When I first started blogging, I was unaware of the term “passive income”. Since then, I have been reading articles about passive income on various blogs. Almost every blog has at least one article on passive income, so I didn’t want to miss the boat.
In the next few sections, you’ll learn about passive income, what can be considered passive income, and what cannot. I’ll also talk about a few passive income ideas at the end.
What is passive income?
According to Investopedia, “Earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved. As with non-passive income, passive income is usually taxable; however it is often treated differently by the Internal Revenue Service (IRS).”
For some people, income from an investment portfolio is equivalent to passive income. It’s generally the accepted criteria in the blogging community to include interest and dividend income as passive income.
The definition of passive income I developed: “The money you earn with existing money, without additional work effort or dedicating any time.“
You need to put in a lot of work at the start to build up initial money. But once the money is available, it doesn’t require additional effort to earn more money. Additional effort helps to increase existing income/earnings, but it’s not required for passive income.
What passive income is not
| 1. If a source of income requires a constant time commitment, it’s not passive income. Blogging, in its traditional form, is not passive income. 2. Your eBay/Craigslist sales are not passive income because you put a significant amount of time and resources into selling things. 3. Your part time job is not passive income, since you have to work to earn the extra money. |
Why we need passive income
First and foremost, our jobs are no longer secure. Gone are the days of working for a single employer for a lifetime and receiving a grand farewell at the end. The advent of technology made true globalization possible, where work is done in the place with the lowest costs, and products are sold wherever the selling price is highest. At some point in time, many of us have accepted a pay cut to avoid a layoff.
Earning passive income is a great way to hedge against the risk of unemployment.
Every cent you earn in passive income comes without you having to put in effort to earn it. In this way, passive income puts you closer to financial independence, a stage where you no longer have to work to earn money.
Take my example – I have money (emergency fund) saved in an interest bearing checking account at Capital One. Every month I earn around $15 in interest (at 1% APY). Now imagine I have 100 times more money and I invest with a 5% APY interest rate. I could earn $7500 per month. For calculation’s sake, I could retire and live happily ever after.
Can I have $1,500,000 in savings now? No, I can’t, and that’s why this passive income cannot make me rich. It can grow and with the power of compounding returns, I can become a millionaire one day. But, that is a time-consuming way to reach financial independence.
Taking a few passive income-generating steps helps achieving financial independence sooner.
Ways to create passive income
Passive income doesn’t supplement your wage income. If someone claims that you can get rich from a passive investment, he or she is adopting a cheap selling tactic. In order to get rich from passive income, you need to be rich in the first place. Only then can you invest in a huge income-generating asset.
Here are some sources of passive income that I’m looking at for my own future, along with some suggestions on how you can get started.
Writing books. Royalties represent passive income in that the author of the book puts in all the work upfront, but does not have to put forth much effort to continue to receive payment for his or her work (with the exception of self-promotion, etc.).
Real Estate investment. Passive income from real estate can be derived in two ways, primarily. Homeowners may choose to rent out their property, in which case the rental income is mostly passive, although basic landlord duties do require an investment of time. (You can enroll in a service contract to make this a truly passive investment).
The appreciation of real estate also increases net worth without requiring any additional work from the homeowner. Remember, continuous buying and selling to take advantage of fluctuating prices is not passive; you are constantly putting time in arbitration.
Interest/dividend income. Interest income is passive income in that it does not require any additional work on the part of the investor. The money invested may have been earned through work, but the periodic interest and dividends received are passive income.
Advertisement revenue from static websites. Create a few sites and add pages with good content. Do some awesome SEO to bring in search traffic, then place advertisement blocks and AdSense to earn regular income.
Making blogging passive. Once you put the initial time and money into your blog and start generating ad revenue, hire virtual assistants and staff writers. Publish only the posts written by staff writers and distribute a part of the ad income.
Rent your parking space. If you are in a big city, you can earn a lot of money by renting your garage/parking space during office time when your car does not occupy the place.
Earn interest on emergency cash. Until last year, my emergency cash was sitting idle in a Bank of America checking account and was losing value to inflation. Now I am earning interest. Find an interest paying checking account and switch to earn passive income every month.
Use cash-back credit cards. I earned more than $1000 in cash back rewards by using my credit cards optimally. It’s easy money awarded to you just for making your regular purchases on your credit cards.
Every bit helps. Even $5 per month in interest is not small. See if you can put some money away in a passive income-generating investment. Act now!
Readers, what passive income you are generating? Do share with us here.
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Pat Flynn is a master of passive income on the web. For anyone who is interested in passive income, especially online, I would say reading his site would be number 1 on the list.
I would have to question the passive nature of blogging. Unless the site owner gives up complete control, then it’s really never going to be totally passive since there will be a need for material participation in running it.
I am impressed by Pat. Read his blog regularly. I was talking about the possibility of original author not writing on the blog and the whole work is outsourced.
It would be very difficult to move a blog to a completely passive income source. I imagine that a blog would lose reader if the original writer stop contributing entirely.
I think niche sites are the way to go for passive income, although that seems to be in flux due to the various Google updates.
If content is good, today or day after Google would accept that and get you back the ranking. On making blog passive, yes, a number of readers would leave. Earnings can still be continued.
RB40 just read my mind on this one! You definitely want to maintain the original writer because it is the reason why you were able to build your readership.
Even if all readers exit, SE visits would still be there.
I’m thinking real estate wouldn’t be passive income for me. Even though I have a property manager who handles everything, I still spend time on the property – deep cleaning once a year, buying supplies and furniture and etc for it, advertising it and etc.
That much work you have to do for your pure interest income as well Marie. I need to open a CD, monitor statements every month, filing tax (1099 INT form) every year. In true snse, no income is passive income.
What you said about how we need more passive income with the instability in the job market is so true. I earn some interest in my money market accounts but interest rates are so low these days that the income is minimal. I like your tip on renting a parking space. If only I had a lot to rent out in SF – people pay big bucks for parking here! -Sydney
I first heard about renting out parking space from a friend. This is a common concept in NYC, NJ areas. Even at 50% of the regular nearby parking fees, you can earn a fortune in years out of the parking money.
I am totally with you on the importance of passive income. I also believe that living within your means is no longer optional. I believe in the 80/20 rule (although I do 70/30), which means spend 80% and save 20%. Take the 20% of your earnings and invest in passive income generating investments and business opportunities. Saving 5% is simply not going to cut it…
5% is way less than what’s required. Sadly 5% savings rate is average in US.
How passive is passive enough? Pretty much anything “passive” will need some kind of attention. But is it 20% attention? 5% attention?
That income which doesn’t require me putting thoughts every day is passive to me.
Great suggestions for passive income! I am focusing on starting small first then I will work on building passive income from more sources such as real estate and book writing. Right now my focus is on building web properties and working from there.
Interesting! I was just puzzling over this one. I get royalties – from academic publications. Regretfully, my royalties are about £400 per year – so can’t retire on this really.
Problem is that before the latest mess in the global economy we could store labour in money, then money grew and when we needed to we could release the stored labour – this is passive income. Now this doesn’t look such a good idea. What is to be done? Any ideas?
I have a rental property that I am treating as a passive income. However, sometimes it does require a lot of work when there are problems at the property. It’s very hard to grow your passive income portfolio. Those who can grow passive income will be able to retire early…
definitely yes, when you money starts working for you you don’t have to work. But to do tat you need to have enough money as seed capital. Being a landlord is a lot of mental tension as well. When tenant do not pay the rent you might loose your night’s sleep.
I can’t wait until I can afford some condo to near a university so I can buy it and rent it out to students for years to come!
That would be a great passive income. You don’t ave to spend a lot of time on getting renters and their money. Nice plan!
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