What Is Passive Income? 

When most people think about making money, they think about money they’re making at a job. But, income can include much more than wages you’re earning. In fact, there’s income you can make with little to no day-to-day effort. 

We’re not talking about get-rich quick schemes or risky investment opportunities. We’re talking about passive income, which is money you can make with very little maintenance after some upfront work to get things started. Here’s a quick overview of what passive income is and some common sources of passive income.  

What is passive income? 

Maintaining a day job, or even a side hustle, involves active work and attention. Passive income is hands-off and self-sufficient. With passive income, once you get things started, you can continue to make money with little effort. There are many different types of passive income, but some of the more common sources include fixed income investments, rental properties, life insurance dividends, low-energy side gigs and more. 

One nice thing about passive income is there’s no limit on how much you can earn. So, the more passive income investments you can get started, the more potential you have to grow your money.  

How to make passive income with fixed income investments  

Fixed income investments are a very common source of steady, passive income. They’re generally stable investments that generate regular income, usually through interest or dividend payments. Fixed income investments can also help diversify your portfolio and offset risk associated with more volatile assets. Below are some ways that you can make passive income with fixed income investments:  

Purchasing bonds  

When you purchase a bond, you’re effectively loaning money to whoever issued it—usually the federal government, a local municipality or a corporation. In exchange, you’ll receive recurring interest payments, or coupon payments, until the bond matures. At that point, your initial investment will be returned to you.  

Bonds come in variety of forms—and risk and returns can vary. Here are some options:  

• Treasury bonds: Also called T-bonds, these fixed-income securities are issued by the U.S. government in terms of different lengths (1, 5, 10, 20 or 30 years). Interest is fixed and paid every six months.  

• Treasury inflation-protected securities (TIPS): These are backed by the federal government and tied to inflation. Interest rates are also fixed. TIPs are available in 5-, 10- and 30-year terms and pay interest every six months.  

• Municipal bonds: These bonds, which are issued by government entities like states, counties and cities, are used to fund specific projects. They carry a bit more risk than T-bonds but are still considered relatively safe investments.    

• Corporate bonds: These are issued by companies, making them riskier than government-backed securities, but they typically offer higher yields. Junk bonds are high-yield bonds that are issued by struggling companies.  

Investing with funds  

Funds like mutual funds, ETFs and bond index funds are designed to help grow your money without you doing the heavy lifting. Mutual funds pool money from investors to buy and sell securities based on the fund’s goals. Some mutual funds focus specifically on fixed income securities like bonds. A mutual fund allows you to invest in a collection of different assets instead of individual securities, which can provide immediate diversification and help mitigate investment risk.  

Earning interest from certificates of deposit (CDs) 

Certificates of deposit (CDs) are special accounts at banks with higher interest rates than traditional savings accounts. When you put money into a CD, you agree to leave it in the account for a certain amount of time—usually anywhere from one month to five years. When the term ends, you’ll get your initial investment back plus interest. Though you’ll pay a penalty for accessing the money during that period of time, you’ll have the opportunity to earn more on that money than if you’d left it in a savings account. Investing in multiple CDs with varying term lengths, known as CD laddering, is one way to use CDs while still keeping some regular access to portions of your principle. 

Purchasing an annuity  

Annuities are financial products purchased through insurance companies that provide guaranteed income¹ typically in retirement. With a fixed deferred income annuity, money grows tax-deferred at a fixed rate for a certain time period. Then you can let the balance grow or have the option to receive steady, consistent income payments, regardless of what’s going on in the stock market—and they typically last until you pass away.  

Earning dividends from your life insurance policy   

Though they’re not a type of investment, life insurance dividends can unlock a stream of passive income. When life insurance companies perform better than expected, they may pay out dividends to policyowners. For example, in 2024, Northwestern Mutual expects to pay $7.3 billion worth of dividends to its policyowners. If you have a permanent life insurance policy, you could take any dividends as income, or you can use them to increase the cash value of your policy.  

How to make passive income with a side hustle

There are many types of passive income—investing is just one strategy. You can also earn passive income with some relatively hands-off side gigs. In fact in some cases, a side job you enjoy could earn you both money and happiness.  

Though some of these ideas require some work upfront to get things rolling, once you have them in place, you can earn some income with less work. There are many business ideas that can make you passive income that don’t require a full-time commitment. Here are some relatively low-fuss side hustles that could bring in passive income: 

• Content creation: This could take the form of blogging, game development, app creation and more. Social media influencers can also fall under this category. You might even decide to create and sell an online course about something you’re uniquely skilled in.  

• Retail arbitrage: This option involves buying products, then reselling them online at higher price points. It could be a good fit for folks who enjoy shopping and are looking to make extra money. 

• Selling things online: If you’re up for selling items you no longer want or launching an Etsy shop to sell goods you’ve crafted, you could make a little extra dough doing so.  

• Property rental: Purchasing a second property could yield an additional source of income if you rent the property out for a fee.  

How is passive income taxed?  

In most cases, passive income is taxed as ordinary income. Your total earnings and tax-filing status will determine your tax bracket, and ultimately, how much you’ll owe. 

Advantages and disadvantages of passive income 

Like anything else, establishing passive income has its benefits and drawbacks. Here are some pros and cons to passive income:  

Pros 

• You can make money with little effort.  

• Depending on how you approach it, making passive income can be fun. You might be able to monetize a hobby or something you’re already doing anyway.  

• If you’re successful, earnings from passive income could eventually match those from your day job—giving you more financial freedom.  

Cons 

• Some passive income streams, like buying a rental property, require a large financial investment up front.  

• In the beginning, you may need to put substantial time and energy into establishing a passive income stream. 

• Passive income is taxable income. Depending on how you’re making it, you may have to make estimated quarterly tax payments. You’ll want to be mindful of how passive income affects your total tax bill.  

How a financial advisor can help  

There are many ways to earn passive income. The key is finding the most low-maintenance option that suits your needs.  

How to make passive income is one discussion you’ll likely have with your financial advisor when putting together a financial plan. Your advisor can give you recommendations that align with your values and work well with other financial products you’re using. And, your advisor may have new ideas to offer flexibility that you haven’t even thought of. By keeping an eye on your bigger financial picture, your advisor can also help you put that passive income to work, bringing you even closer to your goals. 

¹Guarantees backed solely by the claims-paying ability of the insurer. 

No investment strategy can guarantee a profit or protect against a loss. All investments carry some level of risk including the potential loss of all money invested.