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.
How to earn a passive income:
Looking for insight on how to make 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.
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 invested well in dividend stocks, you may be able to live off the passive income it creates.