Bitpanda Money Matters #05: start building passive income streams

Imagine earning money while you sleep, travel or spend time with family. Sounds great, right? That’s the power of passive income. Unlike active income, which requires you to trade time for money, passive income allows you to build wealth in the background. But while the idea of “making money effortlessly” is appealing, building a reliable passive income stream takes time, planning and the right strategy.

So where do you start? Let’s break it down.

What is passive income?

Passive income is money you earn with little to no ongoing effort after an initial setup. It differs from active income, like a salary or freelance work, where your earnings depend on the hours you put in. With passive income, once your system is in place, the money continues to flow – whether from investments, rental income or digital products.

While no income source is truly “100% passive,” some options require more work than others. That’s why it’s important to choose a strategy that fits your lifestyle and financial goals:

The best passive income strategies to consider

1. Invest in dividend stocks and ETFs

Dividend stocks are shares of companies that distribute a portion of their earnings to shareholders. Instead of relying solely on the stock’s price increasing, you receive regular cash payments – usually every quarter or year. This makes them a great choice for long-term investors looking to generate passive income.

Why it works: Dividend-paying companies tend to be well-established businesses with stable earnings, making them less volatile than high-growth stocks. Plus, reinvesting dividends can help you take advantage of compound interest. By using your dividend payouts to buy more shares, you increase your future earnings potential. Over time, as these new shares generate additional dividends, your investment grows exponentially, creating a snowball effect.

Keep in mind that not all stocks pay dividends. Companies that do typically distribute earnings based on their financial performance, often during earnings season, the period when companies release their financial results.

Want to learn more? Dive deep into how dividends work and what to look for in dividend stocks in the related articles.

Dividend ETFs (exchange-traded funds) offer a simple and diversified way to earn passive income. Instead of picking individual dividend stocks, you invest in a fund that holds multiple dividend-paying companies, spreading risk and simplifying portfolio management. Many dividend ETFs focus on stable, high-yield companies, making them ideal for long-term investors.

Some popular options include Global Dividend Stocks (ESG) (GLDIV-ESG), which targets sustainable dividend strategies, Global High Dividend Stocks (GLDIVIDEND), which covers companies worldwide with high yields and European Dividend Stocks (EURO-DIV), which focuses on top dividend payers in Europe.

How to start:

• Look for companies with a strong history of paying dividends. Sectors like consumer goods, healthcare and finance often have reliable dividend stocks.
• Consider dividend ETFs, which bundle multiple dividend-paying stocks into one fund, reducing risk and making investing easier.
• Set up an ETF savings plan to automate your investments and build wealth over time.
• Another option is dividend funds, which allow investors to gain exposure to multiple dividend-paying stocks while benefiting from professional management. Learn more about dividend funds here.

Ready to start earning passive income? With Bitpanda, you can invest in dividend stocks, ETFs and funds easily and securely. Register today and take your first step towards financial freedom!

2. Real estate: rental properties and REITs

Real estate is a classic way to earn passive income, but it’s not as simple as buying a house and collecting rent. Property management, maintenance costs and market fluctuations can make real estate investment challenging. However, if done right, rental income can provide steady cash flow and long-term appreciation.

• Why it works: Over time, rental properties can generate both passive income and capital gains as property values increase.

How to start:

• Evaluate your investment: Calculate your budget, down payment and mortgage rates, research rental demand in promising areas, and factor in costs like maintenance, property taxes and potential vacancies to ensure steady cash flow.
• Consider REITs for a hands-off approach – If you don’t want to manage a property, real estate investment trusts (REITs) allow you to invest in real estate through the stock market. REITs like Link Real Estate InvestmentTrust or CapitaLand Ascendas REIT let you earn dividends from commercial or residential properties without becoming a landlord.

3. Create and sell digital products

If you have knowledge or skills others are willing to pay for, creating digital products can be a scalable way to generate passive income. The best part? Once created, digital products can sell repeatedly with little to no ongoing effort.

Why it works: Unlike physical products, digital products don’t require inventory, shipping or manufacturing costs, making them highly profitable. For example, an online course or e-book can be created once and sold indefinitely with minimal upkeep.

How to start:

• Write an e-book on a topic you’re experienced in, whether it’s investing, fitness, or productivity.
• Create an online course and sell it on platforms like Udemy or Teachable.
• Sell stock photography, design templates or printables on sites like Etsy, Shutterstock or Amazon.

While building an audience takes time, once your digital products gain traction, they can provide a steady income stream for years. However, it's important to be aware of local regulations. In many countries, selling digital products typically requires registering a business and adhering to tax obligations. Familiarising yourself with these regulations ensures your venture remains compliant.

4. Peer-to-peer lending

Peer-to-peer (P2P) lending platforms allow you to lend money directly to individuals or businesses in exchange for interest payments. This can be a good way to generate passive income, but it comes with risk as borrowers may default on their loans. It’s best suited for those who already have some capital to invest and are comfortable with a certain level of risk in exchange for potential returns.

Why it works: You act as the bank, earning interest on your loans while helping others access credit. Plus, it’s a great way to support projects or businesses that align with your values or beliefs, giving them the financial boost they need to grow.

How to start:

• Use a reputable P2P lending platform that offers borrower risk ratings so you can manage risk accordingly.
• Diversify by lending to multiple borrowers instead of putting all your money into one loan.

5. High-yield savings accounts and bonds

If you prefer a lower-risk option, high-yield savings accounts and bonds offer a way to earn passive income with minimal effort. While they don’t provide high returns compared to stocks or real estate, they can be a stable option for short-term savings.

• Why it works: Your money earns interest without the risk of stock market fluctuations.

If you want to know more about how to start, check out our previous article, where we explain the concepts in more detail.

The power of compounding

Many passive income strategies benefit from compound growth, where your earnings generate even more earnings. This happens when you reinvest dividends, interest or rental income, allowing your money to grow exponentially over time.

For example, if you earn dividends from a stock and reinvest them instead of cashing them out, you’ll own more shares. Over time, those shares generate even more dividends, creating a snowball effect that accelerates your wealth growth.

Getting started

Building passive income doesn’t happen overnight. It requires patience, consistency and smart financial decisions. Here’s how to get started:

1. Define your financial goals: Are you looking to supplement your income, retire early or achieve full financial independence? Your goals will shape your strategy.
2. Start small and scale up: You don’t need a huge upfront investment. Begin with a manageable amount and increase it as you gain confidence.
3. Diversify your income sources: Relying on one passive income stream can be risky. By diversifying, you create financial stability even if one source underperforms.
4. Be patient and reinvest: The most successful passive income strategies take time. Reinvesting your earnings accelerates growth over the long term.

Now it’s time to start putting your knowledge into action. Here’s what you can do until next week’s article:

• Evaluate your current income streams: Do you already have sources of passive income, or are you relying solely on your paycheck? Identify areas where you can start diversifying.
• Research your options: Look into dividend stocks, ETFs or other passive income strategies that match your financial goals. If you’re interested in rental properties, start by understanding the market in your area.
• Set a small goal: Whether it’s investing in your first dividend ETF, saving up for a rental property down payment or creating a digital product, choose one step you can take this week.
• Assess your financial stability: Passive income is most effective when paired with a solid financial foundation. Review your financial plan to ensure you’re in a good position before committing to an investment.

By taking these steps, you’ll be well-prepared to navigate economic uncertainties and build a more resilient financial future. In the next edition of Bitpanda Money Matters, we’ll explore strategies for staying financially secure during uncertain times – helping you protect and grow your wealth no matter the circumstances. Stay tuned!

In the meantime, you can explore more articles on financial planning on the Bitpanda Academy.

Disclaimer
This article is distributed for informational purposes, and it is not to be construed as an offer or recommendation. It does not constitute and cannot replace investment advice.
Bitpanda does not make any representations or warranties as to the accuracy and completeness of any information contained herein.
Investing carries risks. You could lose all the money you invest.