Updated October 12, 2021

Passive Income: Practical Ideas to Build Wealth

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How do you generate passive income? Take a look at the different types and strategies to find the best option for you.

© CreditDonkey

Who doesn't want passive income?

If it was so easy, wouldn't everyone be doing it?

As you know, passive income isn't totally hands-off. It requires upfront work (and costs) before you can enjoy the money.

Most of us are afraid to take the first step. And successful investments take time. Don't be one of those people who wish they'd started earlier. Some income streams can take as little as 10 minutes to set up.

But before you jump in, make sure the pros outweigh the cons. If not, you'll end up wasting time and money.

What Is Passive Income?

Passive income is money you make when you're not actively working. It usually requires either:

Whether you want to keep your day job or are looking for financial independence, passive income can help.

Read on to learn how to make it, mistakes to avoid, and ways to get started right now.

What's the difference between passive income and residual income?
Passive income is money you earn when you're not actively working. Residual income is a type of passive income. Residual income is money you continue to receive even after all the work is done (such as song royalties, YouTube ads, or stock photo downloads).

In the accounting world, residual income has a different meaning. It refers to the money left over after all your necessary living expenses and monthly payments.

What Is Not Passive Income?

Passive income is NOT:

  • Your job: You actively work for wages at your job. The idea of passive income is to earn money even when not working.

  • A side gig: Side hustles, like walking dogs or freelance graphic design, are not passive income as you're still actively working for extra cash.

    However, if you draw and sell your designs online, that could be a nice passive income stream since you can generates lots of sells after making the product once.

  • Stock appreciation: If your stocks go up in value, that's not really considered passive income, since you're not getting paid from it. However, if you have stocks that pay dividends, that could provide you with a regular income source.

What about cutting expenses? This is technically not passive income. However, every dollar saved is a dollar earned. If you can save $500/mo by cutting unnecessary spending, that's an extra $500 you have in your bank account. You can then put that to better use, like investing in dividend stocks.

Can Passive Income Make Your Rich?

We'll be honest. It is incredibly hard to generate enough passive income to live off of. If it were so easy, then everyone would be doing it.

However, with diligence, it is possible to build long term wealth. Traditionally, investing (stocks, real estate, or other assets) is the path to wealth. Over decades, you'll have built up enough to live off of in retirement. This is perhaps one of the only surefire ways to financial freedom.

But nowadays, there are lots of other ways to become rich off of passive income (making an app, YouTube videos, online courses, etc). There's no limit on your earnings. However, it takes lots of work and income is not guaranteed.

Keep reading for both traditional and new ways to make passive income.

Top Passive Income Ideas If You Have Money

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Got some capital to get you started? Let your money make money with these great passive income ideas.

1. Buy Dividend Stocks

Established companies like GM and IBM often pay dividends to their shareholders. These are regular (usually quarterly) payments from a company's profits.

Dividends are separate from the profit or loss you'll take from buying or selling stocks.

A payout ratio is the percentage that companies pay in dividends compared to their total profits. Companies with a 70% payout ratio generally offer the most stability.

Those paying out 100% of their profits can be risky. It's usually a better sign when companies save some of their profits.

You don't need to be a financial guru to purchase dividend stocks. But you will need to do some research. The guidance of a reputable stock brokerage can also help. Here's a great way to get started.

Ally Invest

Get Up to $3,000

Expires 12/31/2021

The minimum qualifying deposit to receive a cash bonus is $10,000. Accounts will be reviewed 60 days after account opening to determine the total qualifying deposit. Corresponding cash bonus will be credited to the account within 10 business days. Once the bonus is credited to the account, the bonus and qualifying deposit (minus any trading losses) is not available for withdrawal for 300 days. If the qualifying deposit is withdrawn, the bonus may be revoked.

Deposit or TransferCash Bonus
$10,000 - $24,999$100
$25,000 - $99,999$250
$100,000 - $249,999$300
$250,000 - $499,999$600
$500,000 - $999,999$1,200
$1,000,000 - $1,999,999$2,000

2. Invest with a Robo-Advisor

If you have money - but not the time - to invest, consider using a robo-advisor. These automatic programs select and manage investments based on your risk tolerance and investment goals.

Some offer extra features like:

  • Financial consultations
  • Professional human oversight
  • Tax advice

3. Invest in Real Estate

These days, anyone can invest passively in real estate. It's no longer just for the rich.

Here are the different types of real estate you can invest in.

  • Real estate crowdfunding
    These platforms let you pool funds with lots of other investors to purchase properties together. Popular platforms like Fundrise and DiversyFund let you start with just $10 (Fundrise) to $500 (DiversyFund).

    Real Estate Investment Trusts are companies that own and operate real estate assets. You can invest in them just like a stock (such as the Vanguard REIT). You can buy and sell shares of REITs on the open stock market at any time.

  • Traditional real estate investment
    The traditional way means purchasing a property, then renting it out for rental income, and/or waiting for it to go up in value. You're responsible for managing the property.

    Roofstock is an online real estate marketplace where you can easily buy single-family homes with renters. The platform does all the due diligence for you, like market research and inspections. It even has options to hire a professional manager so you can be completely hands-off.


Invest in Real Estate with $10+

Become real estate investor with as little as $10

4. Become a Peer-to-Peer Lender

Lending has taken on a whole new look thanks to the Internet. People who don't normally qualify for bank loans can now get financing through Peer to Peer Lenders (P2P)…like you.

That's right—you can use your money to fund loans for others using P2P platforms like Lending Club and Prosper. You'll earn money as they pay back the loan with interest.

NOTE: There is a risk for default with P2P loans. If borrowers stop making payments, you can lose your investment.

Peer-to-peer lending can be a good way to diversify your investments. You may see returns between 5% and 10%.

Both Lending Club and Prosper only require a minimum investment of $25 per loan. Investing in multiple loans can minimize your financial risk in case some borrowers default.

5. Invest in a Business

Investing in a small business can be a good way to support a business, while earning some passive returns.

With equity crowdfunding, investors actually own a small piece of the company. You'll earn returns when the company is acquired or goes public. Or the business could have a dividend agreement that pays investors a share of the profits.

Wefunder and Seedinvest are two popular equity crowdfunding platforms. You can invest in startups with as little as a few hundred bucks.

However, this is a riskier type of investment because startups are more likely to fail. But the potential returns can be higher too. Select your investments carefully. Invest in small businesses you support with terms you understand.

Difference between equity crowdfunding and Kickstarter:
Kickstarter gives you rewards in exchange (like a new product). It's not an investment. With equity crowdfunding, you actually will own a share of the company. You can potentially earn returns on your investment.

6. Open a High-Yield Savings Account

A high-yield savings or money market account is a risk-free, low-effort way to increase your capital. Online savings accounts in particular offer great interest rates.

Some banks, such as Discover, will even give perks to new customers after they sign up, so it's worth checking if there's an active Discover Bank offer right now.

The more you can deposit, the more your money will grow. Best of all, your funds will be FDIC-insured so you won't lose your money.

Check out our updated list of bank promotions.

Discover Bank
Member FDIC

Discover Online Savings - $200 Cash Bonus

To get your $150 or $200 Bonus: What to do: Apply for your first Discover Online Savings Account, online or by phone. Enter Offer Code CY21 when applying. Deposit into your account a total of at least $15,000 to earn a $150 Bonus or deposit a total of at least $25,000 to earn a $200 Bonus. Deposit must be posted to account within 30 days of account open date. Maximum bonus eligibility is $200.

What to know: Offer not valid for existing or prior Discover savings customers or existing or prior customers with savings accounts that are co-branded, or affinity accounts provided by Discover. Eligibility is based on primary account owner. Account must be open when bonus is credited. Bonus will be credited to the account within 30 days of the account qualifying for the bonus. Bonus is interest and subject to reporting on Form 1099-INT. Offer ends 12/15/21, 11:59 PM ET. Offer may be modified or withdrawn without notice. See advertiser website for full details.

Expires 12/15/2021
CIT Bank
Member FDIC

CIT Savings Builder - 0.40% APY

Earn up to 0.40% APY. Here's how it works: Maintain a minimum balance of $25k OR make at least a $100 minimum deposit every month. Member FDIC

7. Earn Credit Card Rewards

You can earn money just by shopping purchases with your credit card. Rewards credit cards offer cash back or points for every dollar you spend (even more with bonus categories).

Let's say your card offers 1.5% cash back on all purchases. If you charge $1,000/mo on your card, you're automatically making $15 a month.

Even better: Credit card signup bonuses may offer a nice chunk of change when you spend a certain amount after opening an account.

But remember, you DON'T need to splurge on expensive purchases. Just by charging your daily expenses, you can make money. Think of it like an rebate on your regular purchases.

Just be sure to pay off your card every month. The interest from carrying a balance will more than wipe out your cash back.

8. Get Cash Back for Shopping and Dining

Many websites and apps offer cash back for everyday activities. Some of our favorites are:

  • eBates: Earn cash back when you shop online through eBates. Standard deals offer between 2%-5% cash back on purchases. But there are often double-cash-back specials and other incentives. You'll get cash back in the form of quarterly checks or PayPal payments.

  • Swagbucks: Earn SB points when you shop online, take surveys, watch videos, and more. You can then trade in your SB points for gift cards or cash back from PayPal.

  • Seated: The Seated app gives you rewards when you dine out. Browse the app's list of restaurants, and then upload a picture of your receipt after you have dined there. You can use your rewards for gift cards for Amazon, Lyft, and Starbucks.

A lot of credit card shopping portals offer rewards, too. The website evreward tracks every shopping portals' current offers. Browse to choose the best deal for you.

9. Try a CD Ladder

If the money you've stashed in a savings account isn't earning much interest, look into creating a CD ladder.

Key Fact: Unlike stocks, CDs are practically risk-free with guaranteed returns. But the rate of return is usually lower.

This means splitting up your investments into different CDs with different rates and maturity dates. The "ladder" provides you with fixed income at set times.

As each CD matures, you can withdraw the money and choose to re-invest. This ensures that you always get the best current rate and regular cash flow.

We review some of the best CD rates here.

Member FDIC

CD Rates - Up to 1.11% APY

  • $500 minimum opening deposit
  • FDIC insured
TermCD Rates
6 Months0.45% APY
1 Year0.50% APY
2 Years0.75% APY
3 Years1.00% APY
5 Years1.11% APY

10. Reduce Your Debt

Crazy as it sounds, NOT losing money is a great way to make money. The interest you pay on credit cards, car payments, student loans, or mortgages is money you could be saving.

Rather than invest in another passive income option, consider paying down your debt instead.

  • For credit cards, consider transferring the debt to another card with an intro APR for balance transfers. Some cards even have no balance transfer fee.

  • For student loans, refinancing can get you a better interest rate and term. Check out what rate you can get for free with Credible.

11. Save for Retirement

A retirement fund is the ultimate passive income stream. Every dollar you set aside is money saved for when you've left the 9-5 grind.

But saving for retirement helps you now, too. By putting money from your paycheck into a 401k, you are lowering your taxable income.

TIP: Invest in your employer's retirement plan.

Many employers match 401k contributions (usually up to 3 or 5%). Maximize your profits by contributing the full amount each paycheck. And don't be afraid to look at other options like Roth IRAs.

12. Buy A Laundromat

Laundromats have an especially high success rate and can generate a lot of passive cash flow each month. People need to do laundry no matter how the economy is.

You will need a chunk of cash for the down payment. But your revenue can most likely cover the monthly financing payments. It's literally an investment that can pay for itself.

Laudromats also require very minimal supervision, making it an ideal passive business.

13. Invest In A Vending Machine

Vending machines can be a great source of extra income if you find the right location. The startup cost could be a couple hundred for a used machine or a few thousand for a new, more advanced machine.

You don't just have to sell sodas and junk food. Healthy vending machines snacks are now trendy, as well as prepared hot food.

But note that this kind of investment is not completely passive as you'll have to restock the machine as needed.

14. Invest In An ATM Machine

ATM Depot allows anyone to buy an ATM. You'll need some upfront cash to purchase the machine (for as low as under $2,500) and put money in. Once it's set up, you can make passive revenue from the ATM surcharges.

If you own a physical business, adding an ATM machine could be a great way to make more passive income on top of your business revenue. If you want to place the machine at a business you don't own, ATM Depot can help you.

Interested in passive income but short on funds? Keep reading for ideas that require nothing but time (and effort).

Best Passive Income Ideas If You Have Time

© CreditDonkey

Time IS money, as the saying goes. Here's a list of great passive income if hard work is all you can afford to invest.

15. Cut Down Your Bills

Saving money means more disposable income in your pocket.

Trim is a free service that helps you negotiate your cable, internet, phone, and medical bills. It also helps you cancel subscriptions that you no longer need.

16. Passive Income Apps

It may sound too good to be true, but you can earn money just by using your phone. These free apps will track your phone usage and pay you for it.

  • SavvyConnect: Simply install the app and surf the web as usual. You'll also need to participate in surveys when asked.

    You'll earn: $5/month for each device type (phone, table, and computer), up to $15/month total.

  • Smart Panel: This app collects your usage data to study how people use the internet. You must have a working VPN installed on your phone.

    You'll earn: $5/mo, plus loyalty bonuses every 3 months. You can also complete surveys for a extra few bucks.

  • Nielson Computer & Mobile Panel: Download the secure app to your device and use the internet as normal.

    You'll earn: Up to $50/year.

  • Cash Magnet: Available for Android users, this app makes you money when you're NOT using your phone. It will browse sites and install games, as well as view and click on ads. This earns money from sponsors, who share it with users.

    You'll earn: It depends on how often you run the app.

BONUS: You can earn some extra money in your down time through Survey Junkie. All you have to do is sign up for an account and take surveys to earn points, which you can then exchange for cash. Read our full Survey Junkie review to learn more.

17. Rent Out Your Home

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If you have a spare room, this is one of the easiest and fastest ways to turn that into passive income. You have more flexibility now ever when renting out your home.

Sites like Airbnb allow you to rent the whole place or even just one room for as many days as you like.

While Airbnb makes things easy, renting your home DOES require some work. Think of yourself as a bed and breakfast owner. Your tenants' comfort is your responsibility, especially if you want a great review.

You determine availability and price, then post a listing with pictures on the site. Travelers book through Airbnb, which handles the payment. You'll be paid within 24 hours of your guests' check-in.

I have created passive income by purchasing investment properties. Getting a mortgage for an investment property requires a large down payment—usually 25% to 30% of the purchase price and a higher interest rate, but purchasing a primary residence is so much cheaper. There are loan programs out there that require as little as 3% down.

If you want to be a real estate investor, start out by purchasing your own home to live in. Take advantage of the low down payment and the better interest rate. Live in the home for a year or two, and save up enough money to put 3% down on another house, and then rent yours out and buy another one. Do this as many times as you can in your life, and before you know it, you will have a portfolio of rental properties where the tenants are paying your mortgage and building equity.

Janis Benstock, Broker/Owner, Settle Down Philadelphia

18. Rent Storage Space

If you're not sure about sharing your home with a stranger, you can rent a part of your home as storage space.

The platform Neighbor allows you to rent your room, garage, or parking space to store people's extra stuff. A garage in Los Angeles can rent for $100 - $200 per month.

19. Rent Your Car

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If you own a car in a major city, you might rely on public transportation more than driving. So why not loan out your car?

Turo and Getaround are car rental platforms that allows you to list your car.

Both are free to join. Start making some money off your idle ride.


Getaround: Earn Money Sharing Your Car

  • Make extra money
  • Set up your own schedule
  • Includes insurance and roadside assistance

20. Rent Your Stuff

You can even rent out your things to people who don't want to spend the money to buy it. For example, someone may want to rent a projector for just one day for an event.

Here are some peer-to-peer rental marketplaces:

  • Fat Llama: rent out electronic and photography equipment
  • BabyQuip: rent out your old baby stuff, like car seats, strollers, bassinets, etc.
  • Spinlister: rent out your bike, surf, or snow sports gear

21. Become a Pet-Sitter

© CreditDonkey

Watch TV, take a nap or go for a walk - and get paid for it. Pet-sitting is a great way to make some extra money doing the stuff you'd be doing anyway.

Many owners would rather their beloved pets stay at home than in a kennel while they travel. If you're responsible and love animals, this is a great gig. You'll be required to walk, feed, play with them, and that's about it.

Some trustworthy sites to look for pet-sitting gigs include: Rover and DogVacay.

22. Create an Online Store

© CreditDonkey

A store sounds like a lot of work. But if managing inventory isn't required, it gets a lot easier.

Sites like Shopify support dropshipping, which allows anyone to start an online store. Shopify provides the e-commerce platform for you to sell your stuff.

Here's how dropshipping works:

  1. You design a fun product, say an "I Hate Coffee" coffee mug (don't overthink it.)

  2. Through Shopify, you connect with a manufacturer who agrees to produce your mugs.

  3. You create an online store through the site.

  4. When a customer places an order, Shopify notifies the manufacturer.

  5. They ship the product to the customer and everyone receives payment.

All you need to get started is a good idea. But not an "I Hate Coffee" mug, that's already taken.

23. Sell Your Photographs

If you have a talented eye (and and a decent camera), consider selling your photos on Shutterstock or iStockphoto. Even one picture can earn serious cash if it's downloaded enough.

TIP: Upload an entire portfolio to showcase your work. You'll increase your chances of making sales AND build a brand customers can recognize. With any luck, you'll also sharpen your artistic eye.

Keep in mind, though, that each company offers a different payment structure. Read the fine print and choose the one offering the biggest profits for your masterpieces.

24. Hawk Your Designs Online

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You don't need your own website to put your artistic flair to work. Some options are:

  • Etsy: Etsy offers a user-friendly platform to sell digital files of your designs, such as invitations or cards. No physical products means no inventory or shipping hassles. Buyers simply purchase your design and download it to their computer.

  • CafePress: If you have a really cool design, you can turn it into merchandise and sell on CafePress. All you have to do is upload your design, and CafePress can put it on anything, from mugs to notebooks to apparel. They will handle the payment and shipping.

  • Merch by Amazon: Similarly, Merch by Amazon allows you to upload your artwork to be put on products. When someone buys it, they will make the product and handle the shipping.

Since you probably drive anyway, why not make some money while you do it? No, we're not talking about Uber.

Many companies pay people to advertise using their ride. Check out sites like Carvertise or Wrapify.

You'll need to get approved before you begin. Don't worry--your driving record doesn't matter. Companies care about where you live and drive so they can get as many eyes on their ads as possible.

Passive Income for Doctors
With mountains of student loan debt, it's no wonder that many doctors are looking for side hustles. The ideal passive income gig should be lower risk with less effort.

Here are a few options:

  • Open a high yield savings account.

  • Try peer-to-peer lending.

  • Invest in REITs.

  • Refer your friends for student loan refinancing. Many student loan refinancing companies give you cash for referrals (and your friend may even get a bonus too).

  • Participate in medical surveys. Check out sites like ZoomRx and M3 Global Research.

  • Create exam guides. Still have all your med school notes? Create guides to help current students with their medical exams.

26. Make YouTube Videos

YouTube gets billions of views a day. This built-in audience is always ripe for new content.

You can create videos about anything. Start by asking:

  • What are some cool subjects people AREN'T talking about?
  • What kind of videos do I find entertaining?
  • What do I know that others don't?

The goal is to find something unique, whether it be funny, educational or just plain weird. Give it time and hopefully, the viewers will find you.

If you're successful, you can begin to pursue advertising revenue, which can lead to substantial passive income.

Content creators are constantly adding new videos to Youtube so you'll need to find a way to standout. Use social media sites like Twitter and Instagram to boost your Youtube channel.

We recommend steering clear from controversial topics (like politics) but strive to find cool ways to "go viral."

27. Live Stream Video Games

If you're really good at playing video games, you can earn some extra cash live streaming.

Twitch is a popular streaming site where you can earn revenue streaming once you have enough subscribers.

It does take skills and charisma to gain an audience, but this could be a good way to earn some money on an activity you already enjoy.

28. Start a Podcast

Podcasts are all the rage nowadays. People love listening to them on commutes for either entertainment or to learn something new.

You can start a podcast about literally anything. Just some examples could be:

  • Teach a language
  • Share books and shows recommendations
  • Find strange news from around the world
  • Interview local small business owners
  • Answer weird questions people are too afraid to ask

Once you gain an audience, you can make passive income from sponsorships, ads, or even donations.

29. Become an Affiliate Marketer

If you have a website or blog, use affiliate marketing to make referral commissions with partner stores.

Mention a company's product on your site to make a commission whenever your readers purchase it using your link. The Amazon Associates is one of the most popular affiliate programs.

This method isn't completely passive - it takes a lot of time and hard work to build an audience and you'll need to provide consistent, high-quality content. But once you have a large following, affiliate marketing can provide a nice stream of income.

An easier way is to buy an existing site with a built-in following. Flippa is a marketplace where you can find websites for sale.

Another option is using ads, such as with Google AdSense. You'll earn money when your readers click on an advertisement. There's less money to be made but also a lot less work.

Already own a business but mystified by affiliate marketing? LeadDyno explains how to start an affiliate marketing program in minutes and what to expect.

30. Start an Online Course

Do you have a hobby you know inside and out? Chances are, others don't have the same knowledge. They may even pay for a course on the subject.

That's right, even your intelligence can be used as capital to earn passive income.

Developing an online course takes time but very little maintenance once it's complete. Several websites like Udemy and Teachable offer platforms.

Consider the market before making an online course. You'll need a subject that's obscure enough that it hasn't been covered BUT interesting enough to find an audience. In other words, Introduction to Paint Drying is probably a bad idea.

Take advantage of their built-in audience. You may also want to sell course packages of varying prices to appeal to the masses.

31. Write an E-book

Self-published e-books are still the rage. And technology makes publishing one easier than ever.

For self-published authors without a following, non-fiction e-books like "how-to's" tend to fare better than fiction novels.

Once you finalize your manuscript and design a cover, you can upload the book to a self-publishing platform. We like Amazon Kindle Direct.

Then develop a social media presence to market your e-book.

32. Make an App

Maybe you wont copy the success of Candy Crush. But you can use creator Tommy Palm's story as inspiration to build your own app.

Got a developer friend with whom you can split the proceeds? Or maybe you have some tech talent yourself. Start brainstorming an addictive new game OR a helpful feature to a common problem.

But be sure to research your idea BEFORE putting in the work. There's an app for almost everything today.

33. Strive for Royalties

Compose some music.
Write a great book.
Design a fun product with CafePress.

Make something valuable that people love, and you could collect royalties for a long time. Some writers and content creators receive checks decades after all their hard work ended.

34. Buy and Sell Domain Names

If you're really good at coming up with business names, try flipping domain names.

Selling a domain name can be huge money. The trick is to come up with one that sounds like something a future business would buy. Research what keywords are trending right now. You'll also have better luck if you choose a specific niche.

This is also not a quick buck. It could take months or years for an offer on your domain name.

Use websites like GoDaddy and NameCheap to find unregistered domain names and snatch them up.

35. Rent (or Sell) Your Stuff

You can rent out equipment, tools, and other household items using websites like Craigslist, Nextdoor, and the app Peer Renters.

As always, use common sense when letting strangers borrow your stuff.

Or try selling what you don't need. Remember old fashioned yard sales? Like everything else, they've gone online.

If you've got a bunch of stuff to sell, websites like Decluttr can help. Decluttr gives you cash for:

  • Old CDs, DVDs and Blu-Rays
  • Video games
  • iPads, cell phones and electronics
  • Assorted other household products

Simply scan the barcode on your phone to get an estimate, then ship your stuff using a pre-paid postage label.

How To Get Started

© CreditDonkey

It's time to get that passive income stream flowing. But before plunging ahead with your awesome idea, you'll need a plan. Here are steps you don't want to skip.

Make a Plan

Passive income DOES require some effort. You'll need an upfront investment in the form of money or sweat equity (hard work).

Some patience wouldn't hurt, either. Very rarely will passive income lead to overnight profits. In fact, you may lose some money at first. Consider:

  • Rental properties need repairs
  • Investment portfolios need maintenance
  • Online businesses need upkeep
  • Ongoing marketing may be necessary
  • Any income will need to be tracked and reported to the IRS

Wondering how to transform your talents into profits. We've got you covered below.

What Skills Do You Need?

© CreditDonkey

This depends on the type of passive income stream you create:

  • Someone trading stocks needs a basic understanding of the stock market.
  • A person writing a blog needs subject matter expertise.
  • A real estate investor may need to be a jack-of-all-trades.

Instead of asking what you'll need, consider the skills you already have. And don't waste time on a passive income gig that makes you miserable (you already have a dayjob for that!) Find an idea that's fun AND profitable.

Start by answering these questions:

  • What are my passions?
  • Do I have any secret talents?
  • What are my "areas of expertise?"

Once you have the answers, find a way to carve out a passive income niche.

Here's an example: Let's say you have a knack for writing and DIY projects. You can combine both skills to create passive income.

Start a blog and monetize it. Or write an e-book on DIY. You do the hard work upfront (writing) and collect the royalties (passive income) later.

Cover Your Bases

© CreditDonkey

It's time to get that passive income stream flowing. But before plunging ahead with your awesome idea, you'll need to make sure you can afford the up-front investment right now.

Here are smart moves to start with:

Pay off credit card debt
If you get swept up in a new venture and ignore your debt, the interest rates will eat away your profits. Pay your debts down first.

Build up your savings
Going broke while develop your passive income source defeats the purpose. Make sure you're saving by setting up automatic withdrawals to your 401(k) and emergency fund.

Create a benchmark
Your passive income should exceed a basic investment's rate of return. Look up today's 10-year bond rate or average CD rates.

That's how much you can make just by depositing your money in a bank account. If your passive income source can surpass this interest rate, you are on the right track.

Say Goodbye to Your Free Time
Not all passive income ideas require capital. But you will need to invest time that could be spent relaxing in front of the TV with a bag of chips.

Keep reading to find ways to avoid common mistakes.

Determine Your Risk Level

© CreditDonkey

Many passive income ideas involve some risk.

Real estate investors face deprecating property values. Writers risk spending a lot of time writing a book only to have it make no profit. Almost every opportunity has a chance for failure.

Consider what you can handle in terms of risk. Do you have retirement and emergency savings set aside?

If so, you can risk a little money, which we DO NOT recommend if you're living paycheck-to-paycheck.

What Is Your Why?

© CreditDonkey

Money is an obvious reason for making passive income. But it's what money buys that determines why you should pursue it.

How will you use your profits? Do you have a shopping habit? Are you saving for retirement?

Consider the reasons you need money then create a plan:

  • Short-term: things you will do in the next year
  • Intermediate: things you will do in the next 2 or 3 years
  • Long-term: things you will do in five or more years

Longevity is the key to successful passive income--your money won't start rolling in overnight.

Why It's Important to Have Passive Income

It's not just the satisfaction of making money without working. Here are some reasons passive income is important:

Reduces financial risk
Passive income sources mean less stress if you suddenly lose your job. You'll still have a stream of money coming in, which provides a little cushion during emergencies.

Frees up time to enjoy "the little things"
With passive income, you can spend more time with your family or work on personal goals like travel.

Build long-term wealth
Working a regular job means the amount of money you earn is limited to the hours you work.

But you don't have those limits with passive income. In fact, you can make money from MULTIPLE sources while you're busy doing other things (like napping).

Low-Effort Passive Income Ideas: Some passive income ideas don't seem all that passive. A few, like writing an e-book, require a lot of effort, especially upfront.

Here's a list of our top 5 low-effort ways to earn passive income:

Don't Forget the Tax Man

The government taxes passive income differently than active income (like your salary, wages and tips through a regular job.)

Passive income is money you make from all activities in which you don't actively participate.

So what constitutes actively participating? It can get confusing but here's an example: if you've started a business that you now run, it would be considered active, NOT passive activity.

But if you are a silent partner in a business, that would likely be considered passive activity.

The IRS has two separate categories for passive activity:

  • Trade or business in which you don't actively contribute.

  • Rental Activity (UNLESS you are a licensed real estate agent).

You can find more information on passive activity—and what classifies--here. But consider talking to an accountant or income tax professional BEFORE filing your taxes.

What Experts Say

As part of our series on investing and passive income, CreditDonkey asked a panel of industry experts to answer some of readers' most pressing questions. Here's what they had to say:

Bottom Line

© CreditDonkey

Pursuing passive income can be lucrative but it requires investment. Choose an idea you can spend the time –or money--developing.

Have fun and be patient. You may experience failure. But every venture could set you up for more passive income profits in the future.

Write to Kim P at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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