Ah, passive income – the holy grail of money-earning and the key to financial independence.
It’s a concept that a surprising number of people don’t even know exists, which is crazy considering how useful it can be in crafting your ideal life. Today I want to explain what it is, how it differs from active income, and of course, how to earn passive income!
What is Passive Income?
Passive income is money that you earn by doing no work directly.
You can be on holiday, walking the dog, or sleeping, and still get paid. Does life get any better than sleeping and earning money?
I don’t think so!
Since everyone reading this blog is a smart cookie, you’ll realise that the fact that it’s called “passive income” implies that the opposite also exists. It’s called active income, and you’ve probably been raised to believe it’s the only way to make money.
Active income is earned by trading your time for money. Passive income detaches money from time, so you don’t have to do anything to get paid.
If you’re a visual learner like me, this graph
will should make sense:
Active income – also known as a job – is pretty straightforward. You sell your time for money, coming into work most days of the week, for most of your waking hours. If you’re lucky and get paid for overtime, the more hours you work, the more money you’ll earn.
You’ll notice that the graph rises slightly with time. This is due to promotions, raises and bonuses.
Now comes the interesting part.
Passive income takes a lot of time and/or money to set up – at least at first. After it gets going, though, it can grow exponentially, even surpassing your active income.
This is known as the Crossover Point. Once you get here, now making as much money as your job from work-free passive income. You’re now beyond financially independent, assuming you weren’t spending all the money you were earning!
The Truth About Passive Income
Ok, this sounds a little bit too good to be true, doesn’t it?
The truth is that passive income should really be called residual income. In order to earn passively, you have to front-load your work and invest plenty of time – and probably money – at the start.
Take these examples of passive income and see the work that needs to be front-loaded:
- Dividends from stocks – you need money to invest in them and time to research the companies.
- Rent income from properties that you own – you need a lump sum of cash and enough knowledge to ensure the property is a sound investment.
- Royalties from creative works like music, films, or art – you need time to perfect a skill and create the actual content, like e-books to be sold on Kindle.
- Sales of a digital product – you need to spend the time to create the product, build up a reputable website and spend money on advertising.
- Income from vending machines, laundromats or ATMs – you need money to buy the equipment up front and to hire somebody to re-stock or maintain them periodically.
- Income from a business that you’ve built and set up to be managed by others – you need years to set up the business and make it profitable, as well as significant monetary investment.
As you can see, none of the above is easy, quick or cheap.
What they are, are effective ways to set up recurring, passive income for the future – at the expense of a period of time filled with hard work, patience and money investment!
Hey, if working hard now means I’ll get to sip on Mojitos from a beach in Cancun by the time I’m 40, I’m in! Where do I sign?
How I’m Creating Passive Income Streams
If you’ve been reading my articles for a while, you know that the idea of spending the next 40+ years of my life working a 9-5 job makes me a little dizzy. Far too many people are stuck there because they don’t know about passive income – or simply because they don’t want to put in the extra work.
The solution is to save money and create streams of passive income that will support you for years and years – or at least for the rest of your life!
My approach to accomplish this is to save a large portion of my income and invest it in stocks that have a long history of paying increasing dividends – I love David Fish’s Dividend Champions list for this. Historically, investing in the stock market has proven to be very profitable in the long run, and dividends literally require zero work.
Dividends are as passive as it gets!
Of course, you’ll also know that I’m currently not earning enough to sustain my lifestyle, let alone saving, but I aim to be in a position to start saving and investing again by the end of the year. 😉
There are two other passive income streams that I want to grow:
- Earning affiliate income from recommending products and services here on EtF – requires the work to grow my traffic.
- Creating a digital product and automate the sale process – this will require the initial work to create the course, and the money to automate as much of it as possible.
Check out the second part of this article, 11 Passive Income Ideas You Can Start This Month.