What Qualifies as Passive Income?

What Qualifies as Passive Income?

Passive income is money that pays out more than once. For example, if you work for an hourly wage, you are exchanging something that belongs to you, your time, for a one-time payout. If you can find ways to put your resources to work so they pay more than once, you’re earning passive money.

Lend Money at Interest

According to the experts at SoFi Invest, a simple way to earn passive income is to “lend money on peer-to-peer, or P2P, platforms.” You may find yourself lending to those starting businesses and earning more than you would from a high yield savings account. Be aware that there will be risks with this type of lending; the platform managers may charge fees to vet the applicants as well.

Stocks and Bonds

As long as the markets are making money, you can earn this income from investments. You can use a work-related vehicle, such as a 401(k), to start. These often come with an employer match, which you may choose to use for more risky investments.

If you set up a personal stock investment portfolio, you may be tempted to get in there and move money around. Make sure you are aware of the fee structure before doing this; you may pay more in fees for your trades than you make on them.

Going Digital

A simple way to build such income is to sell digital ad space on a blog or a YouTube channel. The time you put into the blog is active income the first time someone clicks on an article. However, if your blog is pertinent and engaging, you can eventually boost your income as the ad space and click-through rate goes up, building income exponentially as your readers and followers return again and again to your creation. Subscribers can also be a source of income.

You may choose to offer private content on your blog or YouTube channel that is only available to those who pay for it. Do take care to set up an account for easy payments for this extra content; often, the subscriber can simply set up a subscription via credit card payment to gain this access.

Tax Considerations

This income is generally taxable. If you are a rental property owner or a silent partner, you will get 1099. Talk with your accountant about your income earning potential and consider paying quarterly estimates to avoid penalties and pain.

If you are concerned about paying high taxes even past your retirement age, you may want to set up a Roth IRA. A Roth IRA is funded with post-tax income. The dividends you earn will not be taxable. For those with high incomes, a lot of passive investments or those who just plan to work as long as possible, a Roth is a wonderful vehicle.

Passive income is free money, but it is beneficial in that it is not tied to a single period of time or a single item. If you sell a single piece of handmade jewelry, it’s an active income. If you sell a video class on making the same piece, the second video income is passive.

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