It's a concept that a surprising number of people don't even know exists, which is crazy considering how useful it can be in crafting your ideal life. Today I want to explain what it is, how it differs from active income, and of course, how to earn passive income!
What is Passive Income?
Passive income is money that you earn by doing no work directly.
You can be on holiday, walking the dog, or sleeping, and still get paid. Does life get any better than sleeping and earning money? I don't think so!
Since everyone reading this blog is a smart cookie, you'll realise that the fact that it's called "passive income" implies that the opposite also exists. It's called active income, and you've probably been raised to believe it's the only way to make money.
Active income is earned by trading your time for money. Passive income detaches money from time, so you don't have to do anything to get paid.
Ok, this sounds a little bit too good to be true, doesn't it?
The truth is that passive income should really be called residual income. In order to earn passively, you have to front-load your work and invest plenty of time – and probably money – at the start.
Take these examples of passive income and see the work that needs to be front-loaded:
-Dividends from stocks – you need money to invest in them and time to research the companies. -Rent income from properties that you own – you need a lump sum of cash and enough knowledge to ensure the property is a sound investment. -Royalties from creative works like music, films, or art – you need time to perfect a skill and create the actual content, like e-books to be sold on Kindle. -Sales of a digital product – you need to spend the time to create the product, build up a reputable website and spend money on advertising. -Income from vending machines, laundromats or ATMs– you need money to buy the equipment up front and to hire somebody to re-stock or maintain them periodically. -Income from a business that you've built and set up to be managed by others – you need years to set up the business and make it profitable, as well as significant monetary investment.
As you can see, none of the above is easy, quick or cheap.
What they are, are effective ways to set up recurring, passive income for the future – at the expense of a period of time filled with hard work, patience and money investment!
Hey, if working hard now means I'll get to sip on Mojitos from a beach in Cancun by the time I'm 40, I'm in! Where do I sign?
How I'm Creating Passive Income Streams
If you've been reading my articles for a while, you know that the idea of spending the next 40+ years of my life working a 9-5 job makes me a little dizzy. Far too many people are stuck there because they don't know about passive income – or simply because they don't want to put in the extra work.
The solution is to save money and create streams of passive income that will support you for years and years – or at least for the rest of your life!
Of course, you'll also know that I'm currently not earning enough to sustain my lifestyle, let alone saving, but I aim to be in a position to start saving and investing again by the end of the year.
There are two other passive income streams that I want to grow: -Earning affiliate income from recommending products and services here on EtF – requires the work to grow my traffic. -Creating a digital product and automate the sale process– this will require the initial work to create the course, and the money to automate as much of it as possible.
"Are you on a laptop all day? Would keeping an excel file or Google doc file help you track your expenses easier? Would it be more convenient to keep an old fashioned pen and paper type of budget? How about keeping a running tab on the fridge so that you are tracking all expenses?
"For the few that actually look at their goals again, it’s common to revisit them only at the end of the year. This is a crucial error. As our circumstances may change day to day and month to month, so will our goals. A lot can change in twelve months, which is why I propose reviewing once a month, or at the very least every three months.
Revisiting also keeps our desires relevant. It’s helps us remember that we even have them. Ideas aren’t enough, we must execute.
As the great Thomas Edison said, 'Vision without execution is hallucination.' " -Jiu-Jitsu Finance
Increasing your income
"After you have lowered your expenses, it is time to bring in more income. There are many ways to bring in more income especially during the holiday season. Maybe your full-time gig will let you work extra hours for overtime. In addition, retail stores typically hire for the holiday season. That part time holiday gig could turn into a longer gig...
Retail jobs aren't the only part-time jobs available. There are plenty of other side hustles you can pick up right at home to make extra money like: Freelance Writing, Virtual Assistant, Social Media Management." -Financially Fit & Fab
Turn on your automatic savings
"Another no-hassle way to save is by setting up an automatic transfer to your savings account. By automating your transfer, you're making sure that you don't forget or pay your savings last–and as a bonus–automating your savings means you never "see" that money and subsequently makes it sting a little less.
Two new apps that I am loving lately are Digit (which has a cult following). It automatically transfers money from your checking account you won't miss. I also love Qapital, which has rules you can set to "save the change" from your purchases. I saved over $75 my first month of Qapital, which was really astonishing to me. Click here to give it a try." -Financial Best Life
Develop the habit to spend with cash than card
"To spend with cash is also an actionable way to get out of debt. According to the research on peoples spending with credit cards; it was revealed that those who shop with credit card are impelled to spend more on luxury items because they feel they are paying with “play or fun money”. In other words, people who shop with credit card spends more than required.
Evidently, finance advisors hold a strong stand on this. They strongly advise that people who are working on eliminating their debt should cultivate the habit of spending cash, to avoid being tempted to spend on irrelevant items." -MoneyMiniBlog
Leave your wallet in the car when shopping
"This trick is simple but impactful. When doing any kind of shopping, use cash, and only take the amount of money you want to spend in the store with you. Leave all other cash, credit cards, and debit cards in the car.
This is very powerful, especially when grocery shopping. In addition to the amount you plan to spend, you can consider bringing in a small cushion of a few dollars (in case there are hiccups at the register). You will shop (and spend) completely differently when you only have a hundred dollar bill with you versus a hundred dollar bill and your debit and credit cards.
Don’t give yourself a way to spend more money than you want to — and you won’t." -Hope + Cents
Start and maintain an emergency fund
"There is no fixed formula for how much you should have in an emergency fund. Some school of thoughts say 6 months’ worth is sufficient, some say a year’s worth. Everyone’s situation is different and as such, each strategy should differ. To start however, I would suggest understanding your spending habits, and then implementing a 3-6-9 guideline.
3 Months: If you are single without kids, renting, no car, partially dependent on parents for income or any combination of these factors, start off with a target of 3 months’ worth of expenses for a rainy-day fund.
6 Months: Married, kids under 18, own a house or condo, own at least one car, or any of these combined, the base target should be 6 months’ worth of expenses (if married, base it off the income of the highest earner).
9 months: Self-employed, freelancers, anyone with a volatile job or unpredictable paycheck, 9 months’ worth should be the benchmark." -Investment Conversations
How students should avoid the debt trap
"The easiest way to prevent yourself from falling into the debt-trap is by living within or below your means (that is, not overspending). In addition, it is necessary to do research before getting credit cards (or signing any contract to take on loan/ debt) so that you really understand how it works. As a student, you must learn to treat your credit card with respect." -Investment Conversations
Build a budget and stick to it
"There are many free apps available to help you track expenses, but I always prefer using my own spreadsheets. That enables me to have the most control over what I’m doing. I understand that being able to access your spreadsheet on your phone makes tracking significantly easier, which is why I prefer Google Sheets over Excel. You can download the Google Sheets app and pull up your expense tracker wherever you are to input a transaction or monitor your spending. By combining the expense tracker as separate tabs within the same spreadsheet as the bill tracker, you can have all your finances in one easy-to-access location." -The Budget Boy
Create an automatic savings account for travel.
"Here's how this automated system specifically works for you and your travel fund. Once it's set up, it goes like this:
-Your checking account receives income.
-The next day, your checking account automatically transfers money to a separate (different bank) savings account—aka your travel fund.
Know Your Interest Rates
If you have anything that you are making payments on every month, you need to know how much interest you're paying. Make sure you know these numbers, too. Ideally, you'll want to pay debts down that have a higher interest rate first. However, there is another school of thought out there that suggests paying the bill with the lowest balance first. I'd say either way is fine as long as you're making progress and as long as the higher interest rate stuff isn't astronomical.
Action: Look at your statements or call the companies to get your current interest rates on all monthly obligations.
Negotiate Lower Interest Rates
If, by chance, you ARE paying astronomical interest rates on any of your liabilities, call and try to negotiate a lower rate. Oftentimes, if you've demonstrated a history of paying on time, the company will work with you to reduce your rate. The only trick is, you have to ask.
Action: Know your numbers and call the companies to negotiate if you're paying high interest rates.