Whether you’re seeking financial independence, early retirement, or simply looking to boost your regular earnings, a passive income stream can turbocharge your chances of achieving these goals.
In this article, we’re going to explain what passive income is, and give you some ideas. Keep on reading for all the details or click on a link to head straight to a section…
Passive income is a source of regular revenue that is paid to you without having to actively ‘work’ for it.
To put it another way, say you work in an office and you’re paid an hourly wage. In this scenario, the amount of money you earn is directly linked to the labour you perform every hour. This is known as active income.
Passive income, on the other hand, refers to ongoing earnings that aren’t derived from your hourly labour efforts. In other words, it refers to income earned ‘passively’ – perhaps with little effort.
Popular musicians often rely on passive income in the form of royalties. While initial work is required to write, produce, and perform music, once this process is complete, any income made from licensing copyrighted music in future is earned ‘passively.’ So, if you’re a musician and you become a megastar, passive income from royalties can make you very rich indeed!
Even if you aren’t a famous musician, there are a host of other ways to earn passive income. From property, to investments, to savings accounts, a goal of earning £1,000 passively is certainly possible. Let’s take a look at some passive income ideas.
Please note that many of the ideas below aren’t risk-free. Always do your own research!
1. Dividend-paying stocks
Some companies pay dividends as a way of sharing the spoils with shareholders. If that’s something you like the sound off, buying shares in dividend-paying companies could be a straightforward way to earn passive income. See our article that explains how to find high dividend shares for more on this.
Just be mindful that dividends are never guaranteed, and your capital is at risk.
2. Buy an annuity
If you’re nearing retirement, and you’ve a decent pension pot, buying an annuity can give you a guaranteed income for life .
Yet, buying an annuity is irreversible, and there are lots of different types. Because of this, buying an annuity is a VERY big deal that requires careful thought. To learn more, see our article that gives the lowdown on annuity rates.
3. invest in property
Buy-to-Let has been the road to riches over the past few decades, as rising rents and house prices has created numerous property millionaires. While there’s no certainty rents and house prices will continue rising, the buy-to-let sector remains a popular way to earn passive, unearned income.
If you don’t have the funds to buy a second property, there’s also the option of hosting a lodger if you have a spare room in your existing home.
Alternatively, if you like the idea of buying property, but don’t want to deal with tenants or the hassle of being a landlord, then investing in a Real Estate Investment Trust (REIT) is another option to consider.
4. rent out your car parking space
Property isn’t the only asset class you can rent out. It’s also possible to earn a passive income by renting out your driveway or garage.
Car parking spaces can be particularly desirable if you live near a major events venue, or in a big city.
5. earn interest on cash savings
While perhaps not as glamorous as investing in property or shares, interest earned on cash savings can also classed as passive income. However, if you rely on savings interest, it’s important to understand how inflation can impact your ‘real’ return. Right now, the UK inflation rate sits near a 40-year high!
However, despite high inflation, it’s still worth grabbing the highest interest rate you possibly can. Take a look at our best easy-access savings accounts article.
The amount you can earn in passive income will vary massively between individuals. After all, a landlord with a successful property empire will likely be earning a lot more than someone renting out a spare bedroom.
However, if you’re eager to earn passive income, it’s a good idea to have some sort of target in mind. While earning £1,000 per month passively may seem ambitious, it’s certainly possible – even if you don’t achieve it straight away.
If you’re unsure on which passive income strategy to go with, there’s no harm in trying more than one idea (as long as you have the financial means to do so)!
If you currently rely on working – or ‘active’ – income, then it’s likely your tax liabilities will be taken care of for you through the ‘Pay As You Earn’ (PAYE) system.
Yet if you have multiple passive income streams, you’ll have to start dealing with your own tax affairs. For example, if you hold shares or property, inheritance and/or capital gains tax may apply. So before you dive into investing in assets to deliver a passive income, understand the possible tax implications .
Need more information on taxes? Read these articles next!
- Three ways to cut you Capital Gains Tax bill
- What Is a Taxable Grant?
- Filing Taxes – Ways to Stay Legal
- What Is Inheritance Tax?
- The Inheritance Tax Threshold Explained
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.