“Making money while you sleep” has a nice ring to it, doesn’t it? After all one of the goals of financial independence is to build wealth that doesn’t eat up your time, so you can enjoy life and do the things you choose to do.
The truth is that building a passive income stream usually isn’t passive at first. It requires time, money, skills or all three. But where do you start? The first step is to just build a small nest egg savings account that you can use for later. We’ll come back to this.
Building multiple streams of passive income has an additional benefit in the short term: it can make you more resilient, and better able to weather economic shocks.
Passive income is a long term choice that requires short term tradeoffs. If you’re willing to commit your resources to the steps and ideas below, you could be earning effortlessly for years to come.
You just need to know where to start and decide what resources you’re willing to expend for your passive income ideas to take flight.
I’m going to break down passive income, and show you the steps I took to create my passive income streams, but if you want to get right to the ideas, you can. Let’s dive in!
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What is Passive Income?
Passive income is money earned with minimal activity through any venture that requires little daily effort or upkeep on the individual’s part.
Let’s break that down a bit more:
Passive — requiring little or none of your most precious resource, your time!
Income — generating cash inflow to you that either represents income you use in the course of daily life or that you re-invest.
A good litmus test is that you should be able to go out and get a full-time job, that takes up the majority of your working hours, and still be able to run your passive income streams.
The golden rule of passive income – protect your time.
Passive income is more about time than anything else. You could do a lot of things to make money, but not all income streams are passive. I’m all for you actively building a business or a side hustle, but for the income stream to truly be passive, it must require less and less effort to produce income, eventually requiring no effort (or very little to maintain).
For example, if it takes you 2 hours to generate $100 today, and it takes you the same 2 hours to generate $100 next week or a year from now, that income stream is not passive, because it takes the same effort (money, time, etc).
On the other hand, if I open an investing account today that takes some effort. But as that account grows and I check it 4 times a year, my returns go up, and my effort goes down.
Same if I build an online course. At first, I’m earning no money and my effort is very high. But I expend a ton of effort at first. Once the course is complete, I do some continued marketing and client support which amounts to just a few hours per week, while sales roll in month after month.
You get the picture? Now let’s talk about what passive income is not.
What Passive Income is not.
Obviously. The whole idea of passive income is to supplement, augment or get you out of your job so you can retire, travel or spend more time with loved ones.
Side hustles are great ways to make money, but not all side hustles are passive. Side hustles are usually active, and maybe with systemization, they can turn into passive income streams.
If you need to continually invest the same (or more) amount of time for the same amount of financial output, the venture is not passive. Be careful here, because remember, in the beginning, a passive income stream could require more time, money or work than it produces. You have to evaluate the passive income opportunity on its long term state for you.
Consulting is just another job – perfect for a side hustle, but not exactly passive. For consulting to be passive, you’ll need to build the practice with other people, and be able to step away from the work eventually.
Investing for speculation.
Here’s where I split hairs. I do not consider stock investments for capital appreciation only to be passive income. Why? Because stock appreciation is not income. On the other hand, investing in stable companies that throw off cash in the form of dividends is definitely a passive income strategy. The difference is, are you getting a cash on cash return, or will you only see return if you sell the investment?
Also, investments like cryptocurrencies and commodities are reserved for price speculation. There are many times where these investments should get some allocation of your portfolio, but investing like this is not a stable passive income strategy.
Examples: What is and is not passive income
|Active Side Hustle Income||Passive Income|
|Consulting by the hour||A course on your area of expertise that you sell online|
|Freelance computer programming||Building a program you can sell over and over|
|Freelance writing||Writing a book|
|Working construction||Investing in real estate|
|Driving for Uber||Renting out your car|
|Photography sessions||Building your photog Instagram account|
How to Start Building Passive Income
There’s no magic trick that turns your time directly into money. Instead, you plant seeds so your money will grow, even when you’re sleeping or at the park walking your dog.
The initial downtime you put into passive income can be as involved as starting a blog or as simple as logging into a robo-advisor platform and investing $100. You can earn passive income whether you’re an entrepreneur with a brilliant business plan, a talented artist, or just happen to have extra cash to invest.
1. Start building a nest egg
Remember earlier I said to create passive income you need time, money or skills? Let’s start with money. Open a high interest savings account and park even $100 dollars in it. Boom, you just made passive income! It may not be much, but you’ll earn interest on that money and many online banks even offer cash bonuses for opening accounts. Our favorite right now is CIT bank.Get up to $300 from CIT with code “Spring20”
2. Assess your skills
When I started Goodfinancialcents.com I was a Certified Financial Planner looking to grow my business and answer common client questions. I figured out that I could use these skills to create great content online, and that I could make money with this blog over time.
I have friends who were stock traders and now have communities around that skill or write for financial publications. Other friends have gotten good at management, and now are building career websites.
What are you good at? What are you passionate about? Take a quick inventory, and research the ways others have used those skills to build income streams.
3. Assess your time, money and effort. Be realistic about your commitments
Time is a tricky one, because it’s our most limited resource. Trying to make more money or create passive income can be a trap because it usually requires you to learn new topics or new skills, and that can be a time suck. Remember, you may have to bite the bullet in the short term, but in the long term your goal is to minimize your time investment.
Are you fully committed? Current work, family and social activities eat up a lot of time. If you don’t have much time, you’ll need to lean more towards investing or getting someone else to do the work for you.
In this guide, we’ve labeled each idea with an effort level (1-5, 5 requires the most effort) to help you match your current abilities to the idea.
4. Ideate and choose
The final step is to put some ideas down on paper and choose how to begin. We created the following list to help you kick off your brainstorm. To help with that, we’ve created this list of ideas to get you started. Here’s to your wealth and freedom!