Aside from our regular jobs, there are now many other ways of earning some extra income. Making the most of our savings, managing the assets we own, or even relying on our talent and skills can all be a good way of earning what is known as passive income. 

Sara has loved history since she was little. She even chose to become a teacher to pass on her knowledge to her students. A few months ago, she decided that each year, during her holidays, she would visit a different country to see first-hand where many of the events she taught at school actually took place. 

However, when she began to draw up a budget and plan her first trip, she quickly realized that she would need more money than she had anticipated and so she began to think about how she could earn some extra income to complement her wages as a teacher.

After exploring various avenues, Sara was struck by the idea of passive income, as a way of earning some extra money. Although this form of income has always been around, there are now many more ways of earning it as technology rapidly evolves.

What is passive income?

It is essentially money we can earn on a regular or recurring basis without a significant commitment in terms of time or work, as is the case of the active income we earn from our regular job. While some money or effort will normally be required at the outset to set up the source of passive income, once you're up and running, it will require little to no further input.

Whatever the goal we want to achieve with our passive income, this avenue offers a number of benefits, such as instilling a savings culture, giving us an extra source of money so that we don't have to rely on wages alone, or allowing us to cope better with those curve balls life sometimes throws our way. 

This will certainly have a positive impact on our financial health or that of our household. In addition, passive income is an option open to a large number of people as there are various ways of going about it.

What are the most popular forms of passive income?

Going back to our first example, Sara must look at a number of factors – both personal and professional – in order to make the right choice when attempting to achieve her financial goal, which, in case you forgot, is to earn additional income from other sources to fund the trip she is planning. 

Some passive income options she might choose:

  • Renting out property. Renting out property such as houses, office space, warehouses, storage rooms or garage spaces is a traditional way of earning some passive income. In Sara's case, it is one of the most appealing options, as she has an empty room in her flat and could rent it for as long as she needs to, through collaborative economy websites or apps. She could also rent out the entire flat while she is travelling and thus earn even more money.

  • Investing in financial products. Investment or mutual funds are one of the most popular instruments among those seeking to obtain a return on their money. She thought it would be a good idea to seek professional advice in order to choose the product that best suits her profile and needs, including the question of how long she would like to hold the investment and the kind of return she would like to see. She is aIso keen on the idea of investing in sustainable funds to earn a return while supporting responsible projects, reflecting her own personal environmental and social concerns.

  • Creating digital content. This approach has been gaining in popularity in recent years as information or virtual products can be advertised or posted on social media or specialized websites in exchange for a commission. In her particular case, Sara could create an online history course and then sell it on an e-learning platform, write an e-book and market it online, or share the photographs she takes during her travels in an image bank and earn some money with each download. Generally, this type of content requires more effort at the outset or creation stage.

  • Selling second-hand items. This method is becoming increasingly popular because it is an ideal way to give a second life to unwanted electronics, clothing, furniture, or pretty much anything else, thus reducing our collective consumption of resources and at attractive prices too. There are apps and websites on which Sara can post the items she wants to sell to earn herself some extra money. While this stream of income logically depends on having items to sell in the first place, it is a hassle-free option, as no investment is needed to set it up.

  • Monetising talent. Just as you can earn income from creating content in the virtual world, the same goes for the physical world. Artistic talent such as painting, sculpting or handicraft can earn you a nice stream of passive income. Most importantly, what you create should be something you are passionate about and it shouldn't take too long to bring to market.

Mistakes to avoid when it comes to passive income

For this way of earning extra money, there are a lot of myths and misinformation going around that could ruin your chances of achieving your financial objectives or even cause you to give up. 

Many people think that they will see immediate results, but that is a mistake. You need to set reasonable and realistic deadlines right from the outset before the income will start flowing. Consistency is one of the keys to success.

Another mistake that should be avoided is thinking that the “passive" bit means not having to do anything at all. As explained above, while this type of income does not require the same level of effort and dedication as that of a traditional job, it is very important – especially at the beginning – to do the legwork needed to make the project profitable. 

Remember also that passive income does not mean easy money, as writing an e-book, painting a picture or recording a course calls for skills that not everyone has. The same goes for the money that we invest in the financial products or that we use to buy the flat we want to rent out, as time and effort would almost certainly have been needed to amass that money.

Do we need to declare passive income?

Broadly speaking, passive income qualifies as an economic activity subject to taxation, because it is essentially the provision of a service or the sale of goods – virtual or physical – in exchange for monetary remuneration. However, it may be exempt, depending on what the legislation of your country has to say, or you may be required to pay tax on the basis of factors such as the value of the returns obtained or the frequency of the activity.

If you would like to learn more, this article (in Spanish) on the Tu Futuro Próximo website (a blog produced by Santander Consumer Spain) provides further information on what financial freedom means and how you can achieve it through methods such as passive income.

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