What is passive income, and how do you earn it ?

Passive income is recurring and automatic profits from an activity that requires little or no input.

The income generated by work is generally insufficient to achieve a certain level of financial success. However, some people manage to generate additional income. If you want to know their secrets, we'll let you in on it : nothing more or less than creating a passive income. But what is passive income and how can you benefit from it ?

Definition of passive income

In addition to being a supplement to your salary, a passive income allows you to generate money on a continuous or recurring basis, without you having to make any great effort. 

It frees you from working 8 hours a day and does not require your presence, so you don’t have to be 100% available to continue generating earnings. This means that it does not depend on your productivity and is not a compensation for the services you provide. 

Thus, it allows you to generate money even during your sleep, holidays, weekends and public holidays. Creating a passive income is possible for everyone, both for individuals and entrepreneurs.

The benefits of passive income

Taking advantage of a passive source of income increases your financial capacity. This ensures you to grow your wealth. However, taking advantage of an additional and recurring source of money also allows for greater availability. 

In addition, people who benefit from it also have more time to develop their main activities. Moreover, the success of this type of strategy can really make it possible to change your life or to take an early retirement. 

For example, many people take the opportunity to travel around the world because they are no longer afraid of running out of money thanks to their passive income sources. This is because they can bring in money no matter where they are.

Indeed, some domains can generate several thousand euros every day. In addition, it is possible to set up several sources of automatic earnings to make even more money. 

However, it is essential to remain realistic, as the initial gains are generally smaller with a slow growth period. In addition, the increase in the flow of profits depends strongly on the strategy applied and the options chosen. It is therefore important to bear in mind that setting up a recurring complementary source of income does not make you rich overnight.

Thus, your main focus should be on analyzing and comparing your available options, so that you can automatically generate money in a sustainable manner. Setting up a recurring source of income initially requires investing a lot of effort, time and even money.

On the other hand, one of the great advantages of this type of remuneration is that it provides a safety net in case of job loss, in addition to helping you make ends meet. So, even if it doesn't generate much money, it's already very appreciable. Moreover, it will be money obtained with less effort. In addition, it is also a very effective way to supplement retirement funds.

The best sources of passive income

There are many ideas for passive income sources available. However, research is based on the fact that the strategy must allow you to be continuously or regularly paid even when the work has already been completed. For clarity, an example of this is song, movie and book rights that allow their authors to collect money automatically in the long run.

However, some ideas require more work beforehand than others. When choosing, it is therefore necessary to take into account your background, experience, skills and preferences. This can make the strategy easier to implement and more successful. The goal should be to automatically generate money and gain availability.

Investing in the stock market to earn passive income

Investments are risky, but are currently gaining a lot of interest from individuals and entrepreneurs. Indeed, the potential for recurring gains is very high and even increasing.

However, we are talking about a long-term investment, which allows you to reduce the potential risks. Also, it is necessary to favour certain financial assets in order to benefit from reliability. 

In addition, the wide choice of asset types available also makes it possible to diversify the portfolio to better secure the funds invested. Here are the most popular types of stock market assets for generating passive income.

Passive income from dividend-paying shares 

Acquiring shares allows you to take ownership of a part of a company and of certain rights of participation in its governance. This type of financial instrument can generate two types of gains. 

On the one hand, the shares of successful companies increase in value over the long term. In this context, the resale of these company shares makes it possible to generate profits. On the other hand, shares are very popular with investors because they allow them to receive dividends. The latter are shares of the profits that companies pay to their shareholders at the end of each accounting period. 

This is because companies thank investors for their trust. Indeed, they mainly use market capitalizations to support their development strategies.

However, before investing in this family of financial instruments, check that the shares come with dividends. In addition, not all companies have the same policy of rewarding profits. Thus, investors' earnings depend mainly on the shares' quotas and exercise periods decided during the major shareholders' meetings. For your information, some companies have had to suspend or even cancel the payment of dividends to their shareholders due to the economic impact of the covid-19 pandemic.

However, to ensure the continued receipt of this passive income, you can look at the ranking of the largest and most successful companies. For example, the CAC 40 includes the 40 largest French companies, including :

  • Accor 
  • Air Liquide
  • Bouygues
  • Carrefour
  • BNP
  • Essilor 
  • L'Oréal
  • Lafarge
  • Legrand 
  • LVMH 
  • Michelin 
  • Pernod Ricard 
  • Saint Gobain 
  • Sanofi and Société Générale

The NASDAQ-100 brings together the 100 most trusted technology companies in the US, including Paypal, Netflix, Adobe, Microsoft, PepsiCo, Comcast, Facebook, Alphabet, Amazon, Apple, and Intel.

Some stocks called Aristocrat dividends are known in the financial world for paying increasing dividends over a 25-year period. There are also what are called Kings dividends, which are large companies that have paid increasing profits to their shareholders for more than 50 years.

Investing in Bitcoin and cryptocurrencies

Cryptocurrencies, especially Bitcoin, have been the biggest revelations of 2020-2021 in terms of investment. Indeed, the covid-19 crisis had a positive impact on their rise, although it created a colossal price drop initially. In particular, in mid-March 2020 the Bitcoin price halved to €4,100, but it quickly recovered its losses during the year. 

Moreover, BTC hit a new historical record at the end of the year of around €23,500. From then on, BTC began an impressive growth phase that continued until 2021. In fact, as early as January 10, 2021, its price broke another all-time high of €33,800. Currently, Bitcoin is trading at more than €54,000 and experts predict that it will exceed €65,000 by January 2022. 

The potential capital gains are thus colossal. In fact, many companies that acquired BTC during the March 2020 price downturn have simply made billions.

Bitcoin is the king of cryptocurrencies and currently has a market capitalization of over $1 trillion, half that of all digital currencies. 

However, before investing in crypto, it is important to consider that it is highly volatile. The risk of losing the entire invested capital is therefore high. 

However, some crypto-currencies also have great potential for value gains like BTC. This includes its rival Ethereum (ETH) which currently trades at over €3,000 and enjoys the second largest market capitalization with over €360 billion. There is also Ripple (XRP) which has demonstrated a return of 3500% during the first half of 2021, Dogecoin (DOGE) which has a market cap of €26 billion and offered a return of over 5000%, Litecoin (LTC) with a current price of around €158, Tron (TRX) which has posted a return of 500% and many other digital currencies.

Automatic trading as a source of passive income

Attracting more and more investors, trading is a way to make short-term capital gains on financial assets. Indeed, this strategy is based on the exploitation of market fluctuations to make profits. 

The principle is based on buying at low prices and selling when prices rise. Thanks to CFDs, it also allows the use of leverage to multiply gains. However, because of the volatility of the markets, the risk of losses is also multiplied. In addition, this activity requires a lot of time to learn how to trade and to follow the markets.

Nevertheless, there are several solutions to these problems. In particular, investors can use automatic trading robots to grow their assets. These software programs incorporate computer intelligence that monitors the markets for you. 

They also use algorithms that allow them to make the most rational investment decisions. In addition, they are able to process thousands of trades in a matter of seconds, allowing for the best positions to be opened and ensuring a higher return. 

However, it is essential to know that there are scams out there and that you should be wary of claims that promise to make you rich overnight. Choose the software issuer carefully and to make sure that the broker linked to it is reputable. In addition, some trading knowledge is also necessary to be able to use these tools in the best way.

In this context, be aware that on some trading platforms, including the famous eToro, you get comprehensive educational resources to learn how to trade. eToro also provides a demo account with virtual money to test your strategies and avoid losing real money. To start making profits, beginners also have a great feature called copytrading. This feature allows you to automatically copy the strategies of the best traders on the platform. eToro's social trading feature provides a real social network where investors can advise each other and identify market sentiments.

Rental investment: a passive income reference

Collecting rent is one of the most sought after sources of passive income. Indeed, many real estate investors no longer have to worry about the financial side of things, as they only have to collect rent each month. Rental income can actually help to achieve true financial independence. However, contrary to popular belief, this investment strategy requires time to develop the assets. 

In fact, in view of the expenses arising from work and maintenance requirements, as well as taxes, the actual cash flow tends to be lower than initially forecast. Thus, the amount of passive income from property rental depends mainly on the number of properties operated. The rents will also depend on the demand for rent, the type of accommodation and its location.

However, rental investment has a great advantage. Indeed, it requires little or no personal contribution, thanks to the possibility of obtaining bank loans. The obtaining of these last ones depends however on the quality of the request submitted to the bank. Thanks to loans, everyone can thus set up a source of rental income which is highly appreciated for its long-term recurrence. The rents will make it possible on the one hand to refund the loans and on the other hand to engender monthly profits, or passive income.

Furthermore, it is possible to use a leverage effect on rental investments, thanks to short-term rental and furnished rental. This makes it possible to collect more substantial rents. In all cases, however, it is important to always take into account the risk of rental vacancies.

With this in mind, direct real estate investment can be too labour-intensive for some. However, it is possible to use participatory financing platforms to receive regular income from real estate assets. 

These platforms offer the opportunity to invest in certain real estate projects. Through the concept of collective investment, the funds to be invested are much smaller compared to the purchase of a property. The capital invested guarantees a stable and regular income based on a rate of return. However, real estate loans do not support this type of real estate investment. It is thus necessary to draw on savings.

Other passive income ideas

  • Create a blog and monetize it by renting advertising space, selling training, services or white papers.
  • Start a dropshipping business that avoids you having to build up a stock of products, as orders are shipped directly from the suppliers.
  • Sell photos online from platforms like Shutterstock, Getty Images or Adobe Stock.
  • Create a mobile application, a classified ads website, a networking platform
  • Affiliate programs offered by Amazon, Clickbank, 1tpe, jvzoo... which allow you to generate profits on the returns of your referrals

Bank investments and savings books are popular with the general public but do not generate any passive income !

These are the sources of passive income that are the best known to the general public, but are nowadays the least profitable.  They allow you to earn interest on funds placed in savings accounts. Thus, savers do not have to make any effort and can make their money grow. This type of investment offers optimal security of funds. The gains are proportional to the capital invested. In 2021, the rate of the Livret A is 0,5 %. This implies that one must allocate a substantial sum if one wishes to benefit from more generous interest.

However, the profitability of passbooks is lower in reality. Indeed, their rates are generally too low to be able to compensate for inflation. Thus, money placed in savings on a bank account is not optimally valued.