Earning money while lying on the beach, reading a book, or even just while you sleep – sounds like a dream, doesn’t it? The magic word that can make this dream come true is “passive income.” And what is passive income? We’ll cover the definition of passive income and what opportunities and ways there are to build up passive income and enjoy financial freedom.
Definition: What is passive income, anyway?
As the name suggests, passive income doesn’t require you to be active. You don’t have to put in (much) time or energy in return for what you’ll earn. This is how passive income differs from your salary. Because to earn that, you provide your labor to your workplace or your client. Such an income source is therefore considered active income. It’s irrelevant whether you are a salaried employee or you work as a freelancer on a contract basis. If you make resources like your mental and/or physical abilities or your time available in exchange for money, this is active income.
If you would like to generate some extra income in addition to your regular earnings from your (permanent) job – to be more financially free, more flexible in your lifestyle, and more independent – then passive income is just the thing for you.
Serious passive income ideas
Basically, you have many different options available to you to generate passive income. In the following, we will introduce you to some of them. Some of the ideas will require you to invest some effort at the outset, but it can pay off in the long run. We have also recapped the various advantages and disadvantages of passive income opportunities at the end of this blog post.
In any case, be aware that there is no one secret trick or ideal way to get rich overnight. The most successful way to build passive income always depends on what you are good at and what suits your individual situation.
In any case, you should consider the following points:
- Whatever you decide to do, the process for this side hustle should be easy to automate.
- If you want to sell something (feel free to get creative), your idea should be easy to duplicate so that you can sell more than one of it.
- The idea should also be as sustainable as possible.
- It should be something that requires as little time as possible for modifications or updates.
- Produce and sell (digital) products
If you want to produce and sell something, digital products are a particularly suitable business option because it’s easy to duplicate and sell them automatically. In addition, they are often “timeless.” If you have a certain skill or expertise, something you could do is produce an e-learning program or webinar. You could also publish an e-book or sell photos, designs, or images you’ve created. Almost every type of product now has various platforms and store management systems that make selling easy for you.
- Earn commission through affiliate links
If you already run your own website or YouTube channel, then here’s a good beginner passive income strategy for you: earning commission through affiliate links and thus making money passively online. All you have to do is link products that you recommend or use to the respective manufacturers. If someone clicks on your affiliate link and buys the product, you get a certain percentage as compensation…it’s basically effortless.
- Earn money with investments
A well-established way to earn passive income is to invest in securities. If you already have some initial investment budget, you can invest this money in stocks or bonds, for example. And with our Tips for Investing Money in 2022, you’ll be well armed to take this step.
Having your own real estate is also a good stimulator of passive income. A condition for this is, of course, that you do not live in the apartment or house yourself, but rather rent it out. The monthly rental income then becomes your additional income. However, you should not underestimate the potential (cost) expenditure for maintenance and management. You should also calculate potential rent losses if, for example, the property is not rented out at a given time.
You can earn extra income both online and offline by selling advertising space. If you run a website or blog or send out a regular newsletter, for example, you can sell space for banner ads. If you own a car, you can offer up advertising space to companies. You can either use special mediation platforms for this or approach companies about it directly.
Build passive income through stocks
As already mentioned, stocks are an old classic way to earn additional income as passive income investments. The income stream consists of the dividends, which are the profit distributions the respective company makes to you and the other shareholders. As a rule, these distributions are made once a year. The more successful the companies you have shares with, the more passive income you generate. However, you need the appropriate initial investment budget – some capital – to be able to invest in stocks.
You can figure out whether a stock is suitable for you to build up passive income by looking at these two points, among others:
- The dividend yield: Look at the relationship between the purchase price of the share and the annual distribution. For example, if you pay 50 euros for a share and receive a return of 2 euros per year, the dividend yield is 4%. It shouldn’t be much lower than that.
- The Dividend Aristocrats: A company is a Dividend Aristocrat if it has paid out constant or even increasing dividends over a long period of time. Dividend Aristocrats are thus best suited for generating passive income over the long term.
However, if you invest in individual stocks, there is a risk that they will lose value and that you will incur a loss if you sell them. Moreover, companies are not obligated to pay you dividends, and the amount can vary greatly. If you want to invest your money more safely, dividend ETFs are a good option. In this case, you invest directly in a variety of companies. ETFs also tend to pay out their earnings more frequently than do dividend stocks. If you want to read more about what exactly an ETF is, we’d like to recommend this article.
Passive income without an initial investment budget…is that possible?
You need an initial investment budget for some of the ways you can generate passive income. You need it, for example, to buy a property or to invest money in stocks. However, there are also ways in which you can unlock another source of income with little initial investment budget. For example, instead of buying a whole property, you can start out by buying a parking space and renting it out. Or you can start by renting out an unused room in your home via Airbnb or similar platforms. You also have the option of investing small amounts of money via equity crowdfunding. Here, larger projects are financed through a large number of small investment sums. If the project is successful, you share in the profits. Of course, your residual income in these cases will be less than if you rent out a property or invest in dividend stocks. On the other hand, every euro counts.
If you don’t have any initial investment budget, you should try out passive income ideas that take a little more time at the outset but don’t cost anything, such as selling digital products.
Advantages and disadvantages of passive income
Generating passive income probably sounds like a smart and powerful thing to you at first. Earning money around the clock without really having to do anything for it? Great! But there are also disadvantages you need to know in about if you’re thinking about generating passive income. Let’s take a look at the positive and negative aspects of passive income.
Financial independence and security
Earning extra income in addition to your active income automatically makes you more financially independent. So you don’t have to worry so much in times when you can’t or don’t want to work as much, or at all. Depending on the amount of your additional income, you can take time off or venture into self-employment without having to rely on the financial support of others.
More (free) time
Unlike active income, passive income doesn’t require a hefty time commitment. So you can do more of the things you enjoy while earning money on the side. Many people use passive income to reduce their working hours, for example.
You can also use your passive income to provide for yourself in retirement. For instance, you can reinvest it and have it paid out to you monthly only upon retirement. In this way, it’s available to you on top of your state pension, and it can help you enjoy a comfortable standard of living when you’re a senior. You can also generate passive income even when you’re older, as it doesn’t require any work on your part.
Lack of reliability for planning
Unlike your salary, which is deposited in your account in the same amount every month, your passive income can be subject to big fluctuations. This can make long-term planning more difficult.
Even though generating passive income requires less work in the long run than your gainful employment, you will have to invest either time or money in the beginning to develop a new source of income. No one can tell you for sure in advance how successful this will eventually be. Also, the continuous monitoring and administrative work may be more than you initially anticipated it would be.
You always have to consider a certain risk of loss, particularly when you invest money to generate additional income. For example, dividend payments might fall through, or you may not get your property rented out while you still have to pay off the corresponding loan.
Especially on the internet, many programs and activities that promise to be overnight wealth generators make their rounds. You should exercise great caution here, especially if an opportunity for income sounds too good to be true. Especially if it’s about investing your money in the most lucrative way possible, you should carefully study every detail of the conditions.
Conclusion: building passive income
Generating passive income to secure yourself financially is a good idea in principle. However, if you decide to do this, you should carefully weigh the pros and cons and always consider whether the corresponding source of income also suits you and your life situation.
You should also be aware that very few people are able to finance their entire lives solely through their additional income. So don’t immediately quit your permanent job just because you were able to earn a nice extra income in one month. Think of passive income as the financial icing on the cake that you can use on your way to financial independence.
The most important thing is that you handle your finances and start taking the matter into your own hands in order to be financially secure now and in the future. If you want to know how to make confident financial decisions and how you can best invest your money for the long term, we’re here to help! Through our various learning formats, such as online courses or events, you’ll gain the knowledge you need to make confident financial decisions. Our free tools allow you to set financial goals and take the right steps to achieve them.