Passive income is passive income, meaning it is income generated without active action. After your first sale, each subsequent sale essentially has a return on investment of 100000000% or even more (yes I have ignored the effective hourly wage rate or time it takes to establish the stream for now for simplicity purposes).
Each new dollar that you make as a result of work you have already conducted and gotten paid for in the past is an incremental dollar you have earned. How do you place a return on investment parameter on that?
Whether you realize it right now or not, even a little bit of income from your side project is worth a lot more. A modest passive income stream today has the potential of exponentially growing in the future.
Perhaps the biggest benefit however is that it can show you what is possible. It can turn a non believer into a believer, thus compelling him or her to push harder and further and grow that stream, and perhaps add more over time.
Before going any further, it is important to discuss the factual truth involved in setting up a side project to establish passive income. The fact is: Not all succeed. In fact, most fail. Why people fail is a different discussion for another time. But suffice it to say that with the will, “know how”, consistent action, patience, persistence and perseverance over time, anyone can successfully establish passive streams of income.
In the initial stages however, it is easy to get discouraged when your side project is only generating a few cents to a dollar per day (think Google Adsense advertising on your blog or website) after having been up and running for months now.
Passive and residual income is the golden pot at the end of the rainbow, so do not get discouraged easily because the road is long, curvy and the fact that anything worthwhile having in life such as a pot of gold takes time, preparation and hard work.
What you will realize on your journey however is that you will find lose gold dust at each step along the way (these are the pennies and small dollars you earn initially), and even if you think this isn’t much relative to the big pot of gold all the way at the end, this discussion will help you put things into perspective and realize how valuable every little bit of passive income is.
To put earnings from passive income into perspective, let’s rehash the definition of what passive income is. It is income or money generated from activities that involve no current active work. For example, if you deposit money that you have already earned and paid tax on in the bank, the bank pays you interest without you having to continuously work for it. Interest income therefore is passive income.
Similarly, the rent you receive from a rental property you invested in is also passive income. Royalties from patents, franchise fees from branding and residual commissions are all similar examples as well. For a more detailed discussion of passive income, you can read my blog post titled What does passive and residual income mean and why is it so good?
Yes and No. For most it does not. It does however provide a consistent stream of cash flow that makes life more comfortable in many ways. For those that work hard at growing the passive income stream or establishing multiple others, the amounts add up and can surely make them rich. At the very least, it establishes multiple avenues or channels of passive income that bring with it significantly more freedom, flexibility, peace of mind and more options in life.
To really put things into perspective, let’s discuss the worst case scenario. Many aspiring bloggers start a blog with high hopes thinking that it can be their gateway to early retirement and riches. Well, this doesn’t happen for many for various reasons although it certainly can and has for many I personally know. Instead, the blog makes a mere $3-5 per day or $90-150 per month after months of hard work and the blogger throws in the towel and calls it quits.
The income however continues to trickle in over time, and if the blog is search engine optimized well, chances are the traffic will increase over time and so will the income. I will ignore the income growth for now for simplicity purposes. But the fact is that profits are directly proportionate to web traffic for most internet based business models.
An extra $150 per month may not mean much in its absolute sense, especially to a successful individual working in Corporate America making $80,000 a year. However, does it really not mean much in a relative sense? Let’s examine further. . .
Since interest income earned on your money is the king of all passive incomes (so do many think at least), I will benchmark earning passive income from your side gig to this activity. Interest income is viewed as most ideal because money in the bank is safe money (at least the perception is) and you don’t have to do anything to earn the income from it at all.
Interest rates are sub 1% these days. But for simplicity, let’s assume that you can get a 1% interest rate on cash deposited in a bank today. How much deposit capital (money) do you need to generate $150 per month in interest?
$150 per month equates to $1,800 per year, which already sounds a lot healthier doesn’t it? $1,800 can fund a nice trip or two somewhere every year can’t it? Assuming it costs you $30 a year to maintain it (website hosting and domain name), you are still pocketing $1,770 annually.
The question is, how much money will you need in a bank deposit to generate $1,770 a year at 1% interest? Simple division shows you need $117,000 to generate $1,770 a year in passive interest income. Do you have a spare $117,000 that you can keep in the bank today to make the kind of money your blog (hypothetically speaking) is making you?
Agreed that a website or blog is nowhere equivalent to $117,000 deposited in a bank, but what I am conveying here is the relative benefits of a passive income stream. If you don’t have $117,000, you can’t generate $1,770 in passive interest income. However, the blog that you quit and walked away from is generating just as much for you (and you can grow it!).
When you work for a paycheck, you trader hours for dollars. No matter how much money you make, when you stop working, the money stops flowing in. Even a CEO is an employee at the end of the day, just a highly paid one.
How much does the above average Joe making $80,000 a year have to work to earn $150? $80,000 divided by 2,080 working hours based on 52 weeks and 40 hours per week comes out to a wage rate of roughly $36 per hour. So the well educated above average Joe has to work 4 hours to make $150 in income. What is 4 hours of extra free time worth to you every month? That is 48 Hours annually!
Not to mention that a side business generating some money is a nice asset to own for many reasons. You will always have pocket money trickling in from a website you don’t have to work on. You can also sell an asset when it generates money at a multiple of earnings. If your website is making $150 per month or $1,800 per year and you sell it for 3 times its earnings, you can pocket a nice lump sum of $5,400 (Uncle Sam will obviously take his share).
Alternatively, you can refocus on it and grow the passive income stream from $150 to $200 and perhaps more. The Internet is an interesting medium to do business on. Just a little bit of effort over a consistent period of time generates enough momentum to show significant results.
Another scenario is to add more streams of income similar in nature to what you already have. Because you have done it once, you can easily replicate it again, and again, and again. In fact this is how people become millionaires. They find something to do that makes them a dollar, and then they repeat it several times over to accumulate all the dollars over time.
$150 per month, though may not mean much relative to the $80,000 annual income, provides the belief and realization that making passive income from a side project is possible and it does work.
When compared in a relative sense, you will quickly see that even a small passive income stream is worth a lot. Would I rather have $117,000 in spare cash in a bank account earning me interest? Sure, most would take $117,000 cold cash over a blog that makes a mere $150 per month, but many don’t have this kind of money just lying around.
The point is, even the $150 per month is much more valuable that what it seems on the surface. It is income from doing absolutely nothing. A passive income stream of $150 per month is also a lot easier to achieve for most people in the short term than to accumulate $117,000 in post tax cash.
And if you want to replace your full time active income from your job with passive and residual income from your side business, you can refocus on your project to grow it, or simply add more streams of income to grow cash flow.
As always, I do not recommend you quit your full time job to pursue a side business. This is foolish – for now at least. Take your spare time during evenings and weekends and pursue a side project that you are passionate about. The experience is not only fun, but very much rewarding in more than just a financial sense.
I hope this discussion has put some more perspective to passive income for you, and hopefully has helped see things from a different angle.
Readers: What are your thoughts? Do you agree or disagree? Any other ways of putting things into better perspective for our readers?
Read some of my additional thoughts on building wealth with passive income here.