Do you know what type of income you make? Many of us earn active income.
Active income is defined as income for which services have been performed. Active income includes wages, tips, salaries, commissions, and profit from businesses in which there is material participation. Try to think of active income as trading your time for money. But here's the rub, our time is invaluable because quite frankly it's not endless. The well-known quotes sum it up best.
“Nothing is certain except for death and taxes.”
Do you want to spend 40 or 50 years of your life trading your time for money? Well, if you don't, you may want to consider passive income.
- Most types of passive income are derived from real estate/property, while other types are derived from royalties from patents or license agreements.
- An income stream falling into this category is one where the money is usually received regularly, where no additional effort has taken place.
- Most passive income streams require significant effort to start with.
- Some examples include Interest Income paid from bank deposits, rental income from real estate/property, royalties from writing a book, dividends from shares holding.
- Passive income flows to you or your family, whether you are sick, or vacationing, or dead. Passive streams allow you to make money without having to be there.
Passive income sounds great, with some upfront effort, you can have income rolling in week after week. If you make enough passive income to support your needs, it can free your up from pursuing active income. Think of the things you could do with 40-50 more hours in your week.
Let's review some passive options and the pros and cons of this type of income.
Passive Income Options
Like any type of job, task, or goal, it's best to tailor them to fit you and your particular situation. Here are some of the most popular types of passive income ideas. Some are easier to get started and have the potential to make more money than others, but some offer a higher risk.
Renting Things You Own
Renting things your own might be one of the easiest ways to get started earning. Do you have a parking spot, car, a spare bedroom, or even an entire apartment or house you could rent?
There are many opportunities to rent things you already own. Ever hear of Airbnb? Airbnb is an online marketplace that connects people who want to rent out their homes with people who are looking for accommodations in that locale. It currently covers more than 81,000 cities and 191 countries worldwide.
Turo and GetAround are two companies that are making it easier than ever for you to rent out your car when you aren't using it. And let's face it, if you live in an area with Lyft and Uber service, there's a chance you might not even need your car daily.
Here's the thing about blogging. It has a very low entry point. There are many free platforms to get started. So just about anyone can start a blog. But to be successful in turning it into a passive income stream, there are many things to learn. Things like basic web site, and WordPress maintenance, SEO keywords, and producing evergreen content.
If you master all of these skills, it will still take several months to begin to see significant traffic and income from a blog.
Affiliate marketing is a type of performance-based marketing in which a business rewards affiliates for each visitor or customer brought by the affiliate's own marketing efforts.
Often affiliate marketing is associated with a blog or website, but with the growth of social media platforms like Twitter, and Instagram, it possible to be a very successful marketer all via your mobile phone. If you can build an audience, and on social media, a follower is the metric, you can earn a six-figure income, just by promoting other's products.
The great thing about affiliate marketing is, the buyer doesn't pay any more for a product if they use your link, and you still get paid.
You no longer need to nab a book deal with a major publisher to be successful in generating a passive income stream with a book. Self-publishing and ebooks have really change the landscape of book publishing in recent years. If you have a story to tell or skill to share, you could create a book or ebook on your own. Marketing it via social media, a web site, or on Amazon are now easier than ever.
You no longer need to be a teacher or professor with a class full of students to teach others. It is entirely possible to produce a course and sell it online. There are many platforms, like teachable, thinkific, or podia, which will help walk you through the process.
If you have a skill, experience, or expertise, you can create a course. It does not take a full video crew to produce a great video course. In most cases, your video camera on your phone or laptop will do.
Have you ever created a personalized gift for someone like a t-shirt, calendar, mug, mouse pad, etc.? There are many platforms, like Etsy, amazon merch, and red bubble, which you can create and sell products.
In most cases, these sites will produce and ship the product once you come up with the design, art, lettering, etc. This could be a very lucrative passive income stream if you enjoy creating.
Ever heard of compound interest? Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest.
Investing in stocks, mutual funds, and dividend stocks could be a great source of passive income. You have to understand with any investment, there is the potential for risk and volatility.
Real Estate is another avenue to generate passive income. Real Estate investing can take several forms. You can own properties to rent, buy, and flip, or invest in REITs.
Being a landlord may not be considered a passive activity, but there is an opportunity to outsource this responsibility to a property manager. Real Estate investing offers a monthly income and the ability to build equity in the property.
A REIT (real estate investment trust) is truly passive. There are several different types of REITs. One example is DiversyFund. It's a private REIT that allows you to invest in professional real estate projects passively for as little as $500.
These are some of the most common passive income ideas that are available to you. Now let's look at the advantages and disadvantages of generating this type of income.
- Unlimited Reach – Many of the passive income stream examples offer unlimited potential, and reach. If you are selling products, books, courses online, you can reach a worldwide audience twenty-four hours a day.
- Multiple Streams – You don't need to pick just one of these streams of passive income, you can get involved with as many as you like. You can diversify your income streams to insulate your self from any one of them dropping off. According to the IRS, most millionaires have several passive income streams.
- Be Your Own Boss – Many of the passive income ideas can be managed by yourself. Meaning you have no one to answer to and can choose the project you want to work on. This may give you the flexibility you desire.
- Gain Back Your Time – Earned enough passive income may give you your ability to quit a regular job or reduce your overall working hours, giving you more free time to spend how you wish.
- Upfront Work – Passive income takes work. Usually, a big chunk of it in the early phases of building, and some maintenance along the way. You need to be prepared to decide the time to get started and grow it to a legitimate income earning before it's truly passive.
- Income Doesn't Get Produced Immediately – Passive income is a marathon, not a sprint. Slow and steady wins the race. It could take several months of hard work before a profit is earned, but not guaranteed.
- Income Can Be Sporadic – You may not see consistent results week after week. Passive income can have highs and lows depending on many factors. It's even possible for a stream to dry up altogether.
Final Thoughts on Passive Income
Passive income can be an excellent diversifier for your money and your time. Keep in mind depending on which income stream or streams you decide to pursue, it will take a bit of your time and effort upfront to grow and begin earning. The good news is, once the initial work is completed, and a little maintenance over time, it has the potential to earn for years to come. Good luck!
- There are many different types of passive income opportunities
- Passive income is usually not your primary source of income
- Millionaire use passive income as an earning stream to build wealth
- Passive income involves upfront work and some maintenance along the way
- It takes time to generate income
- Successfully passive income will diversify your time and money
If you want to read more about business finances, particularly startups check this article from BeatTheCPA.
Brian is a dad, husband, and an IT professional by trade. A Personal Finance Blogger since 2013 who, with his family, has successfully paid off over $100K worth of consumer debt. Now that Brian is debt-free, his mission is to help his three children prepare for their financial lives and educate others to achieved financial success. He blogs at Debt Discipline.