The title of this post is a phrase that caught my attention as I was reading a personal finance blog that stresses on working hard to climb up the corporate ladder and saving your way to building wealth.
I totally disagree with it. Sure, there are semi passive activities that take some time to manage, but to say there is no such thing such as passive income is absurd. What do you call interest income earned on your money parked in a certificate of deposit in a bank?
Now that I have thrown the validity of the phrase out the window, let me explain why the author and several others who agreed via commenting on the post feel this way. First, any passive venture requires some type of management and ongoing monitoring.
Second, even the truest passive forms of income take time and work to establish. For example, earning the capital required to make interest income on takes time and work. So does finding a property to buy, buying it and then renting it out.
If you really get bogged down in all that minutiae, you will never find a truly passive venture. But you need to. Establishing passive streams of income brings freedom, flexibility and peace of mind for many. That is what this blog is all about.
In its simplest definition, passive income is the moolah you make while you eat, shower, S#@&, sleep and do all else that you do daily. The formal definition of passive income however is as follows: Passive income is any income from an activity in which an individual does not actively participate. Well, if you are not participating actively, then it must be passive. Simple enough right?
Wrong. Here is where all kinds of experts have varying opinions on what is truly active vs. passive. I call this the useless minutiae people fall into and as a result end up paralyzing any chances of making forward progress. Who cares is what I say. If you enjoy it and think it is anywhere near remotely being passive, then pursue it.
Truth is, everything in life (at least when it comes to making money) involves some level of work. Even opening a CD in a bank requires that you research the type of CD you want, whether or not the bank is FDIC insured, open the account, fund it, monitor the statements and then reinvest your money upon maturity. Then you have to claim it on your taxes, pay taxes on it, etc.
The residential rental business has its own set of “to dos”. The point is, all activities involve some type of work. Entrepreneurship, whether full or part time, allows you the freedom to choose how much work you want to put in and what type of work you want to do.
For example, do you want to manage rental properties, find and replace tenants and collect rent, or do you want to blog or build a website and earn passive and residual income from advertisement?
Both activities are passive to a degree, both involve work to a degree, both are lucrative and promise good return on investment and both involve their fair share of risk and costs associated. You just have to choose what you are most comfortable with.
There are many other ways to generate passive income. Whether they are truly passive is a question I will leave for you to answer. I will simply share what I know. Some require time, some require money, some require hard work and some require a combination of any of these or all.
Royalties –These are fees you collect from selling rights to something. If you are able to get a book published, the author pays you royalties upon sale of each copy. Actors and musicians collect royalties when their products sell (movies, CDs, etc). If you own rights to anything that has value to someone else, you can rent out your rights for a cost. Patents and franchises are two mainstream examples through which owners earn royalties.
Investments – Similar to the CD deposited in a bank, investments in the stock and bond markets can also bring in passive income, though they come with increased risks. An investment in a solid blue chip company paying healthy dividends is passive income. So is earning yield (interest) on a bond coupon. Alternatively, one can invest in a small business and benefit from the business’ profits through profit sharing agreements.
Venture Capital and Angel Investing – These are also forms of investing, close to the last example provided above involving investment in a business. Investing in companies (usually relatively younger ones) and betting on the Management behind it is a risky venture. However, the rewards can be tremendous and long lasting in nature. It is fundamentally not very different from investing in stocks.
Website / Blog – Building a high traffic blog or website is one of the most popular ways to generate passive income today for the average Joe. There are very low barriers to entry (if any at all) and the cost is minimal. Be ready to invest a lot of time however in self education and implementation.
There is a lot of work involved in establishing and properly marketing a website or a blog. If done the right way however, income will keep flowing long after the work has already been done. The key is to develop a website around timeless content so you don’t have to update it regularly.
Information based products are typically the easiest to make and distribute in the online space. These are ebooks, DVDs, tutorials, online videos, etc. Often times, you don’t even need your own website or blog.
There are several platforms online that allow you to submit your product for inclusion in their store. Each time a sale is made, they keep a percentage and remit the rest to you. Clickbank is a popular one that sells ebooks. Amazon is another popular one.
Most certainly you can. That doesn’t have to be the case however. People often relate passive income to rich automatically. It’s been ingrained in their subconscious because of the hype created by few exceptional stories around it.
Passive income does bring with it riches in terms of freed time. It eliminates the need to work as much or as hard to sustain the lifestyle you want. Not everyone needs a six figure paycheck to live life on their own terms. What if you only need $50,000 to get by? Can you make $50,000 in passive income? You bet.
Passive income can also be a long term vehicle to building wealth over time. If you are working a full time job and have established streams of passive income on the side, assuming your spending doesn’t get out of control, your saving rate should increase which will help build a bigger retirement portfolio and expedite your journey to becoming a millionaire.
In general, passive income is what you want it to be. You can make millions and become rich, or enough to live life on your own terms. The point is that it does exist and it is achievable by those that believe in it and are savvy enough to implement the principles to manifest it into their lives.
A rare breed out there structure their entire lives around passive income and business automation. I salute those few individuals. Is it easy? Nothing worthwhile having in life is. This certainly isn’t either.
Readers: What is your opinion on the subject matter? Does passive income exist? If so, in what form? Is it worth your time?
Read my definition of residual and passive income in this blog post.