Passive income is the name given to any income source that doesn't require constant time and work, and instead earns you money without your active involvement.
In essence, passive income is when you get your money and assets to work for you. This could be anything from investing in bonds or dividend stocks to running an online store, creating a YouTube channel or renting out your property.
Passive income can be used just as a way to supplement your regular salary or help you achieve other financial goals. It's especially popular with those looking to achieve financial independence.
In the words of Warren Buffet, "If you don't find a way to make money while you sleep, you will work until you die." That's where passive income comes in.
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How to make passive income
Work out your passive income goals. Are you just looking to earn some extra cash on the side or significantly grow your wealth? Having a firm idea of how much you want to earn will help you pick the passive income streams that are most suitable.
Choose the passive income ideas that work best for you. There's no one-size-fits-all approach to passive income. If you have lots of savings you might want to consider a high interest savings account or bonds. If you're an expert in your field, you may want to start a YouTube channel, write a book or create an online course that you can monetise.
Put in the work. Many passive income streams take a lot of effort to set up and might take a while to start making a return. But putting in the hard yards early and getting the foundations right will give you the best chance at turning your passive income idea into a success.
Keep at it. Despite the name, passive income streams do require a bit of maintenance. For example, you may need to produce regular content for your YouTube channel to continue to generate views. Even if you have your money in a high interest savings account, it's worth regularly checking the market to see if you may be able to get a higher rate elsewhere.
Look for other passive income opportunities. Once you have one source of passive income up and running, it's worth looking into what else you can do to generate passive returns. Not only does this help increase your overall income, it also protects you if one of your passive income streams falls away.
Popular examples of passive income are things like the rent you receive on an investment property, the dividends you receive on stocks or the interest you receive from a term deposit or savings account.
Yes, you will likely need to pay tax on any passive income you earn in Australia. However, depending on the source of your passive income, it is unlikely to be taxed on a pay-as-you-go (PAYG) basis, which means you'll need to set aside a certain percentage of the income each financial year to cover the tax you'll owe on that income.
If you generate passive income via investments such as stocks, you will probably need to pay capital gains tax instead of income tax.
If you're making passive income, you should talk to an accountant or tax professional to understand your tax obligations.
It's hard to say. Some forms of passive income like investing, bonds and savings accounts require little effort to set up and maintain, but you'll need to already have savings to invest in order to generate a return. Other types of passive income might require more work, but have a lower barrier to entry in terms of capital.
It's possible to make thousands or even tens of thousands of dollars each year from passive income in Australia. It really depends on the assets and initial capital you have to work with, or how much work you're willing to put into developing your passive income ideas.
There's no "best" source of passive income, as different approaches will suit different types of people. However, you can find a list of the top passive income ideas here.
Technically, no. Generally speaking, passive income means sources of income that do not rely on your active involvement. A second job, like driving for Uber, requires your ongoing time and effort in order to make you income. However, some people may consider any income source that is not your primary job as a type of passive income.
Alison Banney is the money editorial manager at Finder. She covers all areas of personal finance, and her areas of expertise are superannuation, banking and saving. She has written about finance for 10 years, having previously worked at Westpac and written for several other major banks and super funds.
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