5 Passive Income Ideas for Software Engineers
On average, software engineers are making salaries above the national average.
Interns alone are making
$60 an hour plus housing and workplace perks while working at tech companies in HCOL, or High Cost of Living, areas.
Even with salaried positions, there comes a point when we realize that we are trading hours for dollars. Having passive income sources will provide more freedom and more options in the direction we take our lives.
To clarify, these are by no means fully passive. Every single option requires work to make them passive. Even then, you need to put in hours every now and then. If it makes money for you while you are asleep, that is when you can call it passive income.
Here, I will share with you different approaches to obtain passive income. I only briefly touch upon each topic to provide a simple understanding of what it is and how you can earn money from it. Be sure to read up on everything with more depth.
1. Build a Web Application
As a software engineer, this is a great skill to learn (very useful in the workplace as well). Understanding the lifecycle of a web application and all its backend components is important and can earn you a lot of money while you sleep.
Every website has a product. This product could be a browser game, a service for niche businesses, or anything that can fit inside a webpage.
Method 1: Create a free product.
The idea wouldn’t be to sell the product for money, but rather to create a free tool that is useful to some community.
It could be a tool to generate music compositions, an investing tool, a fitness tracking application, or even a sketchy streaming service. The idea is that you place advertisements on these websites. If the website gains enough traction, you can easily cover the cost of buying the domain and web hosting, and eventually, earn some revenue on the side.
Method 2: Create a subscription-based product.
This is generally what we call a software-as-a-service (SaaS). It’s a service we provide in exchange for a recurring payment (although, there may be a freemium option available).
Recurring payments are great, especially when your customers are paying for a product you’ve already developed. We’ve all seen this pricing model before (taken from WordPress):
You don’t need to create a business as big and successful as WordPress to make some money. This service could simply be removing advertisements from Method 1 or an extension of the free product.
A music tool such as ChordChord is a great example of a smaller web application that incorporates both ideas above.
This approach is great, but note that there is a lot to learn about SaaS economics before diving into this space.
2. Start Blogging About Your Career
This idea also involves building a website, but less emphasis on the building and more on the content.
Given that you’ve been working in your field for some time, you definitely have a lot of insight into how to get to where you are today.
Blogging has many benefits:
- Allows you to learn concepts with depth
- Builds a brand around your name
- Teaches you writing skills
“If you can’t explain it to a six-year-old, you don’t understand it yourself.” – Albert Einstein
It’s been studied that teaching allows you to learn best. It forces you to understand concepts with depth so that you can teach it to others.
It also looks great on resumes when employers see what you know and how well you know it. Having good prose also says a lot about you as an effective communicator.
However, this comes with a lot of imposter syndrome. Writing about your career puts you in a position of authority, even when it doesn’t feel deserved. It’s important to remember that there are always people to mentor. There is another generation that has not experienced anything you’ve experienced.
That aside, how do you make passive income from blogging?
Method 1: Advertisements
The amount you receive from advertisements is directly correlated with:
- Your niche (the topic of content)
- Audience size
If you decide that this is the only way you want to monetize, then you should heavily focus on churning out solid content and SEO, or Search Engine Optimization.
Be warned, however, that advertisements generally don’t become profitable until way down the line when you have more traffic. Be sure to write about things that interest you, or else you’ll burn out before you make a single dollar of passive income.
Method 2: Affiliate Programs
Affiliate marketing is a great strategy to earn extra money on the side. The idea is that you are selling someone else’s product.
The most popular example is Amazon’s Affiliate Program. Essentially, you can start selling Amazon products wherever you’d like.
Amazon provides referral links that are connected to your account. You will receive a commission if any of your readers click on the link and buy anything from Amazon through that link. It doesn’t even have to be the item that you recommended.
That being said, what you recommend reflects your credibility as a blogger, software engineer, and human being. Building that trust between you and the reader will earn you much more in the long run.
3. Start a Youtube Channel About Your Career
The motivation for this idea is the same as blogging, but the medium is different.
In some ways, Youtube allows for a more intimate connection between you and your audience. You don’t even need to show your face on camera, but you should at least provide some vocal commentary since it adds a human factor to the process.
The monetization tactics are exactly the same as with blogging. The process is even easier since Youtube guides you through the AdSense registration.
I also want to emphasize that starting a Youtube channel doesn’t have to be about your career. Any interesting hobbies you may have could be great content for your Youtube channel (or even blog). It is definitely a great way to start earning some passive income since you will be working on something you enjoy.
4. Invest in the Stock Market
Stock market investing could be through retirement accounts or taxable brokerage accounts. As software engineers, we’re generally introduced to this kind of investing when we get our first full-time job since compensation may come in the form of stocks.
Every single option below is a way to invest in the stock market; the only difference lies in how the money is taxed. It’s in your best interest to start early due to what people in the industry call compounding interest, where you earn interest on the interest you previously earned. This “snowball effect” is why most of these graphs appear exponential.
This graph approximates the difference between starting your investments in your 20s, 30s, and 40s (even with double investments). As you can see, starting early allows you to reap the benefits of compounding interest.
Here are some ways you can save and invest:
Method 1: Retirement Accounts: 401(k)
If you’re currently working full-time, there’s a chance that your employer offers a 401(k) plan.
Any money you decide to place in a 401(k) is pre-tax money.
Let’s say you earn
$75k a year pre-tax from your full-time job. Suppose your effective tax rate is
After taxes, you would be losing
$75,000 * 0.25 = $18,750…
…and taking home only
$75,000 – $18,750 = $56,250.
If you contribute to your 401(k), you would be taking money from the
$75k (before taxes) and placing it into this account that invests the money into the stock market. This will lower your taxable income, thereby decreasing the amount you pay in income tax.
The money is taxed when you withdraw from the account. That being said, you can’t withdraw until you are 59 1/2 years old.
Your 401(k) contributions are limited to
$19,500 per year as of 2021.
Method 2: Retirement Accounts: Roth IRA
This next option is not employer-dependent and can be started on your own in the next five minutes, hence the name: Individual Retirement Account.
A Roth IRA is similar to a 401(k) plan in that it is a tax-advantaged account, but it involves money received after taxes.
Be sure to check out this article about How to Invest in a Roth IRA, which will take you step-by-step through how to invest with Fidelity.
Any money you decide to place in a Roth IRA is post-tax money.
Let’s take the example of a
$75k salaried position again. You take home
If you contribute to your Roth IRA, you would be taking money from the
$56,250 (after taxes) and placing it into this account that invests the money into the stock market.
Any money you withdraw from this account is never taxed afterward, so it grows “tax-free”. Similar to the 401(k), you cannot withdraw money until you are 59 1/2 years old.
Your IRA contributions are limited to
$6,000 per year as of 2021.
Method 3: Taxable Accounts
You can open a normal brokerage account where any interest you earned is taxed when you withdraw from the account.
This graphic shows the approximate difference between saving in a Roth IRA compared to a taxable account.
Given an annual contribution of
25% marginal tax rate, and a
7% return, over the course of
30 years, you will have saved
~$150,000 in taxes if you invest in the Roth IRA.
So… why open a taxable account? These accounts are generally used for more short-term goals. If you are saving for something in the near future and want higher returns, then you might be interested in a taxable account.
5. Create and Sell a Course
Similar to Youtube, creating a course involves creating quality video content, both in your presentation and editing.
Similar to blogging and Youtube, creating a course involves teaching people something you already know.
The great thing about this is that it is a “Create Once, Sell Forever” product. These information products are sold just like any physical product, but there is an unlimited inventory. As long as there is a demand for your knowledge, there is potential for passive income.
There is the overhead of marketing and advertising your product to the world. That is why it may be good to first build an audience around a blog or Youtube channel, and then promote your course.