Passive income is earned from work that has already been completed or investments where the beneficiary is not actively involved in business operations. Unlike active income, which comes from hourly wages and commissions, passive income requires minimal involvement. Some common examples include earnings from property investments, dividend investing and online income.
However, don’t let the word “passive” mislead you. Earning passive income happens for those who are motivated to put in the hard work and effort at the beginning. The “passive” part comes after you first take some very active steps. Let’s take a look at the reality of passive income and explore some important ways it can enhance your financial livelihood.
Investment properties can be a lucrative source of ongoing passive income. Keep in mind that owning property is not considered passive income if you are conducting business on the premises. Therefore, realtors and property managers are in the active income category, while investors are often considered passive. Property investments are truly passive when you own the property and earn an income from that ownership without residing on the property or participating in the business operations.
Just because you are not using the property as a means of conducting business does not mean you are completely hands-off. For example, owning rental properties still requires you to conduct tenant screenings, address repairs, pay taxes and provide regular maintenance. However, if you put in the effort early on, this income can easily become more passive and the payoff more lucrative over time.
For those interested in exploring passive income from property investments, begin by researching home values and average rent in your area. Be sure to consider a diverse swath of properties including:
- Single-family homes;
- Apartment complexes;
- Office buildings;
- Industrial complexes;
- Businesses with low overhead that primarily earn passive income, such as laundromats and parking lots.
You’ll also want to factor in the costs of additional services you may have, such as hiring a property manager, generating financial reports, conducting internal audits if any of the above is conducted under a business, keeping repair services on retainer, and collecting payments.
Dividends are the earnings that companies pay their stockholders for their investments. Classified as passive income, dividends are paid per share of the stock. For example, if you own 100 stocks and see dividends of $5 per share, then you would earn $500 a year in passive income.
When you’re looking for dividend investments, there are some factors to keep in mind that can maximize their potential for passive income, such as:
- Investing in a company that can pay out dividends even during short-term business declines.
- Avoiding investments with the highest yields, which is a sign that the dividend may not be as sustainable.
- Prioritizing dividend growth over yield.
Like investment properties, dividends do require you to take action from time to time. For example, you’ll want to speak regularly with your financial advisor to manage your stock portfolio. Investors will need to partner with professionals to determine which companies to invest in, when to reinvest their dividends and when to collect, calculate the dividend per share (DPS), and analyze the dividend yield.
The internet has opened a whole new world of passive income for people. You can create digital products, engage in affiliate marketing, or manage a dropshipping e-commerce website. Some of the most lucrative ways to earn passive income online include:
- Writing and self-publishing e-books
- Creating online courses for professionals
- Monetizing a blog or YouTube channel
- Creating an e-commerce dropshipping site
- Investing in domain names
- Licensing music and photos
- Engaging in affiliate or influencer marketing
Some action is required, at least in the beginning, to generate passive income, and all the more for online income than most other revenue streams. However, by automating processes and hiring professionals, you can ease the initial lift on:
- Developing and implementing marketing strategies
- Designing digital products, like apps
- Building websites and providing graphic design
- Creating content for web, email and social
- Maintaining a social media presence
Once you have these online, you will need to keep updating and adapting your processes to stay competitive in the evolving online landscape. You also have to stay on top of emerging technology and trends. If you notice your online income is becoming stagnant or decreasing, use data-driven analytics to enhance your decision-making and improve your return on investment (ROI). Even though your online income is passive, it still has to be examined and managed.
How to manage passive income
To get the most out of your passive income, you’ll want to explore several techniques to help you manage your earnings. When you have clear and achievable goals for your passive income, you can continuously boost your earnings by assessing and reassessing your priorities.
When it comes to managing passive income, several guidelines can help investors maximize their revenue. Drawing a financial roadmap and following it empowers you to sustain and even grow your earnings from passive income.
Prioritize cash returns
Focus your energy on investments that offer consistent cash returns. It may be tempting to spend your time trying to boost underperforming investments, especially those with a high upside value. This means that the stock has more value than the current price. These kinds of investments can be both high-risk and high-reward, which isn’t the primary goal for passive income. To bring in money every month, you’ll want to invest in stocks with regular, stable returns.
Monitor your earnings
While the idea behind passive income is that it requires little regular activity to generate, you still need to monitor your earnings so you can modify your financial strategies. There are many techniques available to help you manage your passive income in a way that helps you build wealth.
For instance, investors can use financial review software to glean new insights into their passive revenue streams. When it comes to making changes to your passive income strategy based on those insights, be sure your decisions are backed by data. Data analytics programs can help investors feel confident in their decision-making with automated data acquisition, transaction testing and reconciling checklists.
These tools are powerful, agile and user-friendly because they utilize artificial intelligence (AI) software to generate predictive analytics. Monitoring your earnings isn’t just important for boosting your inbound cash flow, but also for staying on top of your tax payments.
Develop a tax strategy
Though taxed differently than active income, passive income does have an income tax. You are responsible for paying income tax on your earnings, typically in the brackets of 0 percent, 15 percent and 20 percent, according to the financial professionals at the RealWealth Network. While they may be taxed differently, those who reside in Canada will also need to address the tax on their passive investment income. Before you begin your passive income investment, it’s important to look at how that income will impact your taxes. That’s where having a tax strategy comes in.
Investors can save time and make fewer mistakes by using tools to save on their taxes. For example, with smart auditing software, you can use visualization to get a big picture of your portfolio and identify gaps and inefficiencies. Using software can reduce the risk of audit errors from an incomplete audit trail, human error or security issues.
Passive income can be a great way to boost your savings, pay off debt, expand your portfolio, broaden your work experience and even lead to early retirement. From investments to online products and services, the opportunities to explore passive income are diverse and endless.
However, like all forms of income, passive income is an investment. You will have to invest some of yourself — your time, creativity, ingenuity and perseverance — to see a positive outcome.