How to Avoid Passive Income Scams

woman working from a home office

Scammers often try to sell a simple-sounding promise: You can make money effortlessly. It's not necessarily too good to be true, and there are some legitimate opportunities to make passive income. But knowing that passive income may be attainable is exactly what makes these scams so enticing. And fraudsters will work hard to advertise these scams and take your money.

What Is Passive Income?

Passive income is income that you earn while you aren't actively working. In practice, however, many legitimate passive income streams can require a lot of time, money, risk or a combination of all three.

Investing in the stock market can be a form of passive income, for example, but it carries a lot of risk. And the options that don't require a lot of risk, such as high-yield savings accounts, may not lead to high returns. Investing in a business or rental property might lead to larger gains, but this also comes with risk, and can also require a lot of money upfront.

Some of the most commonly discussed options that don't require a lot of money involve creating content. This could include ebooks, online courses, blogs, streaming video or social media. But don't underestimate how much time you'll need to invest in your craft to attract attention and keep your audience engaged.

Common Passive Income Scams

While creating passive income streams can be a worthwhile goal, there are several common passive income scams to watch out for.

  • Ponzi schemes: With a Ponzi scheme, a scammer may promise you large returns on your investment but is ultimately out to steal your money. These scammers use part of your investment to pay their earlier investors, and then keep the rest for themselves. Ponzi schemes can continue for a long time if the scammer continually attracts new victims.
  • Pyramid schemes: Pyramid schemes are similar to Ponzi schemes, but they generally involve more participation. Instead of being promised investment returns, you're told you can earn money if you recruit more people to join the program. Many are pitched as multilevel marketing programs for a certain product, with a promise that you can become your own boss.
  • Pyramid schemes by another name, such as chain letters, circle games, blessing looms and sou-sous: Some scammers create a spin on a pyramid scheme by dressing up the scheme with another name. It might be pitched as a game or traditional lending circle, where everyone puts in money and one person receives the pot of funds each round. But the last people to join could be left with nothing. (In contrast, there are legitimate lending circles, including ones that can help you build credit.)

Other passive income scams fall into a gray area. For example, you might want to buy a course on how to design ebooks, how to invest in stocks, how to trade options or how to buy real estate. There are legitimate courses that can offer good insights, and investing in education isn't necessarily a bad idea. But there are also people selling courses they aren't qualified to teach—they make their money selling courses, not from the passive income opportunities they're telling you about.

It's not a scam in the sense that you get nothing in return. But you could wind up spending thousands of dollars on courses or membership groups without getting the value you were promised.

What if You've Already Been Scammed?

If you're a victim of a scam, you might not be able to get your money back, depending on the circumstances. But you can help protect others by reporting the scam.

You can submit a report with the Federal Trade Commission online. You can also send a report to the FBI's Internet Crime Complaint Center if the scam involves the internet. Additionally, if the scam was advertised or shared on social media, you may be able to report it to the social media platform.

How to Protect Yourself From Scams

While you might want to earn money while relaxing, think twice before handing over your money and watch out for these red flags:

  • Promises of fast and easy money
  • High-pressure sales tactics
  • A pitch that highlights the possibility to earn passive income
  • The business or group doesn't sell real products or services
  • The person selling investments isn't registered with the proper agencies

Scams often rely on psychological manipulation, pressuring you to act quickly before the "opportunity" ends and you miss out. Some websites or advertisements might even have countdown timers, but these sometimes reset when you refresh the page or the timer reaches zero.

Take a deep breath, ask a friend to provide some perspective and give yourself at least 24 hours to sleep on it and reassess. You can also search for the company's name plus the word "scam" or search message boards for other people's experiences.

In addition to protecting yourself from passive income scams, you could look for ways to protect your credit and identity. Experian offers a free credit report which includes ongoing monitoring and notifications for suspicious activity. You can also subscribe to Experian IdentityWorksSM to get more comprehensive identity monitoring and protection services for yourself or your family.

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