5 of the most effective ways to create passive income

Whatever your money goals, earning a passive income is a great way to earn some extra cash with very little effort.

In this article, we’ll discuss what exactly passive income is, as well as some of the various ways you can earn one.

What is passive income?

Passive income is a way of earning money without having to do any ongoing, active work to earn it. You may have to do a bit of work at the start, but with just a little bit of effort and maintenance along the way, you can earn some generous rewards.

Your active income, on the other hand, requires you to keep working in order to continue to earn an income – like your job. So if you quit, or for whatever reason can no longer work, you don’t get paid.

One similarity that active and passive incomes share, though, is that they may both be taxable. While the tax you owe on money you earn from your job will usually be paid automatically, you will need to declare your passive income to HMRC if you earn more than £1,000 a year and pay any tax you owe yourself.

Ways to earn passive income

Whatever your goals, there are plenty of options available to you when it comes to earning a passive income. To help, we’ve put together 5 simple ideas to help inspire you:

Switch to a rewards or cashback bank account

With so many banks competing against each other to look after your money, now is a great time to take advantage of the cash banks are offering for switching your account to them. These incentives usually come in the form of cashback, often up to £150 just for switching your account as well as a small percentage on spending you do with that account. Some accounts also offer monthly rewards like cinema tickets and digital movies.

And because most banks are now part of the Current Account Switch Service (CASS), switching your bank account is easy and convenient. The CASS means that banks now guarantee to transfer all your existing direct debits and standing orders over to your new account within seven days, which means there’s less work for you. Just remember to move your income over to your new account!

It’s worth researching whether the bank you switch to charges a monthly fee for the type of account you’re considering, before you make the move. You can then weigh up the fees versus the rewards it offers and decide whether the switch will earn you money, or cost you. 

Make sure savings are in an interest-earning account

If you have savings, it’s a good idea to put them in an interest-earning savings account. There are many types of accounts available, some more flexible than others, so you’ll need to do some research to find the one that works best for you and your money.

Typically, the best rates available for your savings will be in the form of fixed-rate accounts and bonds. These accounts will give you higher rates of interest, but also mean you can't access your money for a set period of time. If you ever need to access your money before your agreed bond is up, then it’s likely you’ll face a withdrawal charge.

Other saving accounts include easy-access accounts and ISAs, but they come with much lower rates of interest. They do, however, allow you to access your money without a charge and give you the flexibility to switch accounts when you find a better interest rate. Plus, earning low interest is better than earning none.

Rent your driveway

Thanks to convenient apps like JustPark, you can now rent out your driveway to other motorists with ease – and earn money while doing it. Unlike renting out a room in your home, you don’t need to be a homeowner to do it. But, if you do rent your home or even just your parking spot, you should get your landlord’s permission before you sign up to rent your space. It’s also worth bearing in mind that on-street parking spots that are managed by a local council can’t currently be added to these types of apps.

You can add your parking spot to JustPark for free in just two minutes, and they’ll do the rest for you – advertising your space to thousands of motorists and handling bookings on your behalf. The full address of your space and any access instructions are only revealed to drivers once they’ve booked, and you’ll receive the name and contact details of drivers that book your space so that you can get in touch with them if needs be. We always recommend checking out a company’s Privacy Policy before you sign up with them, to make sure you know how your data will be used.

If you live in a city centre, or close to popular sporting venues and commuter routes, demand for your space and the money you can make from it can really add up. It’s completely up to you how much you charge for your space, but there are useful tools on the JustPark website that help with pricing based on demand in your area. Always remember that if you earn more than £1,000 a year from renting your driveway, or any other sources of income that aren’t your main employment, you’ll need to declare it to HMRC.

Use cashback websites

When shopping online, you can earn money on your purchases in the form of cashback by making your purchases through cashback websites like Top Cashback and Quidco.

These sites act as a middle-party between you and the retailer and give you cashback as a reward for shopping through them. Remember to make your purchase through the link on the cashback website and not directly through the retailer, though, as you’ll lose out on your cashback opportunity. And, it’s always a good idea to shop around, to make sure that you’re not paying over the odds just to get cashback.

The rewards you receive won’t always be instant, so bear this in mind, and only use a cashback website to buy items you would have purchased even if cashback wasn’t an option – it’s never a good idea to buy things just to get the cashback!

Build an investment portfolio

Building an investment portfolio might sound like something you need an economics degree and bags of cash to do, but that’s not the case at all – you can start with just a few pounds.

A great way to get started is with an app like Moneybox. Moneybox lets you invest and grow your money over time through a number of investment strategies – from stock and shares to junior ISAs and personal pensions. The great thing about Moneybox is that they do most of the thinking for you, and you can get started with an investment of just £1. You can also fund your investments with their roundup feature, which rounds up every purchase you make to the nearest pound and invests the roundup money into your chosen account. So if you buy a coffee for £2.40, they’ll round it up to £3 and invest the 60p difference.

Remember to research the different types of investment accounts to find the right one for you before jumping in. Within each type of investment account, you can set the amount of risk you’re willing to take, from cautious to adventurous. So, do your research, seek the advice of an independent, registered advisor if you feel you need it, and choose one that suits you and your financial goals. Because there is a risk of your investments decreasing in value as well as increasing, only invest money you can afford to lose.

Let’s recap

A passive income can really boost your current earnings and help stretch the money you earn in your day job even further. Plus, because passive incomes don’t take too much time and effort, you can still manage your existing work and maintain your current lifestyle at the same time. Whether you’re looking for a few extra pounds to buy luxuries or want to set yourself up for full financial freedom, the tips in this article are a great start.

Please remember that all the information in this article is strictly educational. We are not financial advisors and none of the information provided should be taken as financial advice. Always do your own research before committing to anything with your hard-earned money.

We do not receive any financial gain for sharing links to brands or products, and there may be other companies offering the services we describe.