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Your guide to passive income

What is passive income, and how can it help you maximize your money over the long term? We explore this and more here.

11 min read

The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset.

Stocks and ETFs are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.


For the majority of us, earning money takes work — and lots of it. Across most of the world, people live off of the jobs that they do, trading their time and labor for money. This process can be lucrative, but it can also be rewarding in other ways, allowing you to make an important impact in the world. Conversely — and this is the case for many of us — your job may just be a way to pay the bills so you can devote your free time to other things that matter. 

However, there are other ways of earning money that don’t involve work, per se. And, no, we’re not talking about winning the lottery — we’re talking about something called passive income. 

Unlike the money you earn from work, passive income is earnings which require little to no labor on your part. You can earn passive income through investments you’ve made in equities, properties, products, or businesses — basically anything that generates income for you pretty much on its own. Sound like a good deal? It can be, but as with any other investment, generating passive income can require discipline, time, and some risk.   

In this article, we’ll learn all about passive income, how it works, and some ways to generate it for yourself. We’ll also talk through some considerations you’ll need to be aware of when attempting to secure alternate sources of income. Let’s get started. 

What is passive income? 

When we talk about passive income, we’re referring to sources of revenue that don’t require much labor to acquire. In simpler terms, it’s money you earn without having to do much — or any — work. 

This broad definition encompasses a lot of different kinds of earnings. Most commonly, passive income is earned through investments in portfolio products like stocks and bonds or investments in real estate, but it can also be earned through other, more creative means, like renting out your car or advertising space on your lawn. 

It’s worth noting that although passive income sources may not need much labor on your part once they’re up and running, it can take effort or discipline to get things going. Or, they might require a large investment of capital upfront. But if you strike at the right moment, it’s possible to benefit from your investment for years to come. 

Passive vs. active income: How to tell the difference

Active income is money earned in exchange for your labor, e.g. your salary, business earnings, or freelance income. For most of us, active income is our main source of revenue. It’s what we use to pay our rent or mortgage, buy food and household items, enjoy leisure activities and travel, and save for retirement. In contrast, passive income is earned through little to no effort on your part, such as leasing out your property or earning dividends on your investments. 

Most forms of passive income are designed to supplement your active income, although if you inherit a large portfolio or valuable property, you may be able to live off of your passive income for years to come. Some investments, like dividends or interest, will take a long time to grow enough to generate any meaningful passive income, while others — such as leasing a property or object — can help you support yourself in the here and now. 

It’s worth mentioning that there are some types of work that can earn you either active or passive income, depending on how you play it. For example, if you teach live online courses and charge per class, you would be generating active income. However, if you offer pre-recorded courses for a fee, or host ads on your course website, then you’re technically earning passive income. 

Understanding the different types of passive income streams

In an ideal world, we’d all be able to strike a balance between active and passive income streams. But while most of us are familiar with how to earn money the good old-fashioned way, not all of us have been able to take advantage of passive income. One reason is that we might not have been taught much about how it works. Let’s look at some examples of passive income streams. 

Interest

One of the main sources of passive income, interest is the money you earn on a deposit when you lend it out to a bank or financial institution. You can earn interest through all kinds of financial products, including term deposit accounts, savings accounts, and passbooks. When you put money away for a long period of time, your interest will start to earn interest — a phenomenon known as compound interest.

Dividends

If you invest in stocks, you’re basically buying a share of a company — or, in the case of ETFs or mutual funds, shares of many companies. Some of these companies pay out dividends to their shareholders, which are cash distributions of a share of the retained earnings. Dividends paid out to investors may be higher or lower, depending on the level of investment. Furthermore, investors can choose to have them paid out in cash or to reinvest them into their portfolio with the hope of earning more money down the line. 

Rental income 

Another common way to earn money passively, rental income is a great way to boost your cash flow. Although rental income is most commonly associated with property you own and rent out to tenants, you can earn rental income on pretty much anything, including land, car use, space on your lawn or in your storage unit, or even on tools or designer items you want to lease out. 

Capital gains 

If you’ve invested in something like stocks, bonds, cryptocurrency, or other investments like fine art or property, and its value has grown, then you may want to sell it for a profit. The money you earn on this sale — i.e. the difference between what your initial investment was and what you sell for — is called capital gains. Its inverse, capital losses, are when your investment loses value from what you originally paid for it. 

Royalties 

If you’ve created something, whether it’s a screenplay, film, song or composition, training course, software, illustration, or other form of art, you may be able to earn royalties for its use. Royalties are income earned by letting other people or businesses use your creative work or your intellectual property.  

Cashback or rewards

Some financial institutions offer points or cashback rewards for spending money with their credit card. Generally, these deals are brokered between merchants and credit card companies, with the savings passed down to the customer. While this type of passive income can be quite lucrative when booking travel in the US, it’s less common to earn much money this way in Europe. 

How to position yourself to make passive income

Now that we’ve gotten a handle on the different types of passive income that exist, you might be asking yourself how you can start earning some of it yourself. Though the options are endless, here are some ideas to get you started. 

Before we kick off this section, a word of warning: Just because you invest some time into earning passive income doesn’t mean you’re guaranteed success. Most of the strategies below entail some level of risk, so it’s important to do your research and figure out what makes the most sense for you. 

Purchase property or land to rent out

If you can swing it, buying and renting out real estate is an excellent way to generate passive income. Although it will mean a large initial investment and some regular upkeep and maintenance, you may be able to earn money with real estate for many years to come. A lot will depend on the housing and financial market, and the level of taxes and other fees you need to pay. But if the property or land you own continues to grow in value, you can not only continue to earn more money with it, but sell it one day for a profit. 

Open an interest-bearing account

If you have some cash to spare and want to start generating passive income, you may want to consider putting that money to work for you with an interest-bearing account. Products like fixed-term deposit accounts or easy-access savings accounts allow you to earn interest on your money. The rates may be higher or lower based on the market conditions, but depending on how high your deposit is, they may be enough to help you earn some meaningful passive income each year.  

Lend money to your peers

Peer-to-peer lending, also known as “crowdlending,” can be a great strategy for earning passive income with some of your savings. This type of lending allows individuals or companies to skip the tedious process of getting bank loans; instead, they can source funding directly from one or even hundreds of individuals. Borrowers typically go through a strong vetting and creditworthiness process, but this type of lending isn’t considered as safe as a savings account. On the other hand, you may see larger financial gains. 

Participate in the sharing economy

Many of us don’t have the capital to invest in a property or loan out money, but that shouldn’t preclude us from earning passive income. Luckily, the big, bright world of the internet has made generating passive income much easier. Thanks to the sharing economy, people or groups can earn money from their assets, including their apartments, cars, tools, or even their time. From renting out a room on Airbnb to leasing out your car (or seats inside it on your journey) to loaning tools to people who need them, you can earn some extra cash a lot more easily than you may think. 

License or sell your intellectual property 

Although some ways of earning passive income require a hefty investment, others don’t take much more than a creative mind. If you’re able to write music, create content, develop product ideas, or produce designs, illustrations, or anything that can be licensed, then you may be able to earn royalties on that intellectual property. Figuring out how to do this can be tough, so it’s worth consulting a professional to get started. 

Consider investing your money

Although historical performance isn’t an indication of future gains, investing has long been a strategy for those who want to earn passive income. You can invest your money in a way that suits your age, income, and risk tolerance with a mix of stocks and government bonds, or securities like ETFs and/or index funds. If you have plenty of time to grow your money, it’s possible to eventually earn enough money to supplement your income or pension payments. Note that investing carries some risk of losing some or all of your investment, so you shouldn’t invest money you need to live on. 

A few things to consider when earning passive income

If you do find a way to earn passive income, there are a few things that make it different from other types of income. You’ll want to consider these before you get started.

The most important thing is figuring out how your passive income is treated by the tax authorities in your country. Different types of income streams like capital gains or rental income may have diverging types of taxation, which may or may not work in your favor. Given this, it’s important to educate yourself to avoid any nasty surprises. 

Finally, if you’re investing in something in the hopes of earning passive income, bear in mind that some investments are riskier than others. Savings accounts or term-deposit accounts are a pretty safe bet, while real estate and equities are much more volatile. So, you’d do well to not put all your eggs in one passive-income basket.


Your Money at N26

Whether you’re looking to secure a source of passive income or want to make waves with your freelance business, you deserve a bank account that puts you in the driver’s seat. That’s why we offer a 100% mobile banking experience built with your needs in mind. Our premium accounts like N26 Smart offer up to 10 Spaces sub-accounts — virtual piggy banks where you can save for what matters most. Assign them their own IBANs to transfer money in and out — perfect for managing rent, planning vacations, and much more. Ready for a banking experience you’ll truly love? Compare our accounts and find the one that fits your lifestyle today.

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