Discover how to generate revenue with interest-bearing accounts, royalties and other passive income streams to secure your financial future.
Imagine earning money while you sleep, travel or focus on your day job. That’s the promise of passive income — it creates financial breathing room and opens the door to improving your cash flow.
Whether you’re after a small boost to cover recurring expenses or a buffer for unexpected costs, passive income can complement your regular earnings and help reduce money stress. The key is deciding what will work best for you and your lifestyle.
Here’s what you need to know to get started.
What is passive income?
A job — where you trade your time and effort for compensation — is active income. Passive income, on the other hand, is money that comes from sources that require less time and/or effort. It’s not “free money,” but it does allow you to benefit from your assets, skills or savings in ways that don’t demand constant attention.
Say, for example, you have savings in an account that accrues interest. That interest — the money you earn beyond your principal balance — is passive income. If you own a stock and the company pays a dividend, that is passive income. If you own a rental property, then the rent you receive is passive, too. Some people also consider automated online businesses or affiliate marketing to be passive income if the systems run largely on their own after initial setup.
The common thread: Your money or work continues to generate revenue even when you’re not actively engaged.
Passive income ideas
There are many ways to create passive income, from putting your savings to work in interest-bearing accounts to leveraging your skills or assets. Here are several strategies to consider:
Interest-bearing accounts
Accounts that pay you a return on the money you deposit, typically expressed as an annual percentage yield (APY)
If you save money in an account that pays you interest on your balance, that interest is income. At some financial institutions, an account with higher qualifying balances or the presence of additional qualified products may earn higher interest.
While traditional savings accounts are great, you should also consider certificates of deposit (CDs) and money market accounts. CDs give you guaranteed returns with APYs that are typically higher than those for everyday savings accounts. The catch? You can’t withdraw your money for a set period (several months to years) without facing penalties.
If that feels too restrictive to you, a money market account may be a better fit. Money markets also usually offer higher APYs than checking accounts while still allowing access to your funds — provided you maintain required minimum balances and meet other conditions.
Side business royalties
Payments you receive when others use or purchase rights to your creative work, product or intellectual property
Passive income can also be earned through creative or entrepreneurial pursuits. For example:
- If you have design skills, you could sell digital products or templates on sites like Etsy.
- If you’re a photographer, uploading stock images to licensing sites could generate royalties each time your work is used.
- Authors and songwriters earn royalties when their books are sold or songs are streamed.
Royalties are payments you collect for the use of your intellectual property, either as a lump sum or an ongoing percentage of activity. Once you’ve created the product or work, the royalties can continue long after the initial effort.
Renting out assets you already own
Turning underused possessions — like space, vehicles or equipment — into income by leasing them to others
You don’t always need to buy something new to generate income. Sometimes you can monetize what you already have. For example:
- Renting out a spare storage space, garage or parking spot can bring in steady monthly payments.
- Peer-to-peer rental platforms make it easy to rent out tools, equipment or even high-end household items you rarely use.
- If you own a car you don’t drive often, you could consider car-sharing services that allow you to earn money when others borrow your vehicle.
While these options usually require some coordination and oversight, they can turn unused or underused possessions into ongoing revenue.
Buying rental property as a passive income strategy
Another popular way to try to generate passive income is by buying a property you can then rent out. There are many ways to do this, and each comes with its own benefits and level of risk.
Passive income from real estate typically comes from tenants paying you rent. You purchase a property — such as a single-family home, a multifamily home, apartment building, storage unit, commercial property or vacation home — rent it out and collect monthly payments. Ideally, that rent covers your mortgage and operating costs. Anything left over (your profit) is your passive income (and would likely be subject to taxation).
The first thing you should consider when it comes to buying a rental property, even before looking at the financial side, is what type of property you could realistically manage. Do you have the bandwidth and finances to handle an entire apartment building, or would a single-family home or duplex be a better place to start? You’ll need to market the space, vet tenants, handle the legal issues surrounding leases and be available to tenants if something goes wrong at the property. If you’d rather not manage the day-to-day, you can hire a property management company, but that cost will cut into your profits.
Early in your journey of buying a property, it’s wise to talk with a mortgage loan officer. They can help guide you through the process and give you a better sense of what types of properties would work for your financial situation. What you can afford will depend on factors like your credit score, down payment savings and available cash reserves.
Of course, there are some general benefits and drawbacks of rental properties to weigh before moving forward, including:
Pros:
- Stable cash flow. Rental income can potentially provide consistent, long-term payments that support your monthly finances.
- Equity growth. Property values can increase over time, allowing you to build equity.
- Inflation hedge. Rents often rise with the cost of living, helping to protect your rental income’s purchasing power.
Cons:
- High upfront costs. Down payments, closing costs and initial repairs can make rental properties expensive to get into.
- Ongoing expenses. Maintenance, property taxes and management fees may cut into your profit margins over time.
- Market and tenant risk. Vacancies, non-paying tenants or declines in property values can erode your expected returns.
How is passive income taxed?
The IRS will want to know about any money you bring in, even if you come by it passively. As such, it’s a good idea to work with a tax professional to make sure you’re following the rules, which can be tricky and vary depending on the types of income you are receiving.
Rental income, for example, could be offset by depreciation in your property or repair costs, which may reduce your taxable income. Taxes on dividends and other investment income may depend on your overall adjusted gross income and whether the dividends are qualified or nonqualified. You may also be responsible for paying quarterly estimated taxes to avoid underpayment penalties.
How to earn passive income
Now that you’ve got the basics down and know your options, it’s time to come up with a plan that makes sense for you and your goals.
First, start by clearly identifying those goals. Do you want to replace your existing income completely, or supplement it with a few extra dollars every month? Knowing the end goal will help you choose which strategies are right for you, as well as what entry point makes the most sense.
For example, if you eventually want to own your own office building, you might begin with a single storefront or small residential property. Or if you hope to build a portfolio of dividend-paying stocks, you could start with a low-cost index fund or dividend exchange-traded fund (ETF) and reinvest the earnings to grow over time.
Once your objectives are set, you can think about your plan of execution:
- Choose a low-barrier entry point. If you’re new to the investment game, high-yield savings accounts, CDs and dividend-paying ETFs can all provide steady returns without requiring major upfront capital.
- Explore higher-yield strategies. If you have more capital to invest, you might branch into rental properties or open a brokerage account.
- Track your progress. Use digital tools like the U.S. Bank Mobile App to set goals, monitor growth and measure how your passive income is contributing to your overall financial health.
Passive income isn’t built overnight, but taking small, intentional steps can put you on the path toward greater financial security and flexibility.
