5 Ways to Turn $500 Into Passive Income

If you're unfamiliar with the idea of passive income, it can include any type of money you earn that doesn't require you to be constantly working.

For example, if you buy a second home and rent it out, you're collecting passive income each month. You still need to invest time and money into getting the house on the rental market, finding a tenant, and occasionally doing repairs, but most of the time, it's providing a constant stream of income.

Your day job, on the other hand, isn't passive at all. You have to get up every morning and work on your projects, make calls, close sales, etc. Then you get up the next day and do it all over again.

Nearly one-fifth of Americans have some form of passive income, but what if you don't have lots of money to spend on buying a second home to rent out? Fortunately, there are ways to improve your personal finances using passive income that don't require a significant financial investment.

Here are five ways you can get started building passive income with $500 or less.

1. Sell digital products online

One way to generate passive income online is to sell digital products. For example, you could design journals, notebooks, or digital artwork and sell them on Etsy.

You'll have to spend time creating the content at the beginning, but once you have it all made, you can upload it to an online shop. Many people who sell digital products manage their business by creating new products regularly and researching lucrative niches. But once your products are online, they can generate sales on their own.

If you go this route, you may need to spend some money on a subscription to design software like Adobe's Creative Cloud ($55 per month) or even Canva ($120 annually).

2. Buy stocks

This is a pretty obvious one, and it's one of the most passive ways to generate income. Like any investment, there's no guarantee you'll make money from it, but the potential from buying stocks is significant.

For example, let's say you invested $500 in Microsoft five years ago, added $500 to your position each year, and reinvested any money you received from the company's dividends. Your total contributions over the five years would be $2,500 ($500 in the first year plus $500 for the next four years), but with Microsoft's share price gains over this time, your total investment would now be worth nearly $4,700.

This is just one example; not all stocks will increase at the same pace, but the point here is that small amounts of money -- even $500 invested each year -- can turn into much larger sums, thanks to compounding interest. The good news is that you don't even have to like investing or pick your own stocks to benefit. You can always invest in passive exchange-traded funds and let your money grow over time.

3. Real estate investing through crowdfunding

Companies like Yieldstreet, CrowdStreet, and Fundrise allow you to invest as little as $10 into a property portfolio. These crowdfunding platforms combine the investments from a large group of investors and then put them toward buying properties. This allows the collective group of investors to purchase properties they wouldn't otherwise be able to purchase on their own.

No form of investing is a guaranteed win, so do your research before putting money into a real estate crowdfunding app. You should also look into each platform's fee structure. For example, Yieldstreet's annual management fee is between 0% to 2.5%. The more fees and the higher the percentage companies charge, the less you'll earn on your investment.

4. Vending machines

Owning vending machines can be a relatively easy way to earn passive income. While new machines can cost thousands of dollars, I found some used vending machines on eBay for under $500 that were still in working order.

You'll have to find high-traffic locations and get permission -- or rent the space -- to get your machines up and running. But other than spending some time restocking and maintaining them, this can be a great passive income source.

Data from Naturals2Go, a vending machine company, says that the typical machine earns about $300 monthly.

5. Open a high-yield savings account

Banks are paying very high yields relative to a few years ago, which means that depositing your cash into a new account could easily earn you some nice passive income. Some of the best high-yield savings accounts offer between 4% to 5% APY right now.

Some banks even offer bonuses when you set up a new account, but you'll have to check to see if there are any requirements -- such as setting up monthly automatic deposits -- to get the deal. The good news is that you can likely open a new account with just $500 and start earning money immediately.

You won't get rich off of a high-yield savings account, but considering that you need a good place to store your emergency fund and other savings, it's a no-brainer way to make some easy money.