If you'd like to boost your income so you can put away more for retirement, reach your savings goals faster or get out of debt, consider generating some passive income this year. In general terms, passive income is money you earn from work or investments that don't require your regular involvement. Generating passive income can help those looking to earn more without having to constantly work for it. To get started earning passive income this year, consider the following strategies and choose one that aligns with your skills, availability and interests.
For guidance projecting how passive income can help you work toward your financial goals, meet with a financial advisor.
1. Rent Out Your House
Renting out your house can be an accessible way to generate passive income, especially if you have extra space or a second property.
There are several ways you can generate passive income by renting out your home, and you can pick the method that works best for you. First, with the rise of platforms like Airbnb and Vrbo, homeowners can easily list their properties as short-term rentals. Short-term rentals can offer higher income potential than traditional leases, particularly in popular tourist destinations. Listing your property as a short-term rental also allows you to rent it out seasonally or at whatever frequency you want. .
On the other hand, if you prefer a more stable and predictable income stream, renting your house long-term to tenants might be the better option. In addition to the consistent income, you don't have to worry about constantly filling bookings and turning over the property. With this approach, you can either rent out your entire property or a room in your house. Consulting with a financial advisor can offer valuable insights into market trends and help you decide which rental strategy aligns best with your financial goals.
2. Start an Online Business
Starting an online business can be an effective way to earn passive income, and the possibilities for your business are endless. Not only that, but online businesses typically require little upfront cost.
One possibility is building an online business that sells digital products, such as e-books, courses or software. These products let you earn money from sales without being directly involved in the transaction process. Plus, once created, you can sell products repeatedly with minimal additional effort.
Another way to make passive income through online business is using a retail model called drop shipping. This model involves selling products through an online store without handling inventory or shipping. When a customer makes a purchase, the product is shipped directly from the supplier to the customer. Platforms like Shopify or WooCommerce let you set up a drop shipping store relatively quickly and tap into the global e-commerce market.
3. Dividend Investing
5 Ways to Generate Passive Income This Year
Dividend investing is a way of generating passive income with very little work. Instead, you need upfront capital to invest in order to make income with this strategy. Dividend investing involves buying stock in companies that pay regular dividends, or portions of profits, to their shareholders. This approach not only provides a steady stream of income but also has the potential for capital appreciation as the underlying stock may increase in value over time.
Investors can potentially earn even more by reinvesting dividends through dividend reinvestment plans (DRIPs). This process automatically uses dividend payouts to purchase additional shares of the stock, potentially compounding returns over time. Consulting a financial advisor can help you identify dividend-paying stocks that align with your investment goals and risk tolerance. With careful selection and a long-term perspective, dividend investing can be a key component of a diversified portfolio.
4. Buy a Certificate of Deposit (CD)
Buying a certificate of deposit (CD) is a straightforward way to earn passive income with minimal risk. CDs are time deposit accounts offered by banks and credit unions that pay a fixed interest rate in exchange for depositing your money for a predetermined period, which can range from a few months to several years. The primary advantage of CDs is their predictability; you can calculate how much your CD will earn by the end of the term. CDs are also insured, either by the FDIC or NCUA, up to $250,000, making them a very low-risk passive income strategy.
To maximize passive income, consider creating a CD ladder, which involves purchasing multiple CDs with varying maturity dates. This strategy allows you to access a portion of your money periodically, providing liquidity while taking advantage of potentially higher interest rates associated with longer-term CDs.
5. Peer-to-Peer Lending
Peer-to-peer (P2P) lending lets you earn passive income by directly lending money to individuals or small businesses through online platforms. This method allows you to act as a mini bank, offering loans in exchange for interest payments. Keep in mind that while higher returns are possible, P2P lending carries risk, as borrowers may default on their loans..
P2P lending platforms such as Prosper and LendingClub connect investors with borrowers, allowing you to choose loans that match your risk tolerance and financial goals. Before getting started, research and choose the right P2P lending platforms. Each platform offers different levels of borrower vetting, loan types and interest rates, and conducting thorough research can impact your returns.
Talk to a Professional
While earning passive income can help you reach your financial goals, it’s only one piece of the larger financial puzzle. Speaking with a financial advisor can help you align your passive income strategy with your overall financial strategy. A financial advisor can offer personalized advice, taking into account your unique situation, risk tolerance and long-term plans.
Whether you’re new to investing or have an established portfolio, an advisor can guide you in selecting the right mix of income-generating assets, such as dividend stocks, bonds, real estate and other investments that match your financial goals. They can also advise you on managing any income earned from investments and other passive income strategies. They'll consider tax implications and help you adjust your approach as your life circumstances change. Finally, they can advise on risk management techniques to protect your wealth.
Bottom Line
5 Ways to Generate Passive Income This Year
Generating passive income is a powerful strategy for building financial stability and achieving long-term wealth. By exploring different methods, like dividend investing, peer-to-peer lending and starting an online business, you can create multiple income streams that require minimal ongoing effort. Each method has unique benefits and risks, so consider your goals and risk tolerance when deciding which opportunities to pursue. If you get stuck, consulting with a financial advisor can help you decide which investments to pursue and create a plan for managing your growing income.
Tips for Financial Planning
Whether you’re trying to save for retirement or find ways to earn more passive income, a financial advisor may have the expertise to help you accomplish your goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re trying to make sure you have enough money saved for your golden years, consider using a retirement calculator.
