What is Passive Income?

Passive income is money you earn that doesn’t require you to do a lot of “active” work to continue making it. In essence, you can do most of the work upfront and put some additional effort along the way to earn an income.  

For example, if you create an online course, you just need to update its content to keep the money flowing.

You’ve probably heard the expression, “make money while you sleep.” That’s the biggest draw that entices people to earn passive income. 

You can create something (a blog, course, ebook, videos, or an online store) that generates money even when you’re not working. Or you can make passive income investments (property or stocks) that allow you to earn passively. 

Passive Income Myths: What Passive Income is NOT

Let’s dispel some myths and set realistic expectations before we go any deeper.

  1. Generating passive income is NOT easy and it takes a lot of hard work. Nothing in life comes easy. Making money online is no different. Many conventional internet marketers and online entrepreneurs will try to persuade you to think otherwise. Why? Because they’re trying to make money from false hopes. I’m here to tell you the truth: Online business is hard. I’ll do my best to guide you and give you the information you need, but I can’t force you to take action; that’s up to you.
  2. Generating passive income does NOT happen overnight. I don’t live, teach, or believe in get-rich-quick schemes. My first online business took about a year of hard work before it was generating enough income to support my family. There was nothing easy about what I had to do to get that business going. But in relative terms, it was “quick” because I decided to opt-out of the work-till-sixty-five-deferred-life plan and make my own luck happen. You can do it too.
  3. Generating passive income is NOT impossible. Passive income was just a dream for me until 2008. That’s when I was let go from my job due to the crumbling economy. With no other options, I bet on myself by trying to make my dream a reality. And you know what? The dream came true, and it’s totally awesome! I get to stay at home with my family, work when I want, and make my own decisions. This lifestyle is possible, and I want you to experience it too.

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What Passive Income is not

❌ Your job

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

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 in its long-term state for you.

❌ Consulting

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 a return if you sell the investment?

Also, investments like cryptocurrencies and commodities are reserved for price speculation. There are many times when these investments should get some allocation of your portfolio, but investing like this is not a stable passive income strategy unless you are earning yields or grit bot trading.

4. Index Funds

Index funds are mutual funds or exchange traded funds linked to a particular market index. These funds aim to mirror the performance of the underlying index they track and are passively managed. Therefore, their underlying securities don’t change unless the composition of the index shifts. For investors, this translates to lower management costs and lower turnover rates, which makes them more tax-efficient vehicles than many other investments.

Earn cash back on credit cards

If you’re still using cash or a debit card for your purchases, you’re potentially missing out on a lot of free money. As long as you’re spending money on the things you buy anyway, why not use one of the best cashback credit cards that provides easy cashback rewards on every purchase?

Learn How to Apply See rates and fees Earn a $200 statement credit after spending $2,000 in the first 6 months $0 3% cash back at U.S. supermarkets up to $6,000 a year, 2% cash back at U.S. gas stations and select U.S. department stores, and 1% cash back on other purchases Benefits and Drawbacks Benefits cash back at U.S. supermarkets Annual fee of . Terms apply. Drawbacks No travel rewards Grocery rewards are capped Rewards dollars can’t be used toward the minimum payment due Card Details Earn a $200 statement credit after spending $2,000 in the first 6 months 3% cash back at U.S. supermarkets up to $6,000 a year, 2% cash back at U.S. gas stations and select U.S. department stores, and 1% cash back on other purchases Intro purchase 0% APR offer: 0% for 15 months then 14.24% to 24.24% (variable) Terms apply

Create an online course

If you’re not a teacher but you have expertise you’re willing to share with the public, you can create an online course. You’ll help people around the globe acquire new skills, and you’ll get paid residual income every time someone purchases your course. You can use the following tools:

Residual Income Idea 4: Blogging

There can be big money to be made in blogging. And that’s not just limited to your standard WordPress site with written content. YouTube channels are becoming a huge market for passive and residual income opportunities.

There are several ways that you can make residual income if you own a popular blog or YouTube channel. The first is by selling products, particularly your own. In the above section, we talked about information products. After you put in all that work learning about a subject, you’re now in a prime position to create an awesome blog. Naturally, people who arrive at your blog to learn about French cuisine also probably will be interested in buying your French cuisine cookbook.

But you’re not limited to just information products, or even to your own products. You might develop additional products, such as cutting boards or knives, that complement your French cuisine recipes. You could sell these on your blog, or you could become an affiliate and sell other people’s products on your blog.

Remember all those cookbooks that you read through when learning how to become a master of French cuisine? Your readers are probably interested in those books as well. A quick way to cash in on the sale of those books is by becoming an Amazon affiliate.

When you become an Amazon affiliate, you get a small percentage of the sales that you contribute to on Amazon. So, let’s say you’re writing about Julia Childs’ duck recipe on your blog. You give credit to Julia Childs and you also link to her book on Amazon. When a reader clicks through that link and goes to Amazon and buys the book, you get about 5% of that sale. Becoming an Amazon affiliate is a residual income idea that benefits everyone involved.

So, if the book sells for $20, you’ll end up with $1. That’s not bad, but it’s also not great. Unless you sell 100 of those books in a month. And maybe 100 copies of Gordon Ramsay’s cookbook as well. Add in an all-clad chef series stainless steel kitchen set for $700. You see where this is going. It’s a great way to make residual income.

Amazon isn’t the only website that has affiliates. Smaller companies may be willing to give you up to 50% of a sale that is generated by traffic coming from your website. These businesses are usually selling—you guessed it—information products. They can afford this affiliate fee, given that information products are usually 90% profit for every sale.

Another method for how to make residual income with your blog is advertising. If you have enough traffic coming to your website, ad companies may be willing to pay you to place ads on your site. They can pay you based on the number of people who click the ad or simply the number of people who see the ad. Either way, with all these options, you’ll be able to make money while you sleep.

3. Try your hand with index funds

If you rely on bloggers for your investing advice, you already know that index funds are extremely popular among all types of investors. This is partly because index funds are so easy to buy, but it’s also because they are fairly straightforward.

As a type of mutual fund, index funds make it possible to buy packages of investments that are managed professionally.

If your goal is investing frequently without trying to “time the market”, index funds are one of the best options

When it comes to buying in, I always suggest M1 Finance due to their zero trading fees and endless investment options.

Also know that plenty of other online brokerage firms offer access to low-cost index funds which can take the headache out of your investment strategy.

And if you really want residual income, you should try to save yourself as much stress and hassle as possible, right?

Related: Best Online Brokerage Accounts

I Appreciate You!

I’m here for you as both a guide and as a friend.

I want to hear your stories. I want to know how else I can help you. I want the Smart Passive Income experience to be our experience, together. That’s how we all learn and grow together, including me.

I do my best to respond to emails. I treat everyone equally. And I firmly believe that I’m not special, just a normal guy who enjoys working hard and working smart. In everything I do here with Smart Passive Income, I truly want to make the Internet a better place.

10. Become a Brand Rep

One of the best ways to wield your influence in exchange for cash is by becoming a brand ambassador. Depending on how large your sphere of influence is, you can partner with some major companies to grow both your following and theirs.

Once you’re accepted as a brand rep, you simply post photos to social media, primarily to Instagram, that meet certain criterion and promote the brand.

Some companies might require a weekly post and a number of purchases per month.

In exchange, you get cash, discounts, other perks, and recognition on the company’s social media accounts, all of which equates to more passive income for you.

Put your passive income to work

Once you’ve found the perfect passive income opportunity that fits with your lifestyle, skills, and passions, it’s important not to let that extra cash get lazy. Make sure every cent is working for you by placing the money you earn into a high-interest bank and letting it continue to work no matter what you’re doing.

It’s also worthwhile to reinvest some of your passive cash back into the business. For example, you could buy additional vending machines or another storage unit to give you more passive income opportunities and boost your investment.

No matter how you choose to boost your income, make sure it works around your schedule, and don’t be afraid to try a few different options. There are no limits to the number of streams of income one person can have, so mix things up and enjoy the returns.

You’ll be sipping mimosas on the beach in no time.  

How Does Passive Income Work?

Since you’re busy living your life, you want to build a passive income stream that eventually works while you sleep, play, socialize…whatever you want to be doing with your time. The good news is that you don’t need a pile of cash to start your passive income stream.

If you already have an asset that you are not fully utilizing, that can serve as your investment. If you have money that’s just sitting in a savings account, you can instead put it somewhere where it will earn extra money, letting you invest in your future.

5 Passive Side Hustles

These passive side hustles require a steady but low amount of effort to execute. If you need money now, these options are easy to get off the ground. While they aren’t entirely passive, they still can provide an additional income without requiring you to work all weekend.

1. Learn to Flip Products on eBay

There’s a chance that you know a certain product better than anyone else. Maybe it’s game consoles or cell phones, and for others, it’s makeup, shoes, or handbags. The point is: you might be an expert and not even realize it.

You could earn a significant side income by learning to buy and sell that product for a profit on eBay. This is frequently called “flipping.” The learning curve may be a little steep at first. However, once you get the hang of selling on eBay, you can regularly churn out additional income.

Pro: There’s a lot of pure profit to be made, as long as you know what you’re doing.

Con: Dealing with anonymous parties can be tough, and eBay typically sides with the buyer over the seller. So if you’re selling for profit, you can easily get burned.

2. Use Your Washing Machine

If you have a washing machine and dryer, you can make money. Sound crazy? Several companies bill themselves as the Uber for Laundry, and they are pretty simple. You sign up, pick up clothes from people who live near you, and wash them. Once you deliver their laundry, you’ll get paid. It’s that simple.

Pro: Turn an unused resource in your home into an income source. You don’t need incredible skills to wash people’s clothes.

Con: Everyone has a different definition of “dirty laundry.” Are you sure you want to test yours?

3. Become a Tutor

The more the world changes, the more people need new skills. If you have a specific skill set in language, math, computer science, or any number of other areas, you may be able to find clients to pay you to teach them.

With all of the new technology available, you can even tutor kids in China and make money while in your apartment in Texas. Check out companies like VIPKid for online tutoring jobs.

You can make a lot more than minimum wage by working around your regular work schedule before or after work, during the summer break, or on weekends.

Pro: You have a lifetime of knowledge. Someone out there is probably looking to learn what you already know.

Con: Teaching can be tough, and your students will expect results. How are you going to react when you’ve explained something ten times, and they say, “I still don’t get it”?

4. Become a Collectibles Expert

What do stamps, Beanie Babies, and Pokémon cards have in common? First, they are all niche collectibles with small but thriving markets. Second, you can do a few hours of homework on a particular collectible and immediately become more knowledgeable than 99% of the population. And that knowledge is power.

People are selling their old “junk” every day for pennies on the dollar. If you develop the skills to recognize treasure from trash, you can turn their pennies into your dollars.

The world of collectibles is incredibly diverse, ranging from old arrowheads to Christmas ornaments to classic books. But where there’s a paying customer, there’s an opportunity to earn semi-passive income.

Pro: Niche markets where large differences in knowledge can lead to significant profit margins.

Con: An incredibly diverse range of products and a real risk of getting fooled by counterfeits (a.k.a. losing money).

5. Give Lessons

Are you a highly-trained athlete or artist? Do you have demonstrable skills, competitive experience, or professional licensure? Then you could make a significant side hustle income by giving lessons.

The biggest customers? Parents and their kids. There’s a huge demand from parents who want their children to have good golf swings, nice singing voices, and the ability to speak in public.

And you don’t need to be a professional opera singer or a world-traveling tennis player, and all you need is enough skill so that the parents and their children respect your expertise. Many former DIII athletes and local art teachers make $50-$100 per hour by giving lessons in their expertise fields.

Pro: Lots of potential clients, high demand for your skills.

Con: While the effort to acquire your skills is a passive sunk cost, the effort to give the lessons is quite active.

How Do You Get Started with a Passive Income Investment?

If you have money to invest, purchasing the appropriate passive asset, whether it be a REIT or an index ETF, will allow it to start working for you. You may need to open a brokerage account in such a case in order to transact and hold your investments.

Passive Income Ideas Requiring an Upfront Monetary Investment

These types of passive income require you to invest money up front to generate the passive income later. Don’t be alarmed though – you can start with as little as $5 with some of these ideas, so it’s achievable for everyone.

1. Dividend Stocks

Dividend stocks are tried and true way to earn passive income. You will have to do plenty of research to find good stocks and invest a significant amount of money to receive large dividend checks. However, if you consistently invest money into dividend stocks you can amass a nice residual income over time.

For any of these investment opportunities, make sure you open an account at the best online brokerage, and get rewards while doing it. 

Our favorite place to invest is M1 Finance. You might not have heard of M1 Finance, but it’s a FREE investing platform that allows you to build a portfolio, and invest in it for free.

This is amazing for investing in dividend stocks because you can build your portfolio of, say, 30 stocks. Then, your investments will be auto-allocated to your entire portfolio every deposit – for FREE! You can even auto-rebalance. Then, your dividends can also be reinvested. It’s a fantastic platform, and it was made for this. Plus, M1 Finance was an honorable mention on the best places to invest for 2022!

Read our full M1 Finance review here.

Open an IRA at M1 today >>

Examples of what is and is not passive income:

Some of these common small business ideas are not passive income streams. However, there are alternative ways to transform them into a money-while-you-sleep business model…

Active Income IdeaPassive Income Alternative
A consulting job where you charge by the hourCreate an online course that people can buy
Computer programming on a freelance basisBuilding a specific program that you can license and sell over and over again.
Freelance writingWriting a book or eBook
Working in construction or a similar industryInvesting in real estate
Driving for Uber or a delivery companyHiring your car or selling ad space on your vehicle
Hosting photoshoots or taking photos for commissionSelling stock images or building your photography Instagram account

These examples will help you understand what passive income is and how you can transform your existing side gig into a profitable enterprise that will earn you money even while you sleep.

How many income streams should you have?

There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.

“You’ll catch more fish with multiple lines in the water,” says Greg McBride, CFA, chief financial analyst at Bankrate. “In addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream.”

Of course, you’ll want to make sure that putting in effort into a new passive income stream isn’t causing you to lose focus on your other streams. So you do want to balance your efforts and make sure you’re choosing the best opportunities for your time.

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.

Sign Up With CIT Using Code “Spring20”

2. Assess your skills

When I started GoodFinancialCents 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 brainstorming. To help with that, we’ve created this list of ideas to get you started. Here’s to your wealth and freedom!

Residual Income Idea 1: Information Products

Information products have become a huge factor in the residual income industry. It’s now easier than ever to gain access to and distribute information. Because of this, anyone who is willing to put in a decent amount of advance work can pool a large source of information, compile it into a more digestible format, and then distribute it.

For example, say you are a CPA with a lot of experience in small business finances. You probably already have enough knowledge to fill a book with useful information that small business owners could use to help them manage their finances. The up-front labor would be writing the book and then having it designed to look marketable. From there, you want to choose a source that you can distribute your book through in exchange for money. We’ll cover this in more depth soon.

But let’s say you don’t have a wealth of knowledge that seems marketable. Perhaps you’re fresh out of college and you don’t have much first-hand knowledge or experience that you can pull from. Well, you’re in luck. A lot of information products are based on existing sources of information. The creators of these products will pull from tens or even hundreds of sources of information and distill those sources down into a much more digestible form.

For example, perhaps you’ve noticed that there’s a demand for learning how to cook French cuisine, but most people complain that there’s too much conflicting information and that the information is very difficult to understand. While you have a knack for cooking, you may not be an expert. However, you could start your own residual income business by going through every single book and video on the subject of French cuisine.

After doing that, you will probably know more than 80% of the people who are interested in learning how to cook French cuisine. From there, you can develop your own methodology for cooking French cuisine. Refine it in your own kitchen, and then document that methodology. One thing you want to be sure of is that you always give credit to the experts you learn from. If you’re using Julia Child’s method for cooking duck, then be sure to give generous credit to her. Not only is this the ethical thing to do, but also it can build credibility for you. Chances are your name has very little weight in the French culinary circle, but Julia’s name has all kinds of street cred.

“But won’t people see this as a rip off because I’m just sharing other people’s ideas?”

No, not at all. People will see this as a convenient way for them to get started learning French cuisine. Instead of their having to go through all of those French cookbooks to find the best methods, they can just go to your book.

“But won’t that take business away from those experts?”

Hardly. Your information product on French cuisine will serve as a conduit for people who want to learn more. For example, if they really like Julia Child’s method for cooking duck that you share in your book, then they are more likely to be enticed to go buy one of Julia’s books. Remember, you’re combing through tens to hundreds of resources and putting your own twist on the techniques that you learn.

Once you have an idea on how to make residual income from your information product, you want to figure out the best medium to deliver it. Typically, the three choices are book format, video format, and e-learning platform.

There are two things to consider when choosing your format: What are you most comfortable with, and what do your customers want? If you have a background in video and editing, then you probably want to lean closer toward that for your medium. Unless, of course, you’re delivering a product that just doesn’t do well in video format. For example, self-help information products are usually delivered in book format or audio format because people are insecure about others seeing them watch a self-help video.

How to Build Residual Income

Depending on your interests, skills, and business

Depending on your interests, skills, and business knowledge, you can create sources of residual income that align with your experience. If you don’t have experience in a certain area but wish to learn, there are plenty of resources to acquire the necessary skills.

The main idea behind residual income is leveraging other people’s time and resources to achieve consistent revenue. Whether it’s an online product that continues to be sold or a rental property that is continuously occupied, residual income requires hard work at the beginning but the work and time tapers off once the investment is up and running.

In fact, many people have built their fortunes from residual income, all while achieving a more flexible lifestyle and earlier retirement. Residual income isn’t a get-rich-quick scheme. It’s a sustainable way to build wealth and increase your personal revenue with little effort to no effort.

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