What is Passive Income?

Passive IncomeMost of us trade an hour of our time for a certain amount of money.  Passive Income breaks this relationship.  Income can come in even when we’re not working and an hour of work might yield a dollar or a thousand dollars.

Passive Income “decouples” the money from the effort.  It is no longer a one to one relationship.  The results can be extremely powerful, but it takes some courage.  You work hard to create something now with the hope that it will give back much more later.

A wage from a job is guaranteed, there is no risk (other than losing that job and having to scramble to find another before your savings run out).  With most forms of Passive Income, especially those with the highest potential pay-off, there is no guarantee.  You’re on your own and you will live or die (financially) on your own talent and perseverance.  It’s the classic gutsy gamble of the entrepreneur.

 

Passive income isn’t new.  Some people have been able to make passive income for centuries.

Examples of Traditional Passive Income:

Royalties from a book or music

Dividends from stock

Interest from savings

Profits from a business that runs itself

Rent from tenants

License fees from a patent or other design

The internet has created vast new opportunities for those willing to put in the time and the work.  It no longer takes mountains of money to make money.  A new profitable business can be “bootstrapped” from almost nothing.

Examples of Online Passive Income:

Sales from a virtual store whose products are drop-shipped

Advertising revenue from a content site like a blog

Commissions from affiliate marketing

Membership fees from an exclusive content site or community

Sales from an electronic product you created like an app or ebook

Recurring monthly fees from an electronic service or program

What Passive Income is Not

Passive Income isn’t easy and it isn’t free.  You have to work hard for it.  It doesn’t have to cost a lot in monetary investment, but the time investment can be considerable.

Just because it’s on the internet doesn’t mean it’s passive.

Examples of Online Income that Isn’t Passive:

Selling collectibles on eBay

Making crafts and selling them on Etsy

Designing websites

Consulting

All of the above are great ways to work for yourself and to escape the 9 to 5.  They’re just not passive.  The income is coupled directly to the work put in.

So What’s the Big Deal About Passive Income?

Because you’ve decoupled your income from your effort, it’s possible (but by no means guaranteed!) to make a lot of income from a brief amount of effort up front, and that income can keep coming in for years after you’ve done the work.   A software developer can sell 10,000 program licenses for the same effort as 10.  An author can still be getting a regular cheque in the mail a decade after the book was published.

 There are very few if any Passive Income ideas that are truly hands-off and that will produce forever.  There is usually an intense period of set-up early on and then some amount of low-level constant maintenance required.  This maintenance, however, is often on the order of a few hours per week.  Now you can take all that spare time and either create a new project to add to your portfolio or go backpacking through Thailand.  The choice is yours.

What other examples of Passive Income (online or not) did I miss?  Do you have experience with Passive Income?  What worked for you?  What didn’t? Leave a comment below.

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4 thoughts on “What is Passive Income?

  1. I like your last few points especially. I’m always one to debate that there is no income that is truly “passive”.

    “and then some level of low-level constant maintenance required.” is the complete truth. Let’s not trick people into thinking that they can constantly replace their current income for the next 20 years by setting and forgetting.

    1. You are absolutely right, Teddy. I would say that even a great website that has a perfect hands-off monetization strategy will eventually grow stale or a Google algorithm change will affect it’s traffic.
      A static website can be largely hands-off for a good period of time, though. There are many examples of people only needing a couple hours a month. A blog format needs new posts, though these can be written in advance and posted on a schedule. Likewise, an email sales funnel can be automated with auto-responders.
      Even a forum which generates its own content needs some upkeep and moderation, though users can often be used to moderate for a small share of the profit stream.
      There’s no perfect silver bullet, but some of the bullets are pretty shiny!

    1. Thank you, Cinda. You have no idea how much that means to me. In the early days of any blog you feel a bit like you’re talking to an empty room (I guess because you are 🙂 ). Your feedback means everything to me.

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