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The best passive income sources for you depend on your circumstances. It is important to consider the following: cash flow constraints and requirements, time horizon, and risk tolerance, Cheng said. For example, investment real estate may have higher upside potential, but a longer time horizon, require significant financial capital, and exposure to liquidity risk in the short term. Remember to consider your situation—not just what is worked for others. Be positive and optimistic while being pragmatic, Cheng said. You can build upon your success. With that in mind, here are the 25 ways to make passive income in 2024. Later in the article, we discuss each of these in depth. Understanding Passive Income Passive income can be a great way to generate some extra cash and supplement regular earnings from your job. If you are interested in passive income, stay away from get rich quick schemes found among search results for the term online. Cheng suggests you stay mindful of some common misconceptions about passive income. People often underestimate the initial costs of a passive income opportunity and as a consequence may not have adequate liquidity, she said. Cheng gave some examples: With a franchise, there are certain fixed costs that people will incur before they can experience positive cash flow. With investment in real estate, there are mortgage payments, insurance payments, property taxes, maintenance, and management fees involved even if there is no rental income, she said.
Passive vs. Active vs. Portfolio Income There are three main categories of earnings: passive, active, and portfolio income. While you can receive passive income without regular labor, active, or earned, income is money you get from direct effort or work. It includes salaries, wages, commissions, tips, or revenue from a business where you provide material participation. It is the most common form of income and is subject to standard income tax rates. Active income is the primary source of earnings for most individuals and households and also includes making investments that might later generate portfolio or passive income. Active vs. Passive vs. Portfolio Income For tax purposes, the IRS differentiates types of income, including active, passive, and portfolio income. While many use passive income more loosely to include portfolio income, as we do in this article, it is good to keep in mind that they are technically different for tax and other purposes. Portfolio, or investment, income is revenue from investments, including dividends, interest, capital gains, and other returns from stocks, bonds, currency exchange, and mutual funds. Unlike active income earned from employment or business activities, portfolio income is based on securities an individual or group owns. Note that portfolio income is not passive income, although it seems to have many of the same elements. Even though you may wait months or years before reviewing or changing your portfolio selections, an investor is constantly making decisions about buying or holding different securities. Thus, even if you do not change your portfolio for decades, it is your ongoing choice not to do so that makes income from it not wholly passive. Also, remember that the IRS may treat investment income differently than passive income. We discuss the taxation of these different forms of income much further in a section below.
Invest in Real Estate Perhaps the oldest way to earn passive income on this list. Invest in property to rent or sell at a profit. Consider different markets and property types for the best investments. Potential for high returns: Real estate investments have the potential to generate significant returns through appreciation and rental income. Diversification: Investing in real estate can help diversify your investment portfolio, reducing overall risk. Hedge against inflation: Real estate values and rental incomes tend to increase with inflation, providing a natural hedge against rising prices. High upfront costs: Investing in physical real estate often requires a significant upfront investment, including down payments, closing costs, and renovation expenses. Liquidity concerns: Real estate investments can be less easy to convert into cash than other assets. Market fluctuations: Real estate markets can be unpredictable, and property values may fluctuate based on local economic conditions and other factors. Management responsibilities: Owning rental properties can involve property management responsibilities, such as maintenance, tenant screening, and rent collection unless you hire a property manager Research markets and properties thoroughly before investing. Spread your investments across different property types, locations, and risk levels to minimize the impact of market fluctuations. Develop relationships with real estate professionals, such as agents, brokers, and property managers, to access helpful and practical market knowledge and investment opportunities. Real estate investments often perform best over the long term, so be prepared to hold your investments for several years to maximize returns. Invest in Index Funds Index funds are among the most popular investments, with passive exchange-traded and mutual funds offering easy ways to earn passive income. Broad market exposure and diversification: Index funds are designed to track a specific market index, exposing investors to a wide range of stocks or bonds in a single investment. Low costs and fees: Index funds typically have lower expense ratios than actively managed funds, aiming to mimic an index is performance rather than outperform it. Simplicity: Investing in index funds is straightforward and requires minimal research or expertise, making it accessible to many investors. Dividend-Paying Stocks Dividend-paying stocks provide investors with a steady income stream through regular payments, which can be reinvested or used to supplement other income sources. Potential for capital appreciation: Besides dividend payments, dividend-paying stocks may also appreciate over time. Liquidity and flexibility: Dividend-paying stocks are often traded on major stock exchanges, giving investors the liquidity and flexibility to buy and sell shares to manage their portfolios or access their funds. Invest in well-established, financially stable companies with a history of paying dividends. Diversify your portfolio across different sectors and industries. Reinvest dividends to benefit from compound growth. Monitor your investments regularly and adjust your portfolio as needed. Invest in a Business Provide capital for a business and earn a share of the profits. This could be through angel investing, venture capital, smaller local business investments, or crowdsourcing investment platforms. Potential for high returns: Your investment could yield significant returns if the business is booming. Diversification: Investing in a business can diversify your income streams and reduce your overall investment risk. Conduct in-depth research on the business, industry, competitors, and financial health. Invest in multiple businesses or combine this with other investment types. Consult with financial advisors or investment professionals to make informed decisions.
