Earn money while you sleep? Is it fair to earn passive income while others work all day to barely survive?
What is passive income and how is it generated?
Before we talk about ways to generate passive income, we will clarify what passive income is and how it differs from active or earned income. Finally the 40 real passive income ideas.
PASSIVE INCOME is that recurring income that is not limited by the person’s available time. In some cases, it requires great effort or money to create the sources that generate it. Once established, they produce income with little or no intervention from their owner
Passive and active income
It is important not to confuse passive income with liabilities on a company’s balance sheet.
Some of the better-known definitions of passive income are:
- Passive income is money you earn in a way that requires little or no effort to support, from Dave Ramsey
- Passive income is produced by creating assets that put money in your pocket regardless of whether you work or not, from Robert Kiyosaki
Finally, the following is our own definition of Passive Income:
Passive Income is that recurring economic income that is not limited by a person’s available time.
From this definition, we must highlight the word time. Passive income produces money without being limited by your time. This is different from other types of income:
Active or earned income is that which is limited by your time.
The following are three examples:
Employees
An employee usually has a schedule. That is, he or she sells his or her time or availability to the company that pays the most for this resource.
Self-employed or freelancers
A freelancer, such as an independent accountant or dentist, only earns money while he is working. When he goes on vacation or is unable to work due to illness, he does not earn income.
Business owners
The owner of a small business, say a bakery, cafe, or carpentry shop only produces income when he is on the premises. If he is not open one day, it is a non-income day.
Passive income and financial freedom
If you receive monthly returns on an investment, it doesn’t matter what you do or where you are. That’s why we say it’s an income independent of a person’s time.
This opens the door to an incredible fact: you can have unlimited sources of income because they are not bounded by your time, which is finite.
In other words, if you work for yourself, say as a dentist, you can see as many patients as you want in a day. Despite this, many dentists are millionaires. If a dentist sees one patient per hour, seeing more than eight patients per day is difficult.
On the other hand, a person can have recurring passive income from real estate rents, stock dividends, and securities yields, among many others, without having to work more.
By earning passive income, you’ll make more than you spend each month. You’ve reached Financial Freedom.
Creating passive income generating assets vs. the myth of passive income without working.
I have read authors and bloggers who say that passive income is income that can be earned without working. On this point, I strongly disagree.
The secret to generating passive income is to work hard and know a lot about a certain subject to be able to create assets that generate passive income.
Obtaining this knowledge requires study and work. There are some options, which do not need any knowledge, but they need money.
Another secret is to create systems to obtain passive income without you having to be present.
An example to illustrate: someone may think that Warren Buffett earns his money easily. He just buys stocks here and there until he becomes a billionaire.
According to Business Insider, Warren Buffett reads about 500 pages a day of financial reports and by the age of 11, he had read every investment book in his hometown library.
The point is: creating passive income streams often takes a lot of knowledge and sustained effort over years or even decades. Generating passive income continuously is the reward for this initial work.
The efficiency of passive income streams
Our blog is called income-blog.com because we believe that passive income is the path to financial freedom.
Hereafter you will find many passive income sources, most of which I have tried, some with more success than others.
Instead of claiming one sort of passive income is better than another, it’s more accurate to state it depends on the person and their position.
So I invite you to evaluate in each of the examples which one fits you, your knowledge, and your reality.
40 examples of real passive income ideas
We classify the types of passive income into the following 6 categories:
- Digital products
- Banking products
- Real estate and real estate products
- Stocks, bonds, and mutual funds
- Intellectual property and copyrights
- Other
Digital Products Category
Years ago when I first saw the possibility of creating and selling digital products I could not believe it. Here are some differences from physical products.
Cost:
Physical Product: When you manufacture a physical product, for example, a pair of shoes, each additional pair you manufacture has a cost. Materials and inputs, labor, and electricity, among many others.
Digital product: There is a cost to manufacture the first one. Additional copies or have no cost.
Inventory:
Physical product: When manufacturing, distributing, or selling, you usually need inventory. This inventory involves costs, especially the cost of capital.
Digital product: It is stored on a server somewhere in the world at zero cost. You don’t need inventory beyond the first copy.
Transportation and tariffs:
Physical product: Going back to our shoe example, if you manufacture in Morocco and sell in Madrid, you have transportation costs from the factory to the port, from the port of origin to the port of destination, and from the port of destination to the warehouse.
In addition, you will probably have tariffs, i.e. import taxes.
Digital product: The transportation cost is zero. At the moment there are no tariffs on importing information.
Scale:
Physical product: If you have a small shoe factory, you need a whole commercial structure to sell beyond the city where you produce them: distributors, representatives, and logistics agents among others.
Digital product: From day one you can sell your products in many countries. It may happen that you don’t even know in which country your customer is.
Maybe now you can understand my amazement when I first understood the concept of digital products.
Digital products are a very important type of passive income. I don’t want you to think that selling digital products is easy or fast.
I want to leave you with this opinion: If you learn enough and are willing to do the job right, understand who your customer is, create products that satisfy a need, and reach enough people, believe me you can make a wonderful business, and most importantly: producing passive income.
1. Digital books
Surely you have seen that more and more people are opting for digital books instead of traditional paper books. This has many explanations:
You can carry hundreds or even thousands of books on one device, such as the Kindle, Amazon’s digital reader, which weighs about 180 grams.
You can read the same book on several devices at once. If you left your Kindle at home and want to read while standing in line at the bank, you simply open your app and read from the page you left on the other device.
Instant dictionary. Just tap the word with your finger and you have the definition or translation instantly.
Exactly the same book, of the same edition, has a lower price in the digital version than in the print version.
You can try some chapters of the book, free of charge, before buying it.
You can read books even before their publication date.
Buying and downloading a 300-page book can take you 15 seconds from the comfort of your couch. You don’t have to go to the bookstore, park, or wait days for it to arrive in the mail.
E-books don’t consume paper: you save trees.
Many devices have a “text-to-speech” option, where you can listen to the book instead of reading it.
Among many others. If you write a digital book you can publish it directly (self-publishing), without having to go through the whole cumbersome process of finding a publisher to do it.
Believe me, you don’t have to be Miguel de Cervantes or Gabriel García Márquez to publish a good book.
If you write in Spanish you have a potential audience of approximately 600 million people. You need time, dedication, a little practice, and a computer.
2. Photos and images
If you are a photographer, graphic designer, or plastic artist you can sell your work through Internet portals dedicated to distributing them. There are millions of publicists, bloggers, YouTubers, and editors, among others, who need photos and images for our work.
In my case, as a blogger, every week I use 5 to 10 images for my blog posts and about 10 images a day for Pinterest. I draw the vast majority from portals on the Internet. There are very few images that I produce myself.
To give you an idea: just this week I was looking for some images to promote my article on “10 Investments for Beginners”.
I found the perfect photo. I went to Shutterstock to buy it. Surprise: 300 USD. Just imagine uploading a photo that you can sell for 300 USD.
With you selling just one a week (the same photo, on the same portal, to 50 different people). Now imagine you have 10 photos that produce the same.
Not bad to start… You need time, dedication, a little practice, a good camera, and a computer. But there is no money investment.
3. Selling subscriptions to your site
If you have great content, you can charge for access. There are many sites that use the “freemium” business model, in which users have restricted and unlimited free access to paying visitors. This is the case with Spotify.
If the content of your site or blog is really excellent, you can charge a subscription for your premium content.
Linkedin Learning (Microsoft’s educational portal) offers a scale of levels of access to its courses according to the type of subscription that each user chooses.
A great advantage of this modality is that you get a much more stable income than if you depend on one-time sales.
It is not easy to get your audience to pay for subscriptions. You have to deliver a lot of value month after month that they can’t get elsewhere.
4. Videos
Very similar to photos and images are videos. With the boom in YouTube videos, there are more and more YouTubers. To give you an idea, according to tubics.com, at the end of 2019 there were about 31 million YouTube channels.
This number is growing by 25% annually. Naturally many of these creators do their shots themselves, but there are situations where it’s more practical to buy video segments.
I often download short videos for my own YouTube channel. You need time, dedication, a little practice, a video camera, and a computer. There is no investment requirement per se beyond the equipment. You probably also need a tripod, lenses, and maybe a drone.
5. Formats, templates, and checklists
This category is one of the easiest to produce. On the Internet, you can find thousands of templates for all kinds of uses.
If you have an excellent time planning template, grocery shopping list, travel packing list or any other item that is very useful to millions of people, you can sell it on the Internet.
You need a little time, dedication, and a computer. No investment.
6. Music
Another product that YouTubers use in droves. Check it out: most YouTube videos have some form of music: An opening and closing curtain, ambient music throughout the video, or a segment that they want to highlight or set the mood.
There are 31 million channels and 500 hours of video are uploaded every minute, can you imagine how much music they absorb?
Do you play the piano, guitar, or drums, or better: do you have a rock band? Don’t wait any longer. Record tracks in various genres and lengths and starts getting paid.
You need some knowledge of music, an instrument, a computer, and an application to mix, process, and produce. No investment.
7. Sounds
Like music, sounds are digital products in an audio format that are demanded in huge quantities by YouTubers and other digital communicators.
One of my videos is about the 5 different types of assets. I show a man playing golf, just as the ball enters the hole. I downloaded a segment of the sound the golf ball makes as it goes in.
It’s similar to movie audio effects: thumps, squeaks, the sound of a man walking, or a horse galloping.
It’s practically infinite. If you like noise, this is your thing. Thousands of YouTubers will be grateful to you for recording the new trendy scream. Literally.
8. Courses through your own channels
This is one of my favorites. I am convinced that education is changing radically. Today, according to Insidebigdata, the information available doubles every 2 years.
This means that, if you start a university career when you graduate 5 years later, the information you learned in the first semester will be obsolete.
Today we want fast, practical, useful, and current information. We want 100, 200, or 500 USD courses, not 50,000 USD degrees.
I am a permanent consumer of courses: about software, how to write better, photography, about digital marketing.
If you’re reading this article it’s because you’re looking to learn about passive income. Some people learn easier by watching, some by listening, and some by reading.
One course has everything for everyone: audio, video, text, exercises, and examples. You’ve probably already read or at least reviewed our article named personal finance.
If you sign up you can repeat the lessons as many times as you want. It includes all possible tools. Budget template, goal setting tool, investment recommendation tool.
If you are an expert in a specific topic, you can design a course about it. Be sure that there will be a group of people interested in learning.
On the other hand, there are hundreds of thousands of people all over the world wanting to learn accounting, how to do their hair, their makeup, how to fix their furniture, how to use SketchUp, or how to take better photos with their iPhone, all willing to pay to learn.
I propose you make a list of your skills and competencies.
You can have without knowing the seed of passive income in your head.
9. Selling courses on educational platforms
This is a similar category to the previous one, but you use totally different channels: Course selling platforms, such as LinkedIn Learning, Udemy, and Domestika among many others.
Some of the differences are:
When using consolidated platforms, you already have access to traffic interested in the topic of your course from the moment you publish your courses.
If you decide to sell through your own channel, it takes a lot of time and effort until they get to know you and buy from you directly.
In case you decide to use your own channels, you define your prices and you keep almost 100% of the income, while in commercial educational platforms you have to share the profit.
In some cases, like Domestika, the platform pays you a fixed amount, regardless of the success of the course. If it was a failure, you still get paid. But if it was a resounding success, the one who receives the avalanche of customers and money is the portal, not you.
In the end, the decision is up to you, if you establish your own channels or if you leverage existing platforms to sell your courses.
Review in detail the conditions of both options to use the alternative that best suits your interests and goals.
To familiarize yourself with these products you can start by taking a course on “how to make online courses”.
10. Instructions and recipes
This item is similar to formats, templates, and checklists. If you know how to build kites, 3D-printed drones, or pneumatic cannons for fireworks, you can be sure that there are people willing to buy your instructions.
Note to digital products:
There are thousands of people who make a living selling them. However, you have to know how you are going to promote it. Just because you make a book or a course does NOT mean that there is going to be a line of thousands of people looking at how to use their credit card with your product.
You need to define the channels through which you are going to promote and sell your products.
11. Advertising
If you have a blog, a youtube channel, or even if you are an influencer you can charge for advertising. As you know, the case of blogs is the one I know best. There are companies that want to promote their products related to the topic of my blog.
If you are interested in blogs, I invite you to read our article on how to create one!
For example, in my blog, I talk about Index Funds, as a very versatile investment option.
If your blog already has some inertia, advertising is an example of passive income: you already make the effort to manage your blog; with very little additional work you can already achieve a recurring additional income.
If you are a YouTuber there are several ways to earn money:
Advertising income
Channel memberships
Product library
Personally, I think that in the case of YouTube it is not a very passive income.
You have to be practically a celebrity to have that many followers and views for your income to be significant.
Keep in mind that, on your Youtube channel, you are creating content for a third party (Youtube.com). If you are a blogger, you are creating content for your own channel.
12. Affiliate Marketing
If you really want to live on passive income, affiliate marketing is a way to do it.
If you have a blog, online magazine, or another type of online publication, you can sell third-party products to generate money.
For example, if I write an article on “how to make a blog” and you are interested, I can mention WordPress theme providers, hosting companies, etc. If you click on the link you get a discount for buying through my site.
If you are interested in blogging, I recommend the following article on how to create a blog!
Everybody wins: The provider gets a customer. The blog earns a commission. The customer gets the discount and the product or service they are looking for.
Attention: it’s not about inserting hundreds of words with links to suppliers in your blog posts.
It is about if there are products that you have tested and with which you are so satisfied that you would be willing to refer them to your best friends or family and earn a small commission for doing so.
13. Printable 2D or 3D floor plans.
With the rise of 3D printing, you can produce the centre lamp for your dining room or your own 3D printer in your studio, office, or workshop.
There are amazing designs for all kinds of products. You buy the plans on the Internet. You print. And… done. You have the product.
If you are a designer you can sell your creations for the rest of the world to materialize on their printer.
I have also seen entire plans of houses and villas to download. www.yeggi.com
14. Scores
There are websites like Sellfy where you can sell your sheet music and musical creations.
Category Banking Products
We move a bit away from the digital world to enter the financial universe. The following are asset categories that produce passive income, for which you do need money.
These products are very traditional. Some of them have been around for hundreds of years. But that doesn’t mean they are no longer passive income sources. What’s more, some of them require minimal effort.
I personally make use of these banking products every day. They are a very stable and liquid added to your investment portfolio.
Some of them produce absolutely passive income. All you have to do is purchase the product online and you create assets that generate passive income.
Keep in mind that the profitability of these financial assets depends entirely on the country, currency, institution, and even the economic moment.
I remember that when I was still studying at university I managed to acquire term certificates of deposit with a yield of 34% effective annual return.
To an outside observer, this would be the way to get rich quick. For me, however, it was a way to protect myself from inflation of almost 30%.
I will mention some products that in one country may have acceptable profitability, while in others it may have zero profitability. It is very important to first understand the reality of your country.
15. Savings accounts
These instruments are the simplest thing that exists. Everyone has access to them and you don’t have to know anything about them to open them other than going to the bank and presenting your identity card.
If you open them in an entity supervised by a more or less decent government, you should not have many risks. You have total liquidity. Naturally, the big trade-off is that the return may be zero or below inflation.
I include savings accounts in our list of assets because strictly speaking, they do produce a residual income. Minimal, but they do. I suggest you use them more as a transactional tool, not as an investment.
For ways to boost your savings at home, read our article on 50 ways to save.
16. Certificates of Deposit / CDT
These are instruments issued by banks or financial institutions. They have fixed terms (that’s why they are sometimes called “term certificates of deposit”), therefore, they have less liquidity than savings accounts.
Here’s how it works: You take your money to the bank, which gives you a piece of paper indicating the term and interest. Then you wait for the term to elapse (30, 90, 180 or 365 days usually), go back to the bank and they pay you your money plus interest.
On the other hand, they have higher yields than savings accounts.
We recommend using these instruments intensively because it has great advantages:
- Very easy to open
- It does not require any knowledge
- Maintains the purchasing power of the money. Often several points about inflation
- The value of the investment does not fluctuate. No surprises.
- High security
- It is possible to choose short, medium, or long terms, depending on your need for liquidity.
- While there is not much to know, we have learned to shop around and find good interest rates.
If your deposits are protected by the country’s government, it is a very safe asset.
If we opened CDTs in large multinational banks, instead of 8% we would get 2.5 or 3%.
17. Savings accounts with tax benefits/construction incentives
In number 15 we talked about savings accounts. In many countries there are accounts with tax benefits, that is, you have a tax exemption for depositing and keeping the money there.
To maintain this tax benefit you can withdraw the money to buy real estate. It is a government measure to encourage employment through construction.
It is a transaction. You buy real estate and the government deducts a percentage of taxes. The government gets more revenue because there is more employment for the people who built the property you will buy.
You have to be very careful with these accounts. Each country has its restrictions. But: in some cases, they are a way to have a higher return than traditional savings accounts, without the term limitation of CDTs.
This is another tool that we use intensively, with the help of our accountants.
My invitation is to explore with professional help if this type of account exists in your country and if they are convenient for you under the current situation.
In summary, we love this tool because of the liquidity (when you have funds without tax benefits), profitability, stability, and security of this tool.
Real estate and real estate investments category
In this part of the list, we are going to mention real estate-related assets. Many of them we have used and continue to use for a good part of our investment portfolio.
According to this article, 90% of millionaires have created their fortune through real estate in the last two centuries.
18. Renting real estate
This is a very traditional and quite local alternative. As it is such a local investment, a good recommendation for Buenos Aires may be bad or useless for Mexico City or Madrid.
It is very important to understand the dynamics of the local market. An indicator that is very important for me is the rental budget (monthly rent * 12)/(the price of the property + remodelling + property tax).
For example, if I buy an apartment for 200,000 EUR and the rent I receive is 1,000 EUR/month, my profitability indicator will be 6%. If your maintenance costs and taxes are about 2,000 EUR/year, the profitability will drop to 5%.
Another point to take into account is that the different uses of real estate (housing, offices, commercial premises, rural property, etc.) have different behaviours.
To get an idea of the right price for a property, it is advisable to visit dozens or hundreds of them.
A few years ago I saw a property whose value per square meter was about 10% below the price of the sector and had exceptional conditions compared to the average of the sector.
Result: I saw it, offered it 1% below the offered price, bought it and it has had an appreciation of 8.2% per year since then, excluding rent.
Knowing if the property is at a good price can only be discerned if you have seen so many properties in the area that you instantly know if it is expensive or cheap.
I invite you to take into account several common sense aspects, useful when evaluating a property for housing.
There are many types of real estate in which it is possible to invest, such as apartments, houses, premises, offices, warehouses, farms, penthouses, and garages, among others.
The price of a real estate sometimes goes up and sometimes goes down. It is an incorrect popular belief that the price of real estate always goes up.
With the Coronavirus quarantine, the prices of many office buildings have gone down. This trend is likely to continue due to the number of companies opting for telecommuting.
If you finance the purchase of the property through a mortgage loan, make sure that the leasing fee is higher than all the costs of the property: loan instalment, property taxes, maintenance, etc.
This way you will have a free cash flow, however small it may be.
Always take out lease insurance. Even if the tenant stops paying, you will still receive the income.
Past appreciation is no guarantee that the property will continue to appreciate at the same rate in the future.
If you buy an apartment on the top floor of the building, it is very common to have problems with dampness, leaks, or leaks.
Second-floor apartments tend to be darker, colder, and with noise from the entrance of cars.
Older apartments generally have higher maintenance costs than newer apartments.
Housing properties with a view tend to be better priced than those without.
19. Buying real estate for resale
We will omit this alternative because we do not consider it a source of passive income.
There are activities such as buying, remodelling, and reselling, which can be highly profitable, but, as stated, the income derived from these activities is not considered by our team as passive income.
20. Real Estate Titles or rights to the usufruct of property and Real Estate Crowdfunding
If you are going to buy an apartment, you probably hand over your savings and take out a loan, and … done!
If what you want to buy is an office building or an entire industrial park, there are other ways to raise money from many investors and acquire or build large real estate projects. One of these is real estate securitization.
A securitization company sells the securities to investors like you, and in return, you receive a right to exploit it.
In other words, if the securitization company builds an office building, you are entitled to a fraction of the rent that the tenants pay monthly in exchange for your money.
Important: You do not own a brick. You own the usufructuary rights to the real estate asset.
Believe me: it’s simpler than it sounds. I’ve had this type of title for over a decade and I couldn’t be happier.
21. Rental of tourist real estate
Surely you have seen the boom that this type of real estate has had. I hesitated to put it on this list because in many cases it is NOT a passive income, but a labor income, because when you rent your apartment to tourists, the rotation is very high, and the permanence is very short.
This forces you to work continuously to fix the apartment, to hand it over to the new tenant, to check that the tenant who leaves has left everything in order, maintenance, etc.
We decided to include it, because if you have several apartments in this modality, it is possible to hire an administrator who is delivering and receiving the properties, does the maintenance and does other activities.
Advantages: Nominally it is much more profitable than a long-term rental.
Disadvantages:
- It requires much more work and is much more uncertain than long-term rentals.
- Tax regulations in many cities equate them to hotels.
- City legislation is increasingly averse to this type of investment and taxes are higher.
Check very well the local legislation before buying, adapting or building real estate for tourism.
Taxes may be the same as those charged by hotels. In tourist cities like Barcelona or Cartagena de Indias, licenses for new tourist housing are totally restricted.
I leave you with a wise phrase: “It is too expensive to have a bad lawyer”. If you like this type of asset, I suggest you start by hiring a good lawyer!
Airbnb has almost a mental monopoly on many of us – you should know it’s not the only one!
Booking.com recently entered into direct competition with Airbnb for this gigantic tourist housing market.
22. Real estate investment funds
If you don’t have a lot of money, or don’t want all the hassle and risk of managing, maintaining, leasing, paying taxes and insurance, real estate investment trusts are your thing.
Real estate investment funds often include in their portfolios real estate or real estate holdings in many countries on various continents.
This way, if one of these geographies goes into crisis, there are other locations that can compensate for growth and profitability.
We invite you to read our full article on these types of real estate assets or download our detailed guide to Passive Income.
Stocks, bonds, and mutual funds category
Many people imagine an investor as a person who lives glued to 4 computer screens buying stocks when the price goes down and selling when the price goes up.
However, the strategy used by the world’s most famous passive investors is totally different.
Let’s start by making a differentiation: A share is a stake in a company. If you buy a share, you are, in fact, a co-owner of a real company.
Likewise, if you buy a corporate bond, you are lending money to a company to finance its operation or growth.
A company is made up of people, resources, procedures, and brands that combine to generate value for the parties and more specifically, dividends and shareholder value. Thus, if you become a shareholder you are entitled to this value generated by the company.
Seen in this way, if you have enough knowledge to identify which companies have a market price lower than their intrinsic value, you will be in an excellent position to own an asset that will produce dividends or appreciation for many years to come.
23. Stocks
Stocks or shares of companies. If the company’s shares are traded on the stock exchange, their price is subject to the law of supply and demand.
As the company’s capital stock grows, so does the value of your investment. In addition, you may be entitled to a proportional share of dividends. In this article on investing in shares, we explain this in more detail.
24. Corporate bonds
For their financing, companies use money from investors (equity) and debt (liabilities).
Just as you can buy shares, you can also invest in bonds. In this way, the company will use your resources as a loan to finance itself.
The advantage of buying bonds is that the company commits to pay a fixed interest rate. The higher the company’s risk, the higher the interest rate.
You as a bondholder do not care whether the share price goes up or down. In any case, the company must pay you the return to which it committed itself.
Caution: these instruments are more stable than stocks.
This is especially important in times of crisis. You will probably want to invest part of your assets in funds that group together the corporate bonds of the most solid companies.
For example, the BND fund (check it out on Yahoo Finance).
25. Government bonds
Just as companies can finance themselves by selling bonds on which they pay interest, so can local, regional and national governments.
The bonds of more stable countries with less perceived risk offer more security, but less return than less stable ones.
Your private pension fund will most likely invest part of its portfolio (your pension) in government bonds.
In some cases the bonds are tax-free. They also have the advantage that the promised interest is fixed. That is, if you buy EUR 1000 in bonds at 5% per annum, at maturity, you should be paid EUR 1050 no matter what.
Knowing how to choose the right company and the price at which it makes sense to buy it requires a lot of knowledge, dedication, work, and often patience. Even if you have these skills and dedicate all this time and effort, you incur a risk.
Fortunately, there are ways to access shares of all types of companies with less risk and effort. You can invest in mutual funds.
An index fund is an exchange that contains hundreds of individual stocks or bonds, i.e. diversify your investment to the maximum. It is not uncommon for one of the stocks to fall, as in the cases mentioned in the article on risk.
However, if one of the 500 stocks falls, there will be others that will grow, thus offsetting the loss.
On the other hand, since index funds are not actively managed, the management cost is very low. One such fund is EDV.
I personally think it is an excellent alternative if you want to diversify your portfolio with stocks and bonds.
26. Index funds that follow stock market indexes
Similar to corporate bond funds, these funds are exchanges or portfolios with dozens or hundreds of stocks.
It is much more stable and less risky to invest in a fund that tracks a stock index than an individual stock.
In other words, it is a way to diversify risk.
These funds group stocks by industry (Energy, Healthcare, Real Estate, etc.), by company size (large, mid, and small cap), and by geographic region (United States, Europe, emerging countries, etc.) among others.
Some examples are:
- S&P 500 (GSPC)
- Dow Jones Industrial Average (DJI)
- NASDAQ Composite (IXIC)
- VTR Consumer Discretionary ETF
- S&P 500: Vanguard S&P 500 ETF (VOO)
The term ETF stands for Exchange Traded Fund, i.e. funds that are traded on the stock exchange.
27. Index funds that track pools of corporate bonds
The following is a fund comprising a large number of corporate bonds: Vanguard Total Bond Market Index Fund Investor Shares (VBMFX).
As we indicated above, the advantage of bonds is that they have a fixed return. Therefore, in the event of a stock market crisis, bonds and bond funds maintain portfolio stability.
The disadvantage is that, in boom times, when all stocks are growing in value and distributing very good dividends, bonds and bond funds give you the same yield.
28. Index funds that track sector indexes
Just as we saw the funds that track the S&P500 and the DJIA, i.e. the set of US companies and the largest market capitalization industrial companies, respectively.
You can also invest in index funds that specialize in sectors, such as energy, healthcare, and real estate among many others.
In this way, you can diversify even more.
29. Commodities and other commodity indices
Commodities are products, raw materials, and other goods that are traded according to their specification with respect to certain standards. Some examples are metals, fuels, and agricultural products such as soybeans, corn, wheat, etc.
It is possible to invest in commodity mutual funds.
One of the most commonly used indexes is the MSCI (MSCI Global Metals & Mining Producers ETF), which has the symbol PICK.
You may be wondering which type of fund is the most suitable.
There is no single answer. It depends on your current investment situation and many market conditions.
However, to give you a more accurate answer, we have the Investment Recommendation tool. You answer some questions about yourself, and it makes a suggestion of the best types of investments according to your profile.
On the other hand, it is possible to have a “Perpetual Portfolio”, which balances itself. We have an article for you in which we describe this method. I personally find it a very simple scheme to manage and with a structure that withstands recessions and economic crises well.
30. Peer-to-peer lending (Crowdlending) or peer-to-peer lending platform
PPPs are known in English as Peer to Peer lending, (or P2P lending) are platforms that seek to simulate the function of banks.
In the beginning, banks collected money from savers and then gave it to borrowers at a higher rate. This difference, called the spread, was the main source of profitability for the first banks.
Today’s banks are much more complex and have many more sources of income, and large structures with thousands of employees, offices, and technological platforms, among others.
PPPs operate under the following premise: By having a VERY light structure, no branches, and employing very few workers, their costs will be much lower than those of traditional banks.
Since the costs are lower, they can give a higher interest rate to savers and charge a lower interest rate to borrowers. So, in principle, the idea is a good one!
Some platforms use artificial intelligence and social network data analysis among others, to estimate the risk of each credit aspirant and assign an interest rate according to their risk profile.
So, if you invest in PPP you can decide the level of risk you are willing to take to earn a certain level of return.
Advantages:
It is possible to choose the return according to the risk the investor is willing to take.
It is possible to find double-digit returns.
Disadvantages:
You can lose resources if one of the borrowers decides not to pay.
It is a relatively passive income generation figure. I think it is advisable not to invest a very high percentage of equity in this alternative.
Intellectual Property Category
31. Patents
Patent exploitation by royalties
In this form it sounds incredible: Through a contract, you authorize a company to produce and sell a product based on your patent, and you get paid for each copy sold. This really is passive income.
Unfortunately, it’s easier said than done. I’m not telling you it’s impossible, but you have to have VERY good contacts, a very good product, and a great lawyer to make it work.
Advantages:
You can achieve a small monopoly.
If you manage to market your patented product it can be extremely profitable.
Disadvantages:
Commercializing inventions requires a lot of perseverance and conviction.
Patent evaluation and granting processes are slow.
There are many other forms of intellectual property. Other examples are:
- Trademarks
- Copyrights
- Trade secrets
Other passive income sources category
I grouped the following passive income sources into the other category, as they are not very different and do not have many characteristics in common, plus they match the meaning of passive income.
The following options depending on your specific situation. The purpose of listing the sources of passive income is to invite you to think outside the box and see that the options are limitless.
Start by recognizing what your talents are and what special conditions you have from which you can generate passive income in 2020 and beyond.
32. Retirement Pension
Maybe you didn’t expect to find this title in an article about passive income. I think it is very important. The pension is really passive income.
Obviously, you have to work for years to get it, but once you become eligible for the pension, you can do whatever you want (sounds fancier that way) and the money keeps coming.
If you are 18 at the time you read this, you may think that the pension will come…
Option 1. Never
Option 2. When I am old
Once again I speak from my experiences. I am 46 years old and I am processing the early pension.
As a personal finance blogger, I calculated all my possibilities and discovered that retiring at 46 is optimal.
I don’t consider the pension allowance my main source of income, but rather supplementary passive income for life.
From this point I want you to take away:
Find out about the legislation, your obligations, and the existing alternatives.
Seek to retire, but not retire. It’s a bit depressing to stay in a job you don’t like hoping to have a pension to do nothing. Life has much, much, much more to give you.
In my opinion, it’s better to have a pension than not to have one, even if it’s small. In a way we are in this plan of acquiring and creating multiple passive incomes, to support ourselves from them from an early age. Another way to put it is self-pension yourself young.
33. Friends Fund
If 10 friends donate 50 EUR/month, the fund will have 500 EUR more each month, plus yields.
One of the 10 buddies can borrow 5,000 EUR to buy a car from the fund. Instant credit approval and a cheaper interest rate benefit the lender.
The lender pays a higher interest rate than a bank would for the same money in a savings account or Term Deposit Certificate.
In the end, everyone wins. In the experience, I had, practically all the money in the fund (a few years ago it was already over 100,000 EUR) was always lent among the partners.
Attention: these schemes only work if there is total trust between all members.
It is not absurd to think of achieving double-digit interest in this way. It is also important to have a system to record all the information on contributions, credits, and investments in a reliable and easy way.
34. Taxis through a management company
In many countries, there are management companies in charge of managing cabs. The investor buys a vehicle with the ideal conditions, and the company is in charge of assigning a driver, maintaining it, and delivering the proceeds of the operation to the owner or investor.
35. Rent your car by the day through a peer-to-peer rental portal.
This is a very interesting way to get the most out of your car.
You can register your car on portals such as turo.com or getaround.com and indicate the days with availability. The interested person reserves it and you deliver it or the user picks it up.
I know people who have been using these services for months and it works. It is good, as always, to do a little research.
Check aspects such as:
Which model is the most in demand.
In which cities the service works best.
Do you have time to deliver the car and receive it (turo.com), or do you want everything to work more or less automatically (getaround.com) without your intervention in person?
36. Earning km, miles, or points by buying airline tickets
While km, miles, or points are not money as such, they are convertible into cash.
Originally these loyalty programs were conceived by the airlines and were redeemable only on flights.
Over time these awards can be redeemed for all types of goods and services in addition to flights.
37. Earn km, miles, or points for credit card purchases.
Very similar to airline ticket rewards, these are earned by paying with credit cards. If we buy groceries, supplies, clothes, vacations, and other recurring expenses anyway, it is better to earn points for doing so.
In some countries, there are government incentives through which you can save some value-added tax points by paying through credit cards.
The purpose of these government incentives is to bank a higher percentage of the population. In this way, it broadens the tax collection base.
38. Reduce your debt
This is undoubtedly the most passive income of all.
It is also the safest investment of all because your income (in this case reduced spending) does not fluctuate. If you pay half of your debt, you reduce half of the interest you pay for sure.
We hope this list will grow over time and with your input. Always remember that all investments have a level of risk.
Be sure to study and understand each investment well, and go in with a low amount the first time, while you understand how it works.
In the specific case of credit card debt, we have a complete article listing the advantages and disadvantages.
39. Which one is right for me?
More than a type of passive income, it’s a method to choose from.
If after reading the list you have no idea which is the most appropriate asset for you, don’t worry! . Remember that there is no one right investment for everyone.
“Passive income is that recurring economic income that is not limited by the person’s available time.”
Passive Income for Beginners
Some passive income sources are difficult, like patents or website advertising.
Even without much knowledge or resources, a person can purchase or generate passive income assets.
Below we list 3 options that are easy to open, easy to maintain, and do not require high assets.
It is worth mentioning that as we have more knowledge and more capital, we can access other types of more profitable investments.
40. Bank term deposits
It is the type of passive income that requires less knowledge and is also one of the least profitable, however, it has no fluctuation and is quite safe.
ETFs or Indexed Funds
This type of passive income is more complex than bank certificates of deposit, however, by choosing a fund such as the VOO (Vanguard S&P 500 ETF | Vanguard) or the IVV (iShares Core S&P 500 ETF) you can have long-term growth of 8% without much thought, although it does have a lot of fluctuation.
Reduce debt
Many may say this isn’t passive income, but I think it’s the safest and most rewarding.
If you pay off your credit card debt in full, you’ll save 30% per year with 100% security. What other investment is so safe and profitable?
If you know of one, let me know!
Conclusion: generate passive income
There are many ways to generate passive income, you just need to create the assets that produce the income.
Not all passive income-producing assets require money to create.
Passive income DOES require work, at least many of them do. The important thing is that income generation does not depend on available time (like a job).
Anyone can have passive income-producing assets, regardless of age or financial situation.
To conclude: Is it fair for some to generate passive income while others work all day?
Finally, to answer the question about the fairness of generating passive income while you sleep, when other people must work all day to develop it… I don’t know if it’s fair.
What I do know is that it’s available to everyone. At least it’s fair. What do you think? We’d love to hear your opinion.
Here’s another question: What do you prefer: to generate passive income while you sleep or to work all day to survive