Most people will likely associate income with the salary they receive from a regular job. But there are other ways to earn some extra income that should involve a bit less time and effort. In this guide, we summarise the different types of passive income and how much you might be able to earn.<\/p>
Passive income is a form of income that doesn\u2019t come from a \u201cproper job\u201d. Work you receive a salary for from an employer, or self-employment where you invoice clients for the work you do, for example. The idea behind passive income is that it doesn\u2019t require huge amounts of ongoing effort to earn, though you may need to put in a bit of time, effort and money up front.<\/p>
There are a few ways in which you can earn a passive income, including:<\/p>
The best way of making a passive income will depend on your personal circumstances. If you don\u2019t own a car, you can\u2019t very well earn money from renting it out, after all.<\/p>
The way of making income that\u2019s most likely to be an option for most people is saving and investing. To start making money from that you need to have some money to save or invest. But you don\u2019t need to own any other assets or publish a website. So in the rest of this article, we\u2019ll focus on earning a passive income through saving and investing.<\/p>
Broadly speaking, there are two main reasons to save or invest your money.<\/p>
The two don\u2019t have to be mutually exclusive. Some options let you draw some income while your initial capital continues to grow. Here are the main options that you can potentially use for a passive income.<\/p>
As of September 2023, the best easy-access savings accounts<\/a> pay upwards of 4% interest on savings. If you\u2019re willing to lock your money away for a year or more (and delay receiving any income), you could earn closer to 5% with a fixed-rate bond<\/a>.<\/p> We\u2019re not going to lie though. Unless you have a lot<\/strong> of money to squirrel away, the level of passive income you\u2019ll be able to earn from savings will be pretty low. Even at a rate of 4.5% (paid annually), putting \u00a310,000 into savings would only earn you \u00a3450 a year. Enough for a weekend away, perhaps. This isn\u2019t to be sniffed at, but only a tiny fraction of what most people need to live on. And there\u2019s no chance of capital growth beyond the interest you earn. Plus with annual inflation at around 10% as of March 2023, money in even the best-paying savings account will be losing value in real terms.<\/p> This doesn\u2019t mean it\u2019s not worth having some money in savings. In fact, it\u2019s recommended to keep enough to cover a few months\u2019 worth of essential outgoings in an easy-access account to cover emergencies. But don\u2019t give up your day job just yet.<\/p> Investment bonds are effectively loans to government (also called gilts) or companies (corporate bonds). In exchange for these loans, investors receive an agreed rate of interest. Over the 30 years to the end of April 2023, the yield (annual interest) on government bonds has been just over 4%. The yield on corporate bonds can be higher than gilts. That\u2019s because there is usually a greater risk of businesses defaulting on their loans than of the government doing so, particularly if the company is less well established. This means that companies have to pay a higher rate to balance out the higher risk.<\/p> But, while interest rates on bonds can be higher than those on savings accounts, you\u2019d still have to invest quite a lot of money to earn a decent income.<\/p> Dividends are shares of the annual profits of companies that are paid to investors. Not all investments pay dividends, though. There are three main types of investment that may pay dividends.<\/p>Interest from government or corporate bonds<\/h4>
Dividends from investments<\/h4>
Compare platforms where you can purchase stocks<\/h4>