If you’ve ever BEEN ON THE INTERNET, you’ve probably heard the words passive income. The idea of earning money without actually working is pretty exhilarating, and the term gets used a lot in internet marketing. You may have seen “passive income” ads on Facebook and Instagram.
In this guide, we’ll answer “what is passive income,” and we’ll share benefits and pitfalls–plus give you some REAL HARD TRUTHS about generating passive income. We’ll also share 45 passive income ideas, with something here for everyone.
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What is passive income?
Definition of passive income
Passive income is revenue generated without significant or ongoing labor, energy, or time to earn or maintain; and it’s almost always generated by assets that create cash flow. Passive income can be earned with or without direct attention or effort by an individual, and there are a lot of catch phrases to describe it (e.g. “making money while you sleep” or “put your money to work for you”).
If you want to understand the most important factor in creating passive income, it all comes down to one word: ownership. You need to either own a cashflowing asset or own a stake in a cashflowing asset to generate passive income.
With very few exceptions, most passive income still requires some work. This could be relatively hands-off (e.g. interest from your 401k) or require a burst of upfront effort before passive income is generated (i.e. creating a membership website).
Importance of passive income
Developing passive revenue streams is the foundation for building long-term wealth. When you exchange your hourly labor for money, you have a few problems.
- You can only keep working as long as you’re healthy and able.
- You can only earn so much per hour–eventually your labor has a cap on its value, no matter how skilled you are.
Passive income can fix this challenge by separating the time you work from the money you earn.
So “stop trading your time for money” isn’t just a catch phrase. It’s the secret to building wealth. And everyone needs to do it. That’s because having passive income also protects you from the one thing that happens to every human sooner or later–when you are no longer healthy enough to trade your labor for an income.
- Modern retirement is built on passive income. You put away a portion of your paycheck (and if you’re really lucky the company matches it), until your investments make enough money so that you don’t have to work anymore.
- For businesses, passive income can help you scale and provide a financial cushion. For example, if your business owns your office building and leases out a space to another business, it creates a revenue cushion that has nothing to do with the product or service you sell.
It’s important for everyone to find ways to build passive income that fit their wealth goals and personality.
Benefits of Passive Income
Financial freedom: Sooner or later, financial freedom requires passive income. Traditionally, most people waited for retirement for this. But more and more people are challenging this narrative and creating financial freedom at younger ages. This was the whole point of the Financial Independence Retire Early (FIRE) movement; people saved and invested HUGE amounts of their earned income to get enough of a nest egg to retire on.
Diversification: Having all your eggs in one basket can be risky. Using different passive income streams to diversify your income can create stability if one stream fails.
Time freedom: “Stop selling your time for money” was the passive income catchphrase; but it’s true. If you can build enough passive income, you have the freedom to spend time how you want. Some people lie on beaches, but a lot of people use financial freedom to train for a new career they love or to start a passion business.
Wealth accumulation: When your income exceeds your expenses, you’ve got the recipe for building wealth. The more passive income you have, the more opportunity you have to build wealth.
Passive income examples
Rental Income: If you own a property and collect rent, that’s a passive income source. Some people also invest in Real Estate Investment Trusts–which is another way to get rental income without owning the property.
Stocks: Owning stocks or preferred shares in a company is a proven way of getting passive income. The passive income can either come from regular dividends paid out to shareholders or by selling the stocks at a higher price. This works for individual stocks or bundles of stocks (index funds)
Royalties: It’s less common, but collecting royalties on artistic creations is passive income too. For example, Michael Jackson’s music catalog brings in about $44 million in annual revenue–long after his death.
Affiliate Marketing: It’s less common now, but at the height of the blogging craze, a lot of people made money from affiliate marketing–where you placed products in your blog and earned a commission for people who bought. Influencers make money with the same concept, often monetizing their followers with pitching products.
Licensing/IP: If you’re an inventor who patents a technology, you can license it out to companies that manufacture it. As long as you own the intellectual property rights, you can collect passive income on this.
A membership community: Not many people realize this, but an online community with paying members can be a great passive income source too. Communities scale fast, don’t require much work to keep running, and thanks to member-generated content and AI automation it’s possible to earn from a thriving community that only takes a few hours a week to manage.
Online courses: If you sell a prerecorded course on your blog or in your community, you can generate passive income from it.
Passive vs. Active Income
What is the difference between active and passive income?
Technically, active income requires working regularly to obtain, while passive income is defined as income generated without regular work.
But this isn’t really the case. Almost no income is truly passive. A degree of work goes into any sort of income in a capitalist economy. However, as opposed to passive income, which requires little to no effort to generate, active income is earned by hands-on work that requires a significant degree of time and energy—think wages and tips.
Passive income has a disproportionate return to the hours worked to obtain it.
The hidden work behind passive income
There are almost no income streams that actually take zero work. For example:
- If you renovate a house yourself to flip and sell it, you’ve made active income from the time and energy—the active work—you put into the renovations.
- If you renovate a house to rent it, then you’ve opened up a passive income stream from the rent money coming in each month.
Which of these takes work? The answer… They both do!
The TRUTH is, literally every single passive income stream you can create requires putting something in: either investing time or money. Investing money is the closest thing you can get to real passive income–for example, if you invest in a low-cost index fund you can hypothetically just let it grow for years. But even most investors research their investments, and spend at least some time balancing their portfolio.
And if you’re building assets to produce passive income, it will take even more work. Starting a blog. Launching a course. Cleaning and listing a rental unit. Nothing is truly passive.
The difference is, for many of the passive income streams people talk about (e.g. online courses, blog advertising, dropshipping), the labor is front-loaded AND/OR the return is huge in comparison to the labor put in. That means you do more labor up-front setting them up, but then not as much to keep it going.
Here are the hidden labor costs in several common “passive income” examples:
- Owning rental units: Hidden labor costs include finding and buying a property; dealing with maintenance and tenant issues, covering costs when the unit is empty; cleaning and repairing in between tenants. You can hire other people to do this work, but even managing this takes time!
- Starting a blog: Hidden labor costs include setting up the blog; designing the look; finding and paying for hosting (ongoing); creating content and keeping it updated; learning how to drive traffic; setting up monetization; managing relationships with affiliates and advertisers; dealing with malicious attacks; and more! This “passive income” source takes a lot of work!
- Licensing IP: Hidden labor costs include learning a field or technology; finding a unique solution; checking if it exists elsewhere; testing and refining; protecting your IP (with lawyers); finding a buyer; managing licensing agreements; suing if someone violates your IP rights.
As you can see, if your definition of passive income is “it doesn’t take any work,” none of these are passive. Instead, these have the potential to provide an oversized return for the time you do spend.
The internet and passive income
One of the reasons everyone knows about passive income is because if the internet. Thanks internet.
Chances are, you’ve experienced a guru telling you that you should be earning money sleeping by creating a digital product that will earn you passive income.
So why is it that we talk more about passive income with the rise of the world wide web? And why are so many people trying to create passive income online?
Here’s what the invention of the internet actually did for passive income.
The internet and the technological advances that went along with it automated things that traditional businesses had to spend time on. Digital businesses don’t need the things traditional businesses need: warehouses, fulfillment, shipping, product development, etc. Most of these essential business functions can be done virtually and even automated.
So in many cases, when we’re talking about passive income, we’re really talking about the freedom and scale that a digital business can offer.
Passive income – challenges and risks
If you’re planning to build a passive income stream, it’s important to be aware of the challenges and risks that come with passive income. Here are a few to consider:
- Initial efforts or investments: There is NO passive income source that doesn’t require an investment up front. Every single passive income source will require an investment of either time or money (or both).
- Nothing is guaranteed: And for that initial time and money investment, nothing is guaranteed. There is no business coach or positive mindset mantra that can change this: markets fall, products fail, competition eats your lunch… No investment is without risk.
- There are bad actors: On the internet and IRL, you’ll find bad actors–people selling lousy investment advice, an “easy 6-figure blueprint,” a get rich quick promise. Passive income is amazing and desirable, and some people are willing to prey on others’ hunger.
- Monitoring and maintenance: Go ask any blog owner if their income is totally passive. They’ll tell you they are continually updating content to make sure the traffic comes–dealing with changes in the Google search algorithm that hurt their bottom line. Every form of passive income requires at least some monitoring and maintenance.
46 Passive income Ideas
Remember, every passive income idea has costs involved, either time or money. As you look through these ideas, choose ones that fit your strengths and goals. Remember, ALL of these have pros and cons–don’t make investment decisions without doing your research and consulting professionals:
Digital business to build
- Communities: Online communities can work great to generate passive income, usually through a combination of membership fees and other digital products. The average community earns $27-33/mo per member of recurring revenue and scale through user-generated content and AI tools with low-effort for the host.
- Courses: Selling an asynchronous (pre-recorded) course is a great way to generate passive income, OR you can run a cohort course (live teaching) and sell copies of the recording after!
- Coaching programs: Selling 1:1 or group coaching programs make for great passive income–you can pre-build some or all of the program.
- Digital downloads: Sell a premium swipe file or PDF that users pay to download.
- Premium content: Sell gated or premium content on a blog or membership site.
- Newsletters: Sell a paid newsletter to your email list or add a paid newsletter to your membership site or community.
- Printables: Create coloring books, wall art, or pretty much anything your customers can print themselves and sell it online (e.g. Etsy).
- Blogs: Write a blog and monetize it with affiliates or advertising.
- Ebooks: Write an ebook and sell it on your website or on Amazon.
- YouTube Channels: Build and monetize a YouTube Channel.
- Software: Build or buy software that can be sold on a one-time or monthly membership subscription.
- Print products: Design products that can be sold and shipped without you manufacturing (e.g. selling t-shirts using Printify)
- Build apps: Build or commission your own app and monetize it.
- Software plugins and extensions: Build tools that can be integrated with an internet browser (e.g. Grammarly).
- E-commerce store: An ecommerce store on your website or Amazon (could be dropshipping for more passivity).
- Stock photos: For photographers, selling stock photos on Adobe Stock or Shutterstock can earn you a few bucks from licensing.
- WordPress themes: Create WordPress themes and sell them on a marketplace like Envato or Code Canyon.
- 3D models: Design 3D blueprints and sell them on Turboquid or Shapeway.
- Adobe presets: Create presets or templates for Adobe programs and sell them.
- Fonts: Build fonts and sell them on a site like So Fontsy.
- Virtual experiences: Roblox games, in-app purchases, there are a ton of virtual games and experiences that can be monetized.
- Dividend stocks: Individual stocks from established companies that routinely offer a dividend (payout of profits to shareholders).
- Dividend ETFs: Baskets of stocks (index funds) that look for high-dividend returns.
- ETFs or mutual funds: Bundles of equities that track the market (e.g. an index tracked to the S&P 500)
- Equity growth stocks: Investing in high-growth companies.
- High-yield savings accounts and CDs: Investments with guaranteed interest back.
- Government bonds: Investments that (usually) have guaranteed returns–issued by governments.
- Commercial bonds: Investments with a guaranteed rate of interest (issued by companies).
- Real Estate Investment Trusts: Invest in real estate and benefit from rentals without buying properties.
- Preferred stocks: Specialty stocks that can come with priority dividends–often offered to employees.
- 401 K: Not a specific investment type, but a type of account in which your employer matches investments.
- Residential rental properties: Owned rental units which benefit from tenants rental payments.
- Commercial rental properties: Commercial buildings that collect rent from commercial tenants.
- Short-term rentals: Prioritize higher-yield, short-term rentals (e.g. Airbnb)
Ownership passive income
- Royalty trusts: Give income based on extraction rights (e.g. oil & gas).
- Intellectual property: Royalties paid by a company using protected intellectual property (e.g. patents, music catalogs, etc.)
- Franchises: Businesses that add locations by copying the existing business–the owner of the new location pays franchise fees to the original owner.
- Content syndication: Someone pays you royalties to use content you’ve created.
Other passive income ideas
- Peer-to-Peer Lending: You lend your money online to someone who needs it and pay interest.
- Investing in local businesses: Using your money to help boost a local business (either for interest or equity).
- Crowdfunded business investments: A way to invest in a company without the stock market.
- Peer-to-peer car rental: List your car on a carshare site and earn when someone rents it.
- Vending machines: Own and stock vending machines and earn from the profits.
- Car washes: An automated car wash is a local business that can run on autopilot with minimal oversight.
- Laundromat: A laundromat is a passive income business that can work when you’re not there.
Passive income Strategies
Long-Term vs. Short-Term Strategies
In many cases, passive income requires patience and time. For example, if you are investing in the market or starting a blog, it could take months and even years of effort before you see returns.
As you’re thinking about what type of passive income you want to develop, be realistic about your timelines and when you can expect to see returns on your time and money.
We mentioned at the beginning, but diversifying your passive income sources and strategies can be a really good plan!
There are a lot of passive income sources out there. You can pretty easily get carried away by “the next best thing.” But sometimes the greatest success comes from persevering until you figure it out (Definitely read Martinus Evans’ story if you haven’t! It’s really inspiring.)
Celebrate the boring
Passive income is sexy to have, but when it comes to developing passive income streams, sometimes it’s less sexy. Putting in the hours. Plotting out the course. Saving the money to invest. Posting in your community weekly. It’s the little actions done consistently over time that create success, not the flash in the pans.
Finding real opportunities
It’s hard to know sometimes what an opportunity is, but occasionally, if everyone is already on a bandwagon, it may be that opportunity is oversaturated. Warren Buffet has a saying: “be fearful when others are greedy and to be greedy when others are fearful.”
The point is, assessing real passive income opportunities takes wisdom and sometimes it means ignoring where the crowd is running and using your intellect to find real opportunities.
Play to your strengths
Just because the latest passive income strategy is selling NFTs doesn’t mean that’s what you have to do. Find a passive income stream you’re passionate about and interested in, that fits with your natural strengths. If you’re great with teaching, start a course. If you’re awesome at crunching numbers and evaluating opportunities, maybe spend your time investing.
Don’t be afraid to pivot
Consistency is important, but so is knowing when to walk away when something isn’t working. If you find something hasn’t worked after you’ve given it a real shot, it might not be for you.
Know your legals
Passive income is like any other income–if you don’t tell the government about it, you’ll be in trouble. Do the work to set up your legal and taxation systems to protect yourself and your investments and keep you on the right side of the IRS!
Ready to start?
If you’re ready to get started building passive income streams, come build with Mighty! You can create and sell memberships, courses, premium content, and so much more. Mighty is the only platform you need to create a thriving digital business, and it’s free to try for 14 days!