How to Make Passive Income: 9 Investment Strategies to Try

What is passive income?

Passive income is money you can earn without working a traditional job. This is the opposite of active or earned income, which is generally defined as income received from working at a job or as a contractor.

That's not to say passive income is easy money — in fact, the opposite can be true. Most ways to generate passive income require a large upfront investment, and the income part comes later. But once you've made that initial investment, passive income can pay off for years to come.

To help you compare your options, our editors have compiled a list of nine investing-based passive income ideas. We've included the effort level and return potential for each strategy, plus who they might work best for.

9 ways to earn passive income through investing

1. High-yield savings account (HYSA)

Best for: Most people. While it may not be the most lucrative passive income strategy, a HYSA offers an easy, low-risk way to earn interest on cash you want to keep accessible.

One of the easiest ways to earn passive income is to park some of your money in a high-yield savings account. These accounts work like a standard savings account, but with one very important difference: you can earn interest on the money deposited — and at a rate that is typically much higher than the national average.

While HYSAs aren’t designed to produce outsized returns, they can yield from a couple of dollars to hundreds or even thousands of dollars a year, depending on how much money you’re holding in the account. Interest rates (also known as APYs) vary by bank and can change based on the current economic climate, so it pays to shop around for the right fit.

2. Certificates of deposit (CDs)

Best for: People who don’t need immediate access to the money they deposit but would eventually like to use their earnings toward short-term savings goals.

A certificate of deposit is a type of savings account that pays you a fixed interest rate (either monthly or annually) in exchange for locking up your money for a set period of time. Unlike high-yield savings accounts, a CD’s interest rate won’t change during the term.

The tradeoff here is limited flexibility, as you’ll usually pay an early withdrawal penalty if you access your funds before the CD matures. Terms for CDs can range from 6 months to 5-plus years.

Like high-yield savings accounts, CDs won’t produce larger-than-life returns, but if you have cash you won’t need for a while, it’s a low-risk way to grow your savings.

3. Bonds and bond index funds

Best for: Investors seeking steady income and diversification.

Bonds are a way for investors to lend money to companies — as well as federal, state and local governments — and collect interest income. They are considered a safer investment than stocks, but also generally earn a lower return on your investment. You can either invest directly in a bond or in a bond fund, which is a collection of bonds, through a taxable brokerage account.

Nerdy Tip: If you have a 401(k), chances are part of your portfolio is already invested in bond funds. As you get closer to retirement, portfolios often shift toward a higher percentage of bonds to help reduce risk and preserve gains.

4. Dividend stocks

Best for: Long-term investors who are comfortable researching individual stocks and managing the tax consequences of dividends.

One way to build a passive income stream is to invest in dividend stocks, which distribute part of the company’s earnings to investors on a regular basis (typically quarterly). Dividend stocks are typically less volatile than other types of stocks, so they can help diversify and even stabilize your investment portfolio, too.

Ideally, the best dividend stocks increase their payout over time, helping your future income grow. Investors can also choose to reinvest dividends back into the stock, potentially increasing their investment if the stock does well.

5. Dividend funds

Best for: Investors who want dividend income but don’t want the responsibility of choosing individual stocks.

You can also invest in dividend index funds or dividend ETFs rather than picking and choosing individual stocks to buy. These funds tend to hold a well-rounded selection of many stocks that aim to mirror the performance of a given index.

A dividend ETF or dividend index fund will invest in a selection of stocks that pay dividends, which are regular payments that you could either cash or reinvest. This is a form of passive investing for those who prefer a more hands-off approach.

6. Real estate investment trusts (REITs)

Best for: Investors who want real estate exposure without owning property; retirees.

If you want to build passive income from real estate without the fuss and bother — not to mention the hefty down payment — of buying and managing properties yourself, real estate investment trusts (REITs) may be the answer.

Similar to mutual funds, REITs are companies that own commercial real estate, such as office buildings, retail spaces, apartments and hotels. When you buy a share, you are investing in them rather than purchasing them outright.

REITS tend to pay high dividends, but they vary in complexity and availability. New investors may want to stick to publicly traded REITs, which you can purchase through an online broker and are publicly traded on stock exchanges. You can also diversify your real estate holdings by investing in mutual funds or ETFs that track multiple REITs.

7. Rental properties

Best for: Investors with capital, risk tolerance and time (or money to outsource management).

Investing in real estate to earn rental income is another way to build passive income. Long-term rentals can provide a reliable source of cash if they are located in a healthy market for renters, but they also carry long-term stressors like maintaining those properties, and paying multiple mortgages, property tax bills and other costs. Additionally, there’s the burden of communicating with your renters — something that could eat up a good chunk of your time.

8. Peer-to-peer lending

Best for: Investors who want potentially higher yields than savings accounts or CDs and are comfortable taking on credit risk and limited liquidity.

An alternative to traditional bank loans, peer-to-peer lenders, like Prosper and Lending Club, match investors who are willing to lend money with borrowers who are vetted by the platforms for creditworthiness. It’s riskier than putting cash in a high-yield savings account or money market fund, but you can potentially earn more interest.

9. Cryptocurrency staking

Best for: Crypto investors who plan to hold long term and understand volatility and platform risk.

Crypto staking is a way of growing your holdings in certain cryptocurrencies by using them to help verify activity on an underlying blockchain network. When you stake a cryptocurrency, you can be rewarded with more cryptocurrency.

Staking, for most people, involves delegating your cryptocurrency to someone who is compiling records of transactions on the network on which it runs. Those verifiers need to put some tokens at stake to guard against fraudulent transmissions. By giving the voting power of your tokens to a reputable verifier, you can get a share of the rewards they receive for carrying out their job accurately.

But there is some risk: If the verifier you're working with is penalized, you may be as well. And staking sometimes requires you to commit your holdings for a set period of time, meaning you can't sell or trade them. Several crypto platforms offer staking programs. It's important to note that staking is not available on all cryptocurrencies — notably, Bitcoin does not support staking.