2 Reasons Why 2023 Could Be a Huge Year for Passive Income

·7 min read
Zephyr18 / Getty Images/iStockphoto
Zephyr18 / Getty Images/iStockphoto

While almost every investment is down right now, there’s an abundance of opportunity to keep the cash flow rolling in 2023.

With hundreds of thousands of layoffs, falling asset prices and continued inflation, finding ways to earn more money has become vitally important.

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Right now is probably one of the best opportunities to find passive income investments that pay out regular returns. The combination of lower prices and higher rates makes finding passive income opportunities even easier, and you can expect higher returns than we’ve seen in a while.

So here’s why passive income could be big in 2023. Also check out five passive income streams that are worth it.

What Is Passive Income?

Passive income is regular earnings from investments or other income sources that do not require your time or input. Think of it as “making money while you sleep.”

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There are several types of passive income, including:

  • Income-producing investments. There are several types of investments that pay out regular income, such as dividend stocks, high-yield savings accounts and real estate investment trusts (REITs). These are considered passive because you just have to deposit your funds and earn without any extra effort on your end.

  • Passive business income. While building a business is not a passive endeavor, you can build one that pays you over and over without any extra effort. Many online businesses let you create something once and continue selling it, such as an eBook or online course.

  • Real estate. Investing in a rental property or real estate business can require a lot of effort up front, but you can earn money each month automatically once your property is rented. This is considered one of the best forms of passive income (but with a higher up-front cost).

There are also some misconceptions about passive income, so here are a few ways to earn money that are NOT considered passive:

  • Your job. If you get paid to show up and work, it is not passive income. Even if you are quiet quitting, you are still getting paid for your time. Your job is (almost) never considered passive income.

  • Side hustle. While you can build a business that pays you without extra work from you, most side hustles require your active input. Freelance work or running an online business is not passive income.

  • Some investments. While investments such as dividend-paying stocks or bond funds provide regular income payments, investing in non-dividend stocks or vacant land don’t provide regular returns. These assets will appreciate over time but do not provide immediate passive income.

Here’s Why Passive Income Might Be Big in 2023

There are two main factors at play in 2023 that will make finding passive income much easier:

  • High interest rates. While the Federal Reserve continues to raise rates to combat inflation, this means that yields on savings accounts and other passive income investments are on the rise, too. This makes it a great time to earn money from any cash you have sitting around.

  • Lower asset prices. While 2021 and 2022 saw a massive surge in housing and stock market prices, 2023 presents an opportunity to buy these assets at much lower prices. As prices drop, investing in real estate or dividend-paying stocks becomes much cheaper.

Derek Sall, founder of Life and My Finances, also thinks 2023 will be huge for earning passive income.

“With recent inflation growth, interest rates are high right now — not good for buying a house but great for earning passive income,” he said.

Savings accounts, bonds and other fixed-income investments make it easy to earn high rates without much effort.

Bottom line: Assets are on sale and yields are up. If you invest right now, passive income payouts are some of the best we’ve seen in a long time.

Best Passive Income Investments in 2023

Check out some of your best options for 2023.

High-Yield Savings Accounts

High-yield savings accounts offer higher interest rates than standard savings accounts, and the money is still in a safe, government-insured account. Some high-yield savings accounts are paying over 4% APY right now, which is much better than the national average savings account rate of around 0.24% APY.

Personal finance expert Jim Wang of Wallet Hacks is a huge fan of these accounts and thinks “everyone should make sure they’re getting 3.5% to 4% APY on their savings. With the Fed increasing rates, if you have any significant cash savings where you’re earning less than that, you need to switch banks.”

Dividend Stocks

Dividend stocks are investments in individual companies that pay out quarterly or annual dividends to stockholders. Some famous examples are Coca-Cola (KO), Verizon (VFC), Bank of America (BAC) and Chevron (CVX).

You can simply invest in a dividend stock and collect a dividend deposit each quarter. Or you can reinvest the proceeds to compound your returns. This is what makes dividend stocks one of the best passive income vehicles available.

Bonds and Bond Funds

Bonds and bond funds are investments into government or corporate debt; the company or government agency issues bonds in return for your cash investment. Bonds pay out regular “coupon” payments on a monthly or quarterly schedule.

While bonds have been hit hard in recent years, this is actually great news for passive income investors. Bonds and bond fund prices are down, but yields are way up, making this a great opportunity to buy bonds and earn good income.

Currently, bond funds such as Vanguard’s Total Bond Market Index Fund (BND) are returning around 3.50% APY, and the expense ratio is a minuscule 0.07%.

Real Estate Investment Trusts (REITs)

While investing in real estate is one of the best passive income opportunities, the up-front effort and cost can make it hard for individual investors to get started. But you can still own real estate equity through a real estate investment trust (REIT).

REITs allow you to own a portion of a residential or commercial real estate property and take part in the passive income that comes from rents and other income activities. Platforms such as Fundrise make this easy, letting you buy into REITs for as little as $10. There are REITs that hold many types of real estate, giving you instant diversification.

Rental Properties

Real estate is sometimes seen as the holy grail of passive income. This is because the combination of finding a great deal, earning equity through improving the property, earning income through monthly rent and massive tax breaks can give a great return on investment.

While real estate prices are still higher than a few years ago, prices are starting to come down. This year may be a great opportunity to snag a deal on a rental property and start collecting some of that passive rental income.

Warning: Real estate is not passive at first and requires up-front effort to get the property and systems in place to make it more passive down the road. Hiring out improvements and property management can make it much more passive.

Debt Payoff

While putting cash into savings accounts or bonds can earn you a great yield, if you have high-interest debt, you may be able to generate higher returns by paying it off.

Sall has paid off over $50,000 in consumer debt and said, “If you have high-interest debt, don’t discount that as an option. If you pay down your 25% interest credit card, you’re essentially earning that 25% in passive income. If you have a 7% mortgage, you might even focus on paying that down.”

Debt payoff is completely passive income that could provide some of the highest returns of the year.

Bottom Line

Right now is a fantastic time to start thinking about finding ways to earn passive income. There are tons of great investments available, and some you can start earning income with today. Plus, with the ease of starting an online business, you also can build an online passive income-generating asset more easily than ever.

Just remember: Passive income may not start out passive. It might take some time and effort to get it to the point that you are earning money while you sleep. But, in the end, it should be worth it.

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