The concept of passive income is something most people aspire to – as who doesn’t like the idea of earning money with minimal effort? Yet, in reality, most of us stand idly by and don’t take the time to learn how to effectively invest our active income in order to generate a passive income over time.
However, all hope is not lost! This article will cover the basics of turning your active income into a passive income stream and how it can solidify your financial position over the long term. We’ll also touch on a few of the best ways to generate passive income in today’s society – with the lowest risk possible.
Active Income into Passive Income – The Lowdown
First, we need to differentiate between active income and passive income, as this will provide a solid foundation for our discussion. Put simply, active income refers to the money you earn from the services you are paid for, e.g. your job. For the vast majority of us, active income stems from employment and requires us to ‘actively’ work for it to be compensated.
On the other hand, passive income is money earned from activities that you are not actively involved in. The term ‘making your money work for you’ is thrown around often, but this saying provides a good way of visualising passive income. Most people aspire to have at least one stream of passive income on top of their active income, as the two income streams can really help you drive towards financial freedom.
So, how can we go about creating a passive income stream in today’s society? Fortunately for us, the technological advances over the last decade have paved the way for new and exciting options to arise that offer the chance to create passive income. However, the vast majority of these options require you to take a risk and use a portion of your active income to get them up and running – which is why so many people get cold feet and opt to remain comfortable in their current situation.
Top 3 Ways to Turn Active Income into Passive Income
If you are someone who likes the idea of taking a portion of their salary and investing it to potentially create an additional income stream – then well done! You’ll never ‘earn money while you sleep’ without a bit of risk, but at the same time, you must manage this risk so that you don’t leave yourself in a bad financial situation. So, with that in mind, let’s explore three of the most popular ways people invest their active income to earn a passive income stream.
1 – P2P Lending
According to Comserveonline.com, the global P2P lending market is expected to be valued at a remarkable $558.91bn by 2027 – which is nearly $500bn more than it was worth in 2019! The ripple effect from the COVID-19 pandemic has meant that consumers are now more interested in alternatives to ‘traditional finance’, which is why P2P lending is such an exciting area. Put simply, P2P lending involves an investor ‘lending’ money to a borrower and receiving a return – all without requiring a financial intermediary such as a bank.
The great thing about P2P lending is that the returns tend to be much higher than what you’d get on a typical savings account. Due to this, savvy investors may decide to allocate a portion of their active income into P2P lending, which will allow them to create a passive income stream from interest payments. As with most things, the more capital you put in, the higher your returns will likely be – but remember to never invest more than you can afford to lose!
2 – Investing in the Stock Market
Another great way to turn active income into passive income is by investing in the stock market. The most efficient way of doing this is by investing in dividend-paying companies, which distribute regular dividend payments to shareholders. Different companies will have different schedules and yields, so it’s vital to do your research before investing.
If you were to use some of your active income to create a portfolio of dividend-paying stocks, then you’d set yourself up with a nice passive income stream to complement your salary. Many companies make payments bi-annually or quarterly, with these payments going straight to your broker, who will then disburse them to you. Although yields can change (or companies can decide to stop paying dividends altogether), this methodology is still one of the most popular in modern times.
3 – Real Estate
The third way to use your active income to create a passive income stream is through real estate investing. You may have heard of this before, but many people look to enter the real estate market by buying a property and then renting it out – thereby generating a passive income stream. However, out of the three methods mentioned in this article, this one is the most capital-intensive.
The initial down payments will depend on where you are and market conditions, but once you have acquired a mortgage on a property, you can then lease it to a tenant – with the rental payments covering your mortgage payments and then some! You could even invest in a real estate investment trust (REIT), which are trusts that own income-generating properties and distribute some of the income they earn as dividends to investors.
So, to wrap up, the idea of investing your active income to generate a passive income stream is definitely worth exploring if you wish to strengthen your financial position. There is an abundance of options out there to create a passive income, each with its own level of risk and capital requirements. Overall, by considering one (or more) of the methods mentioned in this article, you’ll be laying a solid foundation that will help push you towards financial freedom over the long term.