Today, I want to cover the basics of passive income. It’s a special form of site hustle that can really boost your income (and your finances) to the top. Let’s start with a little story.
You have some tough weeks going on. In your private life, you have to fix some stuff or you have just a little bit more stress than normal. You go to work as you always do but somehow your thoughts are not that focused. Your job is well-payed but that comes with responsibilities. After some hours, you recognize something happened that wasn’t intended. This could be an email with sensitive information that was sent out to a client or you’ve deleted some very important data irreversibly. You’ve screwed up!
This wasn’t the first time during the last months that something like this has happened. You go to talk to your boss and he is totally enraged. 2o minutes later, you know that you are now officially jobless.
As you drive home, you are anxious about how to go on in life. How do you tell this to your girlfriend? What will your parents think as they were so proud of you to get the job for this Corporate America company? How to pay the bills until you’ll find a new job?
That night you can’t fall to sleep easily. Many concerns are popping off but at 4 AM your eyes drop as you grew tired.
In the next morning, you’re filled with energy again and you want to look for a new job and start your computer. You check your bank account and notice that you’ve received payments of $3,000.00 last night for work you’ve done months ago.
You can’t help yourself from smiling. ‘Maybe, this joblessness is not that bad’.
What passive income is
Passive income is neither a way of getting rich quick nor a way of getting money without any work.
It’s simply an agreement between you and your future self to perform the work now and receive the paycheck later. I want to use the quote of Pat Flynn from Smart Passive Income (Mr. Passive Income himself):
“It’s all about working hard now so you can reap the benefits later.”
For sure it’s not only working now and receive the money later. Otherwise, this would be a pretty bad deal. It’s about creating a scaling system that generates you additional income days, weeks, months or even years after you’ve put in the work and get much more than you would receive through your day job. You want to remove your time from the equation time = money.
But why do you want to separate your income from the time you put in?
Why do you work for a company?
Let us talk a little bit about your day job first.
Why does your company offer you money to do their work? Why do you do the work for them?
It’s easy, you are trading. You need money to cover your expenditures and have a “nicer” life and your company needs your time to do something for them. If the job requirements are higher then there are fewer people who can do the job and they will offer you more money if you have the right skillset. That’s why people in the top management of big companies are paid much better than a person who works at the assembly belt. I know many think managers earn way too much money but a good management can lead a company through tough times and ensure long-term growth which leads to more money for the business and why a good manager could be a great investment (even for millions of dollar per year).
Sorry, I got a little distracted. Back to you. What could you do instead in that time? You could do all the stuff that you love like playing video games, watching a movie with your girlfriend, going out, buying clothes or anything else.
Probably, you would prefer to do one of these things but you go to work to get money to cover your costs of living and be able to live a better life. You could argue that these hours at your working place are wasted. They are just used to generate income so you can continue (or improve) the life you live.
There is no flaw in that system until you discover one thing. Your time on this planet is limited.
Money is not your problem but time is
Let’s say you earn $20 per hour. What you are actually doing is selling one hour of your life for $20 (and this doesn’t even take commuting into account). To visualize this think about a string that represents your life. Every time you go to work someone is taking scissors and cut a little bit off. As soon as there is no string left you will die.
I don’t know how you feel about this but for me, this is a scary thing.
I know we need someone who does these jobs and working for a paycheck is actually not that bad. But throwing away 30-40 hours a week just to have a nicer life in the other 30-40 hours we can use is depressing to me.
Another thing to note is, that if the time per week would be unlimited you could work more hours per week and earn more money. But you can’t work 120 hours per week and that’s the reason why this system is not scalable.
How differs passive income from a day job?
I told you before that for passive income you do the work upfront but this is not the only difference. With passive income, you want to stop trading time for money. You don’t remove your time entirely with passive income. But you make it reusable.
Let me give you an example. You are a financial advisor and clients come to you and you give them useful advice and therefore they pay you $40/hour. You have a family and some hobbies so you can only work 40 hours per week. This will lead to a maximum of $1,600.00 per week ($40/hour * 40 hours). You don’t have more time and consequently, you (your time) are the bottleneck of the equation.
What you need to do to increase your income is cloning yourself so you can work more hours. But you don’t have to. You could create an e-book which consists of the most requested advice you give to your clients. If there are more specific questions they will come to you anyway. But for all of the others that you can’t help because you don’t have enough time or who are located in a different place on this planet the e-book is a great starting point. You’ll need some work at the beginning to create the book and later for marketing. But as soon as you sell the book, it can generate a side income and it can be reused infinitely and don’t requires your time.
In that way, you don’t trade time for money but put in some work at the beginning and enjoy the money that flows into your bank account later. If your passive income is high enough you can work less at your job or even quit totally.
Examples of passive income
I hope I have peaked your interest in passive income now. There are thousands of ways to generate passive income but I want to cover just a few for now.
Investing is actually a great form of passive income. However, this depends heavily on your expectation of ‘later’ and your investment style. If you don’t receive dividend payments and are a buy-and-hold-investor (what I highly recommend), you will receive a passive income in 15-20 years from now if you start today. However, there are specific income generating investment styles like Dividend Growth Investing. I still encourage you to reinvest that income in the beginning but it’s also okay to use the dividend payments right away. If you want to learn more about it you should check this post.
It’s an often discussed topic if blogging is a form of passive income or not. I would say this depends on the circumstances. As always you have to put in some work upfront (writing content and marketing). If you’re offering a consulting service this is no passive income. With consulting you trade time for money. However, if you use some form of affiliate links or sell some of your products this is somewhat of a passive income.
Anyway, I need to add that in order to lead customers to your website and generate earnings through affiliate links or sell your products, you should continually produce and market content and then you will again trade time for money. Though, I think it’s still more scalable than a day job.
If you want to learn more about blogging, I highly recommend the podcast and blog Do You Even Blog of Pete McPherson.
We’ve covered affiliate marketing shortly in the blogging area but you don’t need a blog for this to work. Affiliate marketing works through links. You could use an affiliate program of a company like Amazon and write reviews about products. As soon as you are a member of that affiliate program you can generate special links to products. They will tell the company that offers the product that the visitor (and hopefully customer) comes from your website. In exchange for leading people to the product, they will give you a portion of the price the customer has paid.
Let’s say you have a link to a product that costs $100 and they will pay you 4% of that if the buyer was referred from your website. Then you will receive $4 for every product that is purchased through a person that has followed your link. Again, this won’t work forever if you don’t put in some time to improve your content and your marketing.
If you want to learn more about affiliate marketing, I suggest you check out this super lengthy post of Neil Patel who is one of the most famous online marketers out there.
Selling products online
There are a lot of ways to make money on the internet and I think a great one is through online products. This could be an e-book or an online course, you could write some software or distribute your own songs.
This heavily depends on your own unique skills. This doesn’t even have to be online but I think it’s the easiest way to start out. Think about your own skill set or interests and then build a product. Information products can work great here. This is a true passive way of generating passive income as long as you don’t have to work on the product anymore.
I hope you’ve enjoyed this post. Let me know, what you think about passive income or if there are any questions unanswered by leaving a comment below or ask me on Twitter.