What Are Passive Income Streams and How Can You Benefit From One?

What Are Passive Income Streams and How Can You Benefit From One?

When people hear the phrase passive income, many picture a life of leisure – lounging at the beach while money pours in. The truth is, generating passive income usually requires some work in addition to your regular job.

A recent survey revealed that only 20% of American households earn passive income through dividends, interest or rental properties. Since these activities generate a median income of $4,200 a year, they are great ways to earn some extra cash, but they certainly aren’t an option for everyone.

Earning cash from investments or a rental property, for instance, requires extra money to invest. Since two-thirds of Americans say they are now using their savings to deal with inflation and the rising costs of necessities, such as food, clothing and rent, most households don't have enough money to generate passive income from either of these strategies. 

That doesn’t mean that the rest of us are out of luck. Fortunately, there are a number of other ways to earn passive income to help pay bills or increase your savings. 

Ideas for Generating Passive Income

Nearly three-quarters of Americans make money from a side gig, and for most of us, generating passive income will require some level of commitment and energy outside of our regular day job. The difference between a part-time gig or side hustle and passive income strategies is that the former require a regular, ongoing commitment, while passive income streams are set up to continuously generate revenue with little effort after startup.

For those with special skills or abilities, one idea is to create a course and market it through a platform such as Udemy or Skillshare. It’s an opportunity to help others by sharing your expertise in an area, and one that continues to generate income as people enroll and take part in your preplanned lessons.

Others could use their talents to bring in extra money through online portals. Photographers, for example, can market their work through stock photo websites, such as Getty Images or Alamy. Graphic designers can do the same by selling illustrations, icons or templates.

For the tech-savvy, creating an app can be a great way to generate passive income. In 2021, Apple paid developers a total of $60 billion, and for those making less than $1 million a year, the company pays out 85% of the sales price of an app. Just keep in mind that you’ll need a popular app and a lot of downloads to see the biggest earnings. 

However, earning passive income isn’t confined to those with a marketable skill or talent. With the rise of peer-to-peer sites, such as Airbnb, many homeowners are making money on their primary residence, instead of purchasing separate rental properties. 

If you have a room over your garage, for instance, why not rent it out? About half of corporations responding to a recent survey reimburse employees for non-hotel lodgings reserved during business trips, and an increasing number of leisure travelers are choosing to reserve accommodations through vacation rental sites such as Airbnb or VRBO.

Things to Consider About Generating Passive Income

Before pursuing passive income, there are things to consider. First, don’t expect to make money tax free. The IRS requires you to pay on passive earnings, and this can require extra effort because tax payments won’t be withheld from the money you make. 

One way to handle this is to request that your employer withhold additional money from your paychecks to help cover the extra taxes. Others choose to make quarterly estimated tax payments. To find which alternative is best for you, seek the expertise of an accountant.

You may also want to consider what you will do with the passive income you earn. While paying bills is a necessity, you could invest any extra earning into a retirement account. Opening an IRA or Roth IRA are two options. However, before you do, it’s a good idea to speak with a wealth management professional to make sure you’re making the right account selections and that you won’t exceed maximum annual contribution limits.

Next, make certain you have the proper insurance to cover your passive income activities. Renting out a portion of your home or property, for example could negate your homeowners coverage, so check with your carrier to make sure you have the right policy in place.

Other activities may require you to have business insurance as well. For instance, an accountant who opens a website to answer questions and offer advice could be opening themselves and their business to additional liability. Always consult with your attorney and insurance agent to make sure you are covered for any additional risk.

Finally, think about the time it will take to set up your passive income stream and how much money you could make. If your time commitment outweighs what you'll earn, you may want to seek an alternative option. After all, the goal of passive income is to make money to increase your savings or help you cover daily expenses.