savings accounts
This capitalises on interest rates for money invested in bonds or savings accounts. Yields tend to be low since the 2008 financial crisis.
Banks often offer low-interest rates on the money sitting in your accounts. Depending on how much money you have in the account, and the rate, this can be anywhere from pennies to hundreds of pounds. If you have big money, this can even thousands of pounds each month.
Similarly, interest income received from bonds are generally low if you are managing your risk. If you are willing to invest in more risky bonds, returns may be higher. Examples of higher risk bonds are through P2P lending, and bonds from emerging markets.
Although higher yield investments are tempting, don’t underestimate the value of low risk income. In uncertain times these can be your safety.
If you invest through a Cash ISA or an Innovative ISA you won't pay taxes on this interest income.
2. Dividend income from stocks or investments:
Beginner passive income earners will find this method to be one of the easiest ways to up their game beyond the yields in their savings account. All you need to do is open a brokerage account.
When investing, some stocks and investments offer dividends to their shareholders. Yields can vary from a fraction of a percent to more than 10%. Dividend rates should be clearly stated on the asset for investment.
However, dividends are never guaranteed—rates may go up or down, or even cancelled. And the underlying value of an asset can fluctuate.
Make sure your sources of dividend income are properly diversified, so if one sector, asset or stock crashes, your investments and any gains aren’t all wiped out. If you've invested well in dividend stocks, you may be able to live off the passive income it creates.
3. Rental income/Airbnb
Owning property and renting it out can be a great source of passive income, as long the income exceeds underlying expenses.
Finding a balance is important. Not only is property expensive upfront, but it can also be capital intensive to maintain: you need to invest to keep the attractiveness of your property on the rental market and cover any related repairs. You also need to consider mortgage costs and expected taxes carefully before investing.
Pro tip: you can also invest in exposure to real estate through certain property funds. The downside is that some of them are not as liquid as a saving account or selling a stock.
Royalty income
The second strategy for creating a passive income stream is to be a maker. If successful, you can earn royalty income or predictable revenue off of your product.
Spoiler alert, it is very hard to scale an idea or product to achieve meaningful and predictable passive income. You will need to invest time, and potentially some cash, upfront to buy the necessary equipment to produce something.
If you’re looking for creative passive income ideas, consider making it online. This can be through YouTube videos, music, an e-book, and selling your photography on stock image sites. You can also build an app and monetize it, create an online course, and secure affiliate marketing deals on your web site or social media accounts
However you choose to earn a passive income, you can use Money Dashboard to track it. Like other inflows and outflows, you can label and categorise any income that is passive, and track how it changes over time.
