What is your favorite way to make money? Obviously, there are many ways to make money. You can work for a company or have your own business. You can earn money from salary, dividend, commission, bonus, and many others.
My favorite way is to earn passive income. I’m sure this is not new to you. I’ve heard about it for years but only recently did I begin to understand its nature. I’m not saying that this is the best way or that everyone should do this. This is just the way I like most.
The main reason I love passive income is freedom. With passive income, I don’t need to be actively involved to make money. I do need to work hard to build the system in the beginning, but once it works I can leave it alone and the system will continue earning me money. All I need to do is checking it every now and then to make sure that nothing goes wrong. I can improve the system if I want to, but that’s optional. I can spend my time on a hobby or a new project.
Differences Between Active and Passive Income
To better understand the nature of passive income, here are some differences between active income (income that requires your active participation) and passive income:
- With active income, you can quickly get full-time income. For example, if you receive monthly paycheck then you will get full-time income within one month. With passive income, it may take a long time before you get it.
- With active income, when you stop working your income drops to zero or near zero. When you work you maintain your income level or slightly increase it. With passive income, when you stop working your income stays at the same level. When you work, you increase your income level.
From these two differences, you can see that building passive income is long and difficult. But once you make it, you will get the big reward of financial freedom.
Steps to Build Passive Income
From the characteristics above, here are the steps you should follow to build passive income:
1. Build a side business. Since it takes a long time to reach full-time level with passive income, don’t leave your day job. The active income from your day job will cover your expenses. At the same time, you should start building your passive income through a side business. Start early because it will take time. These passive income resources might give you some ideas.
2. Focus. It’s important that you focus on just one business and make it successful. Don’t be all over the place. There’s a price to pay for something to be successful and only with focus can you pay the price before you burn out.
3. Leave your day job. Once your passive income reaches full-time level, you can leave your day job. This is where you start enjoying your financial freedom.
4. Diversify. Now that you have more time, you need to diversify your sources of passive income. Work on new income sources. This way when something goes wrong with one source you still have other sources to cover you. This also is a good way to increase your income over time.
Photo by schoschie
This is great!
I love this part – Steps to Build Passive Income!
1. Good that you can build your fortune while still tied to you r job.
2. Yes, it’s easy to get overwhelmed by the number of ways to generate passive income. Your passion in one business is enough. When it takes life of its own, then you can look up another awesome business!
3. Some people like to stay employed but the great thing is that a passive income business does not really affect the job much because it’s automated income.
4. This is where you become unique, when you find more creative ways to. The potential is as broad as your imagination.
Thanks for your advice. You’re super!
Passive income is great but easier said than done and no income is truly passive. That said passive income is truly a mighty goal to aspire to and one which i am working towards
Do you know an example of anyone generating truly passive income? It seems to me that even with “passive” income, you will still be involved in tweaking and optimizing the income sources, branching out to new ones etc.
I think the more important or perhaps more accurate distinction lies in the scalability of the income. Working your average day-job, the income is always linked very rigidly to the amount of hours you put into work. With “passive” income, while you may still have to work regularly on generating it, the money will be more independant of your working hours.
That’s just my 2c. 🙂
I’m totally with you about the socalled passive income. Royalties digital products etc… You do the work once, and then this work starts working for you! It’s just cool!
Claus D Jensen
Thanks for sharing your thoughts on the steps!
Yes, most of them aren’t truly passive. But they still give us high degree of freedom.
What about book royalties? I don’t think you need to do anything to maintain that. In some cases, a book still generates income years after the author’s death (How to Win Friends and Influence People comes to mind). I love your thoughts on scalability, by the way.
That’s the nice thing about passive income. After the initial work is done, it becomes mostly automated.
Online passive income seems to be illusive with the increasing amounts of competition in every niche. Everybody I have talked to or interviewed seems to be working 20 or 30 hours a week for a pretty small amount of money.
I agree with Faramarz, that no income is truly passive.
Donald, It would be great if you could share some details about how much you earn and the number of hours a week to work. 🙂
I agree that it’s not easy to earn passive income online. The possibility is still there though (and there are always offline options).
In my case, I don’t earn much by U.S. standard but I already earn enough by the standard of where I live. I think that’s an advantage of living in a country where the living costs are relatively low. Regarding the number of hours to work, I can actually spend zero hour a week if I want to, but I do choose to keep improving and experimenting with new ideas.
Passive income is easy if you are in an elected office. Here how it works. You get elected to congress or city hall then you write or rather a ghost writer writes a book and you put your name on it and a price of $32.
Then lobbyists or developers buy your book by the thousands and you get a nice check for a million or more dollars. No work. True passive income. There are no ends to this as one can have many ghost writers popping out books and the pockets of lobbyists both foreign and domestic are deep.
Interesting take 🙂
I would add a couple of caveats to this. I think it’s so important to emphasize that the road to passive income is long and difficult, as you said. If people don’t realize how actively they will need to work, they will quit long before the income becomes passive. Second, you need to plan to have a solid understanding of money and spending/saving/giving before trying to generate passive income. In my eagerness to generate passive income, I have too often neglected this one and ended up in debt. Finally, I would call it active-passive income to emphasize point #1.
Having said all that, however, a true understanding of passive income will have you putting all of the above into practice. 🙂
I think most people do not understand how difficult it is to make a passive income, especially online. However, i think your attitude and willingness to stick with it can go a long way.
It amazes me when I see the many ‘get rich scheme’ on the Internet, especially since people fall for them.
Anyway, i think building a passive income is a great idea. It can be a safety net that can possibly be built into more.
Thanks for such an interesting article
Great stuff, can someone teach these to the young gratuates.I believe since they have the benefit of time on their side and haven’t earned their first paycheck yet;This is a lesson they need to learn early before they are overtaken by lifes burdens.
without knowing wot passive scheme you have it is impossible to weight up the benefits
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