If you want to make money online, you’ve probably heard of the term “passive income.” There’s some debate among financial commentators about how to define passive income — but let’s call it “money you don’t have to actively work for and earn as wages.”
Investors can earn passive income from stocks, bonds, and other income-producing assets. You don’t have to “do” anything extra to get that income — you earn it just by owning something. In a similar way, real estate investors can earn passive income from rents on their property.
But not all passive income is easy. Let’s look at some realistic ways that everyday investors and savers can earn passive income.
Here are six ways that you could earn passive income, listed in ascending order of difficulty.
1. Savings accounts
Putting cash in the bank and earning interest from a high-yield savings account or money market account is the easiest way to earn passive income. Currently, the best savings accounts and money market accounts are offering 5.00% APY (or higher). That means if you have $10,000 of savings, after one year at that APY, you’d earn $500 of interest.
A savings account at an FDIC-insured bank is a great choice for easy passive income because it’s risk free. Your deposits are FDIC insured up to $250,000, per depositor, per FDIC-insured bank, per ownership category. You won’t lose money, even if the bank fails.
But there is one downside: If the Federal Reserve cuts interest rates, your bank will likely reduce the yield on your savings, too. The top savings accounts could go from 5.00% APY to 4.75% APY (or lower) sometime in the near future.
2. Certificates of deposit (CDs)
If you want another easy option for “set it and forget it” passive income, consider certificates of deposit (CDs). You can choose a CD with a term and interest rate that suits your financial goals. Some of the best CDs are paying 5.00% APY or higher for a 1-year term, so you could potentially earn $500 of passive income (interest income) from keeping $10,000 for one year in a CD.
But here’s a downside of CDs: They charge early withdrawal penalties if you take your deposits out before the term is up.
3. Stocks
One of the best reasons to invest in stocks is to earn future growth from the appreciation of the share price — i.e. when your stocks go up in price, you can sell them for future gains. But stocks also often pay dividends, which is a form of passive income. Dividends are a share of the company’s profit, paid out to shareholders regularly (though they are not guaranteed and can be cut at any time).
Not every stock pays dividends, but the ones that do can put serious money in your brokerage account. You can even choose a portfolio of income stocks that tend to deliver steady, reliable dividends. This investment strategy can be a good choice for retirees, or anyone who’s investing with the goal of earning passive income today — not just long-term growth for the future.
4. Bonds
Bonds are another form of passive income investment since they pay interest. As a bond investor, you’re effectively lending money (to governments or corporations), and getting paid back over time at an agreed-upon interest rate.
Unlike savings accounts and CDs, bonds are not risk free — bond prices can go down if interest rates go up. Many bond investors saw that happen to their portfolios during Fed rate hikes in 2022 and into 2023. Some government bonds, such as U.S. Treasury bonds, are considered low-risk investments, while some municipal bonds and corporate bonds pay higher interest rates but might be higher risk — not every company is able to repay its debts.
Adding bonds to your investment portfolio can be a smart move for people who are getting closer to retirement age, and who want to turn down the volume of volatility of stocks. But I’m ranking bonds as “lower than stocks” on this list, because of the complexity of bond investing, and because bonds tend to deliver lower return on investment than stocks — lower risk, but lower reward.
5. Rental property and real estate
Want to be a landlord or invest in a real estate investment trust (REIT)? There are many ways to own investment properties and earn passive income from investing in real estate. If you’re fortunate, real estate investments can even outperform the stock market in any given year.
But here’s a downside of real estate for passive income: it’s more work, and more complicated, than just buying stocks. Fixing up a rental house takes time, effort, skills, and sweat equity. If you’re handy with tools and love DIY projects, go for it. But I’d rather just buy S&P 500 index funds.
And not every “can’t miss” real estate investment turns out to be legit. Real estate prices (like stocks and bonds) don’t always go up. Vacant shopping malls and plummeting prices for office space are cautionary examples of how real estate investors don’t always win.
6. Owning a small business that “runs itself”
Perhaps the ultimate dream of passive income enthusiasts is to own an online business, like an e-commerce store or YouTube channel, that “runs itself” and makes money for you without too much effort by you. This can be done, but it takes time, effort, and investment. You might have to put in hundreds of hours of unpaid work before you earn your first dollar of “passive” income.
Bottom line
Passive income is real, but each option has its risks and downsides. Choose passive income investments, like stocks or bonds, based on your overall risk tolerance, time horizon, and financial goals.
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