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Improve Your Finances With a Passive Income Stream

Step-by-Step Guide to Generate Passive Income

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Credit Sesame discusses how to improve your finances with a passive income stream.

One of the best things about a passive income is that it is … passive. You make money in your sleep with some types of passive income, while others require some hands-on work to get started and to continue being profitable.

Either way, side gigs can supplement your full-time job, and can eventually turn into a significant or maybe your only income stream. 

There are many ways to earn a passive income, depending on your skills and what you enjoy doing.

Two types of passive income

Passive income streams usually start small and require time and effort. You may have to put a lot of work in to get it running, or you may just have to invest funds to reap rewards later.

Financial

Passive income streams requiring the least amount of hands-on effort usually require a financial investment upfront. However, you may need to spend time researching the best place to invest your funds. Real estate, peer-to-peer lending, and dividend stocks, are examples of this king of investment.

Hands-on

Other types of passive income can require set-up and organization, but then it may take little effort to keep it going. These include such businesses as dropshipping, renting out your home, and selling digital products.

Investing

If you’re invested in the stock market or have a savings account, then you’re already doing this type of passive investing.

Investing requires having money upfront. As investments can decrease and increase, you should be in a position to lose investment funds if things don’t go well. Although, some investments such as savings accounts are insured up to a certain amount.

Dividend stocks

Dividend stocks are a common way to earn a regular income. Some companies share profits with shareholders through dividends, and pay them on a quarterly or other basis. 

The website Good Financial Cents reports that to generate $1,000 per month in dividends, you need a portfolio that produces at least $12,000 annually. Using an average dividend yield of 3% per year, a portfolio of $400,000 is need to generate that much income.

Real estate

Real estate investment trusts, or REITs, are one way to make money in real estate. They usually trade on major stock exchanges, pay high dividends, and can make a lot of money over the long term. REITs can have an investment minimum of $1,000 to $25,000, and management fees of 1-2% of the total equity invested.

Savings account

A savings account is a slow way to make money, paying an average of 0.17% per year interest as of Sept. 19, 2022, according to the FDIC. For a $10,000 balance, that’s $17.01 in interest paid after one year.

Savings accounts are usually free to open. If not, then the monthly maintenance fee of $25 or so can be waived by having a balance of, for example, $100. The minimum balance requirement may vary.

Hands-on passive income ideas

A more common type of passive income requires more upfront work and a lesser amount of capital. For example, selling virtual and physical items. Maybe you have a hobby or expertise outside of your day-job that can provide an additional income stream.

Rent out your home

You can rent out part of your home or a second home on Airbnb. Nearly half of Airbnb hosts earn more than $500 per month, and the monthly average for hosts is $924. Most hosts pay the company a flat service fee of 3% of the booking subtotal.

Sell digital services

There are a range of digital services you can sell online. Start by considering your skills as a hobbyist. 

If your hobby is baking, for example, you could:

  • Make YouTube videos and earn money through ads.
  • Write a cookbook e-book for free with Kindle Direct Publishing, and sell it through Amazon.
  • Sell stock photos and video of you baking at Shutterstock.
  • Create a course on how to bake and sell it online. Sites such as Skillshare, Coursera, Udemy, YouTube, or your own website can be used to sell it.
  • Create a website devoted to baking and include reviews of baking products for an affiliate marketing partnership where you earn a commission on items sold, such as linking to sheet pans and other baking tools sold on Amazon.

Dropshipping

Dropshipping allows you to sell items to consumers without having to own what you’re selling or stock them yourself. A third party owns and ships them directly to the customer after getting orders from you. The trick is to find a product that’s trending or is something that consumers always need. Some of the best dropshipping products are:

  • Apparel
  • Personal care and beauty products
  • Baby products
  • Pet supplies
  • Office products
  • Home interiors
  • Tools and home improvement

Finding the best ways to market your product is important, so you may need to learn about online advertising platforms such as building a website, facebooks Ads and Google Adwords.

Make something

This can be more work than selling digital products, but if your skillset is in making physical things, such as woodworking, then you can make some extra money on the side.

Etsy, eBay, Amazon and other online stores make it easy for hobbyists to sell their wares. Know how to knit or sew? Etsy sells all kinds of clothing for sale and can turn your hobby into a side gig.

How to start

The best time to start a side hustle that can turn into passive income is when you don’t need it as extra income. If you have a full-time job, use some of your spare time to turn a skill into an income. Choose something that has minimal startup costs.

Research the costs and potential roadblocks into turning a hobby into a business. Putting a YouTube video together can be as easy as turning your phone on and recording something funny, or as complicated as having the right lighting and apps to make it look professional.

It gets easier over time, and sooner or later your hobby may turn into a passive income that gives you the financial freedom to work as little or as much as you want. Perhaps even to give up your day job.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Aaron Crowe
Aaron Crowe is a freelance journalist who specializes in personal finance topics. He has written for Wise Bread, AOL, AARP, Bankrate and other websites that focus on financial literacy and saving money. He has also worked as a newspaper reporter and editor. You can follow him on Twitter @AaronCrowe.

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