What is Passive Income and How Can You Start Earning?

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

Passive income is a term used to describe a stream of income that, once established, takes little to no active management to generate funds. Learning how to generate passive income can be a fantastic way for small business owners to boost revenue and create a financial safety net.

There are many potential ways to start earning passive income – some are more suitable for those with specialist skills, while almost anyone can access others. This article explores some of the most popular and successful ways to generate passive income and increase your monthly earnings with minimal time and effort.

What is passive income?

Passive income can be defined as income generated from a source that does not require regular active management, such as investments, side-hustles, or property.

Most activities require some initial investment of time and money. However, once established, these income streams can be maintained with little effort.

This can include activities such as eCommerce, blogging, affiliate sales, investing in stocks and shares, creating an app, or even renting out property.

The eCommerce industry alone is expected to reach over $4 trillion annual global revenues in 2022, up by over a trillion dollars from 2020. This proves there is an expanding market for online retailers that offers unique opportunities for entrepreneurs to generate passive income.

No matter which course you choose to follow, there is no denying the appeal of making money while you sleep. The additional income can be a game-changer for small businesses.

How to earn it

There are various ways to earn passive income. In Australia, property rental is classed as passive income even if the property is actively managed. This can include buying whole properties to rent or renting out a room through a third-party such as AirBnB.

Some of the most popular ways to generate extra income include investing, renting out property, and generating new revenue streams through products that require little maintenance once produced, such as app development. Passive income can also be generated through owning assets that are likely to increase in value, such as art, wine, precious metals and other tangible passion assets.

The internet has also opened a whole new segment of possibilities, such as blogging, affiliate marketing, online retail, podcasting, and utilising expert knowledge to sell online courses and tutorials.

Types of passive income

With each type of passive income comes its own unique sets of risks and rewards – none absolutely guarantee success. However, with enough knowledge and a small initial investment, it is possible (quite literally) to make money while you sleep.

Once an investment portfolio or ‘side-hustle’ has been established, it can be mainly left to its own devices, leaving you with an income stream that you no longer have to work for.

Examples include:

  • High-yield savings accounts accruing interest

  • Investment in stocks, shares, and bonds

  • Investment in property to rent it out or allow the value to appreciate over time – the average appreciation rate of property is 7.25% per year

  • Money generated from products or services that are already available, such as an app or pre-recorded podcast

Active vs passive income

Active income describes the exchange of services for money, such as working a full-time job. Once up and running, passive income requires hardly any further input to continue to generate funds. Small businesses can benefit hugely from having a combination of both active and passive income streams.

Benefits of passive income

There are lots of advantages to generating some form of passive income stream. Once the idea is established, it will bring in funds without additional effort, which can be used to complement the active revenue of any small business.

  • Earn money without working – passive income earners generate money without continually working.

  • Save time – once a stream is up and running, the time you will have to spend maintaining it is minimal or non-existent. This frees up time to work on active income streams.

  • Gaining local independence – you can continue to earn wherever you are, even if that’s lounging on a beach!

  • Financial freedom – a passive income generates opportunities to take time off from the daily grind without losing out financially.

  • Financial safety net – when you are not relying on one salary or one business to generate your entire income, you have more of a financial safety net. If your active income is reduced over a particular month, you still have funds from your passive income streams to supplement your bank account.

How much passive income can you earn?

The amount of passive income you can generate can vary drastically, depending on what you do and how long you do it. It may also depend on how much initial investment is required before you can start earning.

There is no upper limit to passive income, and many people manage to make a living from it, with some claiming to earn thousands. However, as the money generated is not guaranteed in the same way as a salary and investments can go down and up, it is less risky to have an additional active income stream.

Ways that you can create passive income

  • Writing and publishing an eBook

  • Creating an e-course

  • Becoming an affiliate

  • Stock photography

  • Blogging

  • Digital downloads

  • Offering 3D printing services

  • Setting up an online store

  • Stock market investment

  • Creating an app

  • Real estate rental or holiday room letting

  • Royalties from copyrighted work such as a novel, song or short film

  • Renting out your parking spot

  • Renting out your car or bicycle

  • Renting out a spare room as storage space

  • Investing in peer-to-peer lending

  • Investing in domain names

How to shout about your new passive income streams

Investing in stocks and shares is a relatively private way of generating passive income without shouting about it.

However, many other streams require some form of advertising and promotion to begin generating money. This can be something as simple as sharing a link on social media or asking friends and family to share, or as complex as creating an entire marketing campaign. Depending on the type of business, you may need to create a website – once you have, you can reach out to bloggers and influencers to celebrate your new product or service.

Reviews and referrals are often one of the best ways to increase interest. Find a way to incorporate methods of asking customers to leave reviews into your selling process to help spread the word. You could also consider partnering with other small businesses offering related products and services for some cross-marketing opportunities.

There are multiple potential benefits to setting up a side-hustle or investment portfolio that will start to bring in money without active participation. Square can help small business owners get started, whether setting up an online store or advertising new products and services online and through social media.