Earning a Passive Income – What are the Options?

“Time is money” and “Time is Precious”, but money can’t buy time.. or can it?

We can all agree that time is a precious commodity. Everyone has the same number of hours each day. We cannot buy extra time, but how can we use a passive income to allow us to make better use of our time, and spend our time on things we’d rather be doing?

The ‘rich get richer’ is a phrase you’ve probably heard many times before, but how do they keep getting richer, are they working more? No, the answer is passive income. Passive income is when you are able to earn money without having to invest additional time and resource to generate income. Literally you start making money whilst you sleep.

How to Start Earning a Passive Income?

To start generating a passive income, you need to invest a little time in getting things set up, so that they may continue with minimal input.

To get started, think about what assets you have, is it cash or a physical asset such as a property? If it’s the latter, consider renting out a room or a parking space. There are a number of different ways you can do this and a whole host of apps and sites like AirbnB and Just Park that allow you to earn a passive income, whilst giving you flexibility.

If your asset is the spare cash that you’re currently putting aside each month, maybe you’re wondering if there’s a more productive use of this money rather than sticking it in a low-interest-savings account? If so, then here are a few ways to earn a passive income:

  • Switch Bank Accounts and review your interest rates
  • Buy through cashback sites or use reward cards
  • Invest

Maximise Efficiency

Review whether your bank accounts are delivering the best value for money you can find. There’s little point in being loyal to your bank these days and its easy to switch. Consider whether moving your savings or current accounts to another bank could earn you a switching incentive. Are you paying monthly fees on your current accounts? Can you avoid these fees by using an alternative?

If you have a savings account, what is the interest rate on that account? Is it competitive and do the earnings out-weigh inflation and fees?

If you currently use a credit card or do quite a bit of online shopping, there are ways in which you can earn just by buying on your credit card and through cashback sites. Using a credit card can be a useful tool to help build up your credit profile and make the most of rewards and cashback, but make sure you understand your limits and payment terms.

Investing for a Passive Income

Once you’ve done all of the above steps, you might find that you have maximised your financial efficiency and have more cash available each month to invest with. Now where to start investing?

First, consider a few things, can you afford for the money to be tied up long term 5yrs+? Do you need to be able to access the money from time to time at short notice, and what level of risk are you willing to take?

Generally speaking, it’s best to aim to build a diversified investment portfolio, which means that you’ll eventually have a variety of long-term and short-term investments, fixed and flexible across a variety of assets.

Peer-to-Peer Lending

Peer to peer (P2P) lending is one good way to earn a passive income if you’re looking for short to medium-term investment opportunities, that (in most cases) allows you to access your funds as an when you need them.

P2P lending allows you to earn a passive income from the comfort of your own home, by lending to either individuals or businesses for a return. Depending on the platform (the P2P lending site) returns generally vary from 3-20%. The risk also varies from platform to platform and even within the same platform depending on who you are lending to, and the terms of the loan. Most platforms provide a secondary market, which allows you to sell your loans to other lenders if you need to access your money earlier than planned.

Many platforms offer an auto-invest option, or others like rebuildingsociety.com offer both a manual and auto-invest option allowing you a better level of control on your investments.

Compounding the returns you earn via P2P platforms is an excellent way to improve your income.

Remember, that investing is not the same as saving. When investing whether through stocks or p2p lending, your capital is at risk and the returns may vary. However if you enter into your investment journey to passive income understanding this, you’re likely to start generating a good passive income, which will allow you to spend more time one the things you enjoy doing or aspire to do.

Tips for P2P Lending

  • Availability of BuyBack Guarantees

Some platforms provide provision funds to compensate you to various extents if a loan defaults. Other platforms offer buyback guarantees, which allow you to get your capital back before a default. Look into these options.

Provision Funds vs BuyBack Guarantees

  • Can you save tax by investing through an Innovative Finance ISA?

If you’re going to be earning more, you might as well earn in the most tax-efficient way. The Innovative Finance ISA (IFISA) allows you to invest via P2P platforms as normal, except the interest you earn is tax-free, similar to the concept of a cash ISA.

  • Consider risk vs reward

Make sure you understand the risks associated with each platform and the various investment types. The risk of investing in property P2P platforms varies to that of investing in peer-to-business lending platforms etc.

  • Understand Liquidity

Be realistic about whether you will need to access your capital at short notice, and understand the time frames associated with divesting.

If you’re interested in learning more about P2P lending and earning a passive income, visit our lender library for more helpful tips.

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