If you’ve ever followed a financial influencer or listened to a podcast by someone who has retired young, you may have heard the term “passive income” thrown around; but what is passive income? While the name might seem to imply a steady stream of money that flows into your bank account without you lifting a finger, there’s a little more to passive income than first meets the eye.
Today, we’re going to take a look at what passive income is, why it is important to consider in your journey to financial freedom, and explore some ideas for earning a passive income.
How Passive Income Works
Passive income is a way to earn money that does not require continuous or perpetual effort. That is not to say that passive income is without work. Instead, passive income involves assets or investments that continue to earn money without requiring you to clock in every day.
How much time and effort passive income requires will depend a lot on the passive income stream you choose.
For example, investing in a bond is a form of passive income. You purchase a bond, hold onto the bond, and eventually, collect interest payments on the bond. This requires little-to-no ongoing work on your part, making it a passive income stream.
Conversely, you might launch a blog where you make money through affiliate marketing. After building the blog and setting up ads, you receive ongoing payments when someone clicks on these ads. However, periodically, you take the time to update the blog and to drive traffic to the website in order to continue to gain new ad revenue. This is still a form of passive income but requires more of your time and work than a bond.
Ultimately, you can think of passive income as a stream of money independent of employment. Passive income does not require you to show up to a desk, check in with a boss, or rely on your salary for money.
Why Passive Income Is Important
Passive income isn’t without its challenges. However, passive income is critical to achieving financial freedom. But what if you have a great job that pays a killer salary? Is passive income still important? Simply put, yes, and here’s why:
- Salaried positions have limitations: As the old saying goes “Nobody ever got rich working a 9-5.” Even if you are promoted, receive a raise, and transition from company to company to earn a better wage, you’ll always be limited in how much you can make working as an employee. There are caps to salaries, and there are only so many CEO positions at Fortune 500 companies. Realistically, your job will never provide you with true financial freedom. At best, it will provide you with a few extra luxuries. At worst, it will leave you living paycheck to paycheck.
- Jobs are fickle: We’ve all seen it happen. One day a team is growing, nailing goals, and picking up momentum. The next day, the company announces massive layoffs. Jobs are never guaranteed. Layoffs happen. Bad bosses make poor decisions, and you will always be dependent upon the whim of the powers above you when you rely on employment for all of your income.
Ideas for Passive Income Streams
Let’s talk about practical tips. There are two main types of passive income streams, investing and creating. Investing includes things such as purchasing real estate or purchasing stocks in a company. Creating includes ideas such as writing a book or starting a blog.
As you think about ways to earn passive income, challenge yourself to come up with both investment and creation ideas. To help kick start your brainstorming, use these ideas as a jumping off point (but remember, don’t limit yourself to just these!):
- Purchase a rental property
- Invest in a business
- Write an ebook
- Design an online course on a topic you’re an expert about
- Sell art or photography
- Host a podcast
- Rent out storage space in your house
Bonus Tip: Avoid These Passive Income Myths!
With the hype about passive income, there are a few pitfalls to avoid. Make sure you avoid these myths as you embark on your own journey into earning a passive income:
- It’s easy! — Passive can be a deceptive word. While passive income has the potential for being a hands-off experience, most of the time, you’ll have to hustle upfront to make money down the road. Enter into passive income with the mentality of work hard now, earn big later.
- Multi-Level-Marketing (MLM) — The internet is full of MLM opportunities. These are the businesses that require you to purchase a ton of products up front and are set up to allow people on the top to make the most off of every sale. Watch out for any program that seems too good to be true.
- You have to be rich. — You don’t have to be a millionaire to start earning a passive income. The key is to think strategically about what you do have to offer. That might not be money right now and that’s OK!