Passive Income: What It Is, How to Earn, Importance
Do you think it’s possible to make money without working?
When we talk about passive income, we mean the possibility of generating income without working or making any efforts. Although it may sound unreal, many people today enjoy financial freedom thanks to their residual income.
However, remember that earning passive income does not mean taking no efforts. And that money will magically appear in bank account.
Passive income is about taking advantage of opportunities to achieve it in the medium and long term.
What is Passive Income?
Unlike active income, which requires continuous work, effort and dedication; residual/passive income consists of earning money periodically, without continuously working**.
Specialists, economists or financial analysts define passive income as “the obsession of the rich,” who devote a significant part of their lives to investing in everything that can fill money in their pockets.
Passive income represents one of the most marked differences between people who are financially successful and those who live in financial stress.
While most people live buying debts, millionaires go out to buy assets that generate residual income so that they live comfortably the rest of their lives.
How to Earn Passive Income?
Although passive income is earned without the need to work directly, it does not appear in bank account until series of decisions and actions consistent with money are taken.
In other words, to learn how to generate passive income, knowing how money works is very important, and then use this knowledge to start working.
Ways to Generate Passive Income
Investing Money in Assets
For example, buying a house, an apartment or other property and then renting it and receiving money monthly.
Investing in Shares
In this case, money is generated from the profit made after selling the stock of the company.
Investing Money in your Own Business
It is an alternative for medium or long term. Because it involves learning how to start a business, develop it, grow it and hire people to manage it.
Additionally, generate passive income with other types of activities. For example, if you are a professional, create online courses. Or if you have skills in writing, write a book.
Even with a YouTube channel with evergreen content – it is possible to achieve what is also known as residual income.
Copyright or Royalty Collection
This is possible through inventions or artistic creations. It also applies to book authors, movie creators or songwriters. Because it is something that is done once, but every opportunity that is used by someone else involves the payment of what is known as royalty.
It is an option that has become very popular in recent years and involves monetizing these apps which are high in demand by mobile phone users.
The options to generate income through a mobile application are the volume of downloads in different app stores, selling products within the same application, associate with brands and charge them for space inside the app, amongst others.
Snack or coffee machines
This idea consists of a very simple option that involves buying device from authorized agents or someone who wants to sell it.
One of the key is location of the machine. Since it must be a placed at a strategic location within your city/neighborhood, where there is a population so that higher number of sales can be generated.
Sale of insurance policies
Although for many it is considered a job, this option offers the possibility of generating passive income. This is because once insurance policy is sold, each year the client will have to renew it, guaranteeing an annual income until the person decides to cancel the policy.
Other examples of passive income, depending on the country where you live, is the investment in financial assets such as bonds, debentures, as well as in the mutual funds and stocks.
Steps for living on passive income
It is possible to live comfortably without working eight or even many more hours everyday.
But in order to live off passive income, the fundamental thing is to know the subject in question in order to invest with much more peace of mind and make the most of it.
For example, for some specialists in the field, savings accounts are risky investments that are not really worthwhile. Because they do not generate higher interest rates and do not leave any learning or teaching that will serve for the future.
Although financial reality is quite different for each one of us, there are some general recommendations which can help to live from passive income or so-called residual income:
- Takes time:
The first thing to understand is that no matter what anyone tells, getting to the point of depending financially on passive income does require significant effort. And it’s not something possible to achieve overnight, because it’s not at all an easy task.
- Requires sacrifices:
There are two sacrifices related to passive income you need to be willing to make. The first is initial financial investment. And the second is investment of time and effort, where persistence plays a fundamental role as the key to success.
- Get advice before making a decision:
Before making an important decision with money, and deciding the investment avenue, it is important to have objective that justifies the investment. For example, look for an alternative that has great potential for growth and brings money in the medium and long term.
For this, consult investment professionals who are experts in trend analysis, who know the sector well and can offer good recommendation.
- Franchising is a good option:
Depending on the city/country, investing money in a local franchise also has good prospects.
Because ultimately placing the resources in a business that you already know works well and has a future. You can also opt for a traditional business with a high probability of success or that involves innovation.
- Use creativity:
One last piece of advice is to take what’s in the head and make the most of it. In other words, exploit your hidden talent and turn it into a business opportunity that, in the long run, becomes an important passive income.
There are many other recommendations, but the idea is that you choose the one that best suits current reality and possibilities. Remember that, even if you don’t believe it, there are many more possibilities within your reach than you think to achieve the desired financial independence.
Importance of Earning Passive Income
The objective is not to depend solely on salary, because it has a very high risk. This can be explained as follows:
- If there is a layoff for some reason (e.g. recession) or the other, it stops money inflow and that is very serious.
- You cannot be slave of those income that imply offering a service. But rather opt for other alternatives, to achieve the much desired financial freedom.
- Structuring a passive income means creating a flow that will be continuously entering in your bank account without the need for a fixed work schedule as it happens with conventional jobs and active income.
This is why it is important to keep in mind that, this type of income requires a significant effort. Although it is also valid to say that they are well worth it.
On the other hand, if you don’t have a lot of money to start on your way to financial freedom, don’t be discouraged because things can be started even with a modest investment.
How to Generate Passive Income Online?
Amongst the possibilities that exist to achieve passive income, internet can become a great ally, with considerably attractive alternatives, taking into consideration an initial investment.
To begin with, here are multiple ideas for making passive income online:
It is the best alternative option to earn passive income for individuals having time and wanting to stop becoming a slave and work day and night in job.
This consists of advertising third-party products and earning a commission each time a customer buys any of these items or services. Depending on the platform, the commissions have different percentages.
Create your own digital products
Another alternative is to create own products and it doesn’t necessarily have to be something physical. But rather intellectual such as online courses, videos, books, texts, images, infographics, and audios that can be promoted using different platforms.
Advertising on your website
A third option is to advertise on your website, blog or YouTube channel, to name a few. Advertising platform like Google AdSense is a good way to start.
The key to generate interesting passive income is to generate traffic. Higher the visits, higher will be the income.
For this last idea, a website or content blog is must, where you can charge for exclusive content. The more specific and specialized the content, the more profitable website can be, as you will be solving a specific need for the community reading the content.
Based on what you’ve just read, Internet business opportunities will have a greater chance of success as you build a significant fan base.
For this reason, before putting a product on the market online, it is advisable to work first to build an audience that will surely support later in your venture.
How to Create Assets that Generate Passive Income?
The good news is that you don’t have to have significant capital to create or build assets that generate passive income.
For example, assets that generate residual income could be: web applications, stock that pays dividends, social networking content, YouTube videos, websites, a blog with traffic and advertising.
Creating an asset certainly takes time, effort, and resources as well. Because for it to have the definition of an asset it has to be monetized; that is, investing money in your pocket.
Although you can also talk about something as simple as a computer, which is an asset that can very well generate passive income. It is an asset that, in a nutshell, may very work well when put to use for doing other activities.
The key to passive income is precisely to generate money without the need of physical presence. The idea is to delegate and make use of tools and systems at our disposal, in order to leverage and achieve the goal.
Remember that, not all of your life you will necessarily want to do what you are currently doing. Or perhaps you will not have the same energy or time to do it and it is precisely at that time, you will need passive income or residual income.
Finally, the million-dollar question, does passive income really exist?
About passive income there are many opinions. Some experts say that they do not exist, or that they are not really what they seem.
Critics of passive income claim that money doesn’t really work for us “magically,” as financial gurus claim, and that residual income as the key to financial freedom doesn’t really exist.
This article has been written by Chandra Mehta.
Chandra is a seasoned banker with 20+ years of experience in banking and financial services industry. He’s a retired banker and has served as Chief Manager and Assistant Vice President in State Bank of India/or its subsidiaries.
He has authored many articles on this site (allonmoney.com).