A Guide to Earning Passive Income

Table of Contents

It can be difficult making money in college, especially if you have limited time for a job. Passive income could be the answer: It allows you to earn money or build long-term wealth without much ongoing labor. There are several ways to earn passive income in college, so here’s what to know.

What is passive income?

While active income is money you make from a job or self-employment, passive income is money earned with little involvement. You typically invest some time and money upfront and may need to monitor things to keep everything on track, but your passive income stream won't require as much hands-on work compared to a job. In fact, the goal is typically to generate one or more passive income streams and eventually replace your job completely.    

Passive income ideas

We’ve come up with a list of passive income streams college students can set up. These are listed in order of the work involved, with the easiest first:

Contribute to a high-yield savings account

A savings account is a place where you can stash away money you’re not planning to use in the near term, and you typically earn money on the balance. High-yield savings accounts pay a much higher annual percentage yield (APY) compared to the national average, and anyone can open one at a bank or credit union.When you deposit money into the account, it grows without any work on your part. That’s because of compounding, where you earn interest both on your deposits and on the interest that builds in the account. For instance, putting $100 a month into a savings account that earns 5% APY will earn you $133 in interest in just a year. Keep it in the account for all four years of college, and you’ll earn $625—as long as you keep up your contributions and the bank doesn’t change the APY.

Set up a CD ladder

A certificate of deposit, or CD, is a type of savings account that requires you to lock up funds for a certain term, typically anywhere from three months to 10 years. You’ll pay a penalty if you withdraw money before the maturity date, but the bank pays you a fixed rate, so you’re guaranteed a return. You also may earn a lower rate on some term lengths. But a CD ladder, where you open several CDs with staggered maturity dates, allows you to take advantage of high interest rates while keeping liquidity. Here’s one example of how you can set up a CD ladder:

CD Amount deposited Term length

CD 1 $100 3 months

CD 2 $100 6 months

CD 3 $100 1 year

CD 4 $100 2 years

Invest in dividend stocks

A stock is an investment that represents partial ownership of a company. To buy stock, you can open a brokerage account at a bank (like Chase Bank) or brokerage firm (like Fidelity Investments) and then buy shares from thousands of publicly traded companies around the world.Some companies offer “dividend stocks,” which distribute earnings on a regular basis. So when the company earns money, you get some of the profits through dividend payouts. You can either choose to keep the dividend payout or reinvest it back into the stock to further grow your portfolio. Investing can get complex, especially when you need to consider tax implications and investment strategies. Consider talking with an investment advisor to develop a strategy that meets your financial goals and risk tolerance.

Create a blog

Another way to build passive income is by creating a website and using it to generate revenue. There are several ways to earn money with your content, including:

  • Display advertising through services like Google Adsense.
  • Sponsored content, where companies pay you a fee to publish content about their services or products.
  • Affiliate links, where you promote a product and earn commissions each time someone buys that product.

Companies may not add you as a partner until you’ve gained a sizable following on your social media channels, website and email newsletters. This typically requires you to develop content on a regular basis, so you’ll need to consider the time commitment involved.

Buy property and rent a room

Buying a home and renting out a room isn’t as common for college students as it is with older adults, but it’s still possible. As many as 3.6% of homeowners were under the age of 25 in the most recent U.S. Census.  And in some areas of the country, buying a home may cost less than renting an apartment. For instance, a $100,000 condo may translate to $900 a month if you put down 5% and receive an interest rate of 6.9%. You’ll build home equity and will have more freedom and flexibility than with your other living options, like a dorm room or an off-campus rental.  If you’re interested in this strategy, you’ll first need to save up for a down payment, qualify for a home loan, buy the property and find a reliable roommate to live in the other room. Contact your local state housing finance agency to discuss down payment assistance grants. Mortgage lenders look for strong credit and a steady income to qualify you for a home loan, so you’ll likely need a job to use this approach.  

Is passive income a good idea?

Building a passive income stream can be a great way to earn money with little work involved, but it can take some time. Before trying one of your options, consider the pros and cons:

Pros:

  • Earn money with little work involved
  • May eventually help you replace a full-time job
  • Provides a financial safety net

Cons:

  • Requires an upfront investment of time and money
  • Some ongoing work necessary
  • May not earn a lot, at least in the beginning
Ma Qing
October 4, 2024

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