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Wealthy people often talk about earning passive income for financial freedom. They clearly understand the importance of multiple income streams without being majorly involved in earning them.
As per research, a wealthy individual has not just one but seven streams of income. He strives for multiple regular income streams that flow in irrespective of whether he is there or not.
Thus, what makes him wealthy is not the boatloads of money that he earns. But the more free time he gets because of such recurring income. This is because this allows him to spend time on things he wants to do.
Now, take an ordinary professional who earns an hourly salary for the work he does. His income is entirely dependent on his work. That is, he does not get the paycheck if he does not work.
This is where the importance of passive income comes to the forefront. Thus, it is time that you include one if you do not have multiple recurring income streams flowing in.
In this article, we will learn what passive income, the reasons for building passive income, and how to create passive income ideas is.
What is Passive Income?
Passive Income is also known as Residual Income. It is the income that you generate from investment, rental property, or any other business activity without you being involved all the time. That is, the income stream is not dependent on your presence. This means that you reach a stage where income gets generated automatically and keeps flowing consistently.
The famous quote for passive income comes from the world-famous investor Warren Buffet. He says that‘If you don’t find a way to make money while you sleep, you will work until you die.’
In other words, you work once and get recurring income for years. Robert G. Alan, in his book ‘Multiple Streams of Income’ beautifully explains two types of income streams one can earn from. These are Linear and Residual.
Say you are a professional and get paid a salary on an hourly basis for your work. The number of times you get paid for the work you decide whether your income stream is Linear or Residual.
Thus, the work you do as a professional gets you paid only once in the form of the monthly salary you receive. That means the income stream is linear if you get paid only once for the effort that you make.
If you don’t go to work for any reason, you do not get paid for your absence. Likewise, doctors, lawyers, etc. earn professional fees only when they see patients or clients. That is, they receive Linear Income.
On the other hand, Residual Income is the recurring income that you get over the years by putting in effort for once.
For example, you invest ‘x’ number of hours once when you write the book if you are a writer. However, you earn royalty each time a copy gets sold. That is, you earn income over and over again from the same book for which you worked hard once.
However, earning passive income is not easy. This is because it requires an initial investment of time and money which pays very little initially.
In addition to this, there is a lot of disappointment and stress involved because working for your passive income with a well paying job does not happen easily.
Reasons For Building Passive Income
Gain Financial Freedom
Financial freedom is nothing but having enough residual income that allows you to spend money on whatever you want. That is an income that keeps multiplying and allows you to take up your passionate work.
Furthermore, financial freedom also lets you retire early and not live under the pressure of earning a specific amount of money year-after-year.
Accordingly, passive income lets you manage your finances and make money work for you, and you are not working for it instead.
Also Read: How to start a business in your 50s
No More Trading Of Time For Money
It is not getting rich quickly that people look for. However, it is about earning a good amount of money to lead a comfortable life. They want the freedom of time so that they can spend much time doing something they are passionate about. Or do something they always wanted to do.
This could be working on their dream project, spending more time with family, travelling the world, etc. As per Robert G. Alan, the wealthy is not the one who has more money but has more time freedom.
Since wealthy people have multiple income streams that are passive, they get more time to do anything they want.
Providing For Discretionary Expenses
Discretionary expenses are typically the non-essential expenses that your business or you as an individual can do without if required. In other words, you or your business can run even if you do not incur such expenses.
For example, these expenses could be buying expensive luxury items, going on a vacation, etc.
If you are a working professional, your salary is sufficient to provide for the day-to-day expenses. Likewise, the multiple passive income streams can provide extra expenses if you have these multiple passive income streams.
In addition to this, working for a basic salary to provide for routine expenses all the time can stress you out. But with passive income, you can take out time to unwind or spend time with your family. This helps in reducing overall stress and thus makes you happy.
Therefore, you can incur such extra expenses for your wellbeing without any stress.
Lending Security For Future
With passive income, you can spend your income on buying a house, investing in financial instruments, saving for retirement, etc.
In addition to this, you can use such savings to further grow your passive income sources easily and quickly.
As stated earlier, your salary can be used for day-to-day expenses. Whenever needed, you can use some amount of money from your passive income to undertake routine expenditures.
However, you can save a good amount of money for the future if you keep aside passive income and do not use it for your daily expenses.
Thus, having passive income helps you in planning for the future in many ways.
Typically, people think of retiring in the latter part of their life. This is because that is the time by which they can earn financial security for themselves.
But you can easily think of retiring earlier than what is normally taken as the time of retirement if you have multiple passive income streams.
This is because passive income gets you recurring income without you making much effort to earn the same.
For instance, investing in the stock market, becoming an influencer, writing a book, etc. are ways of earning passive income.
Thus, building any passive income sources takes away the stress and anxiety of earning a specific amount of money necessarily each other.
Since money keeps coming, you can easily retire earlier than the time you thought of doing so.
How Much Money Can I Make From Passive Income?
As mentioned earlier, earning passive income is not easy. Neither is it a means to get rich overnight.
You need a good amount of initial investment to build passive income sources. And if you do not have sufficient money, you can invest your time and effort to build passive income sources that will grow over a period of time.
As you earn more money, you can club that amount with your effort to grow your passive income.
That is how rich people amass wealth. Apart from their primary income source, they invest money in sources that grow over a period of time.
Unlike your primary income source with limited potential, passive income sources give you income multiple times consistently. That is, you earn more recurring income without you being present at all times as a result of the increased level of income that you invest in building your passive income sources.
How To Generate Passive Income?
There are some ways in which you cancreate passive income ideas. Here are some of thepassive income ideasto help you build your own passive income streams. These are as follows.
Buying A Rental Property
Real Estate has always been a good source of investment. This is because you benefit from earning passive income, consistent cash flows, tax breaks, etc.
You get passive income in the form of monthly rental income if you own real estate properties. This helps you to gain financial freedom as you can save the entire amount you earn as rental income.
That is, use your primary source of money for routine expenses and keep rental income as a buffer. However, the only issue with the rental income is that you need huge sums of money to buy the real estate property.
If you do not have huge sums of money, you can go for Real Estate Crowdfunding websites. These are online platforms that allow you to pledge a small amount of money towards a property. Plus, it also makes you the owner of such a property once it gets crowdfunded completely. That is, you receive your share of earnings as well as capital gains from the property.
Another option is to commit your funds towards a Real Estate Investment Trust (REIT). Much like Mutual Funds, REITs collect money from a number of investors which is further used to finance the Real Estate projects.
Thus, you as an investor earn your share of dividend without having to buy or manage a property of your own.
Letting Out Your Property
As you know, buying a property of your own for rental income requires a huge amount of money. If you do not have enough money at your disposal to generate rental income, you can give a spare room of your home on rent to generate passive income.
This way, the only thing that you would have to take care of is house cleaning and maintenance.
There are a number of online platforms to help you connect with the people who want spaces on rent in the locality where your house is located. You can easily list your property on such websites and get reliable tenants for the room who want to let-out.
Furthermore, you do not have to worry about the prices, the house rules, and other requirements for the guests when you host your rental property on such online platforms. This is because you have full control over all such aspects. Moreover, hosting your rental property on such online platforms is free.
This is another great way to generate passive income specially for those who are good with words or have specialized knowledge in a specific field. Once your book gets selected for publishing, you enter into a contract with the publishing house.
Further, the publishing house promises you to pay royalty. Royalty is nothing but a specific amount of money that you receive on each copy of your book that is sold.
Thus, once your book gets published, it continues to give returns for years. Furthermore, you can also self-publish your ebook through Amazon Kindle direct publishing if you do not want to adopt the long route of approaching a publishing house.
This way you can quickly and easily self-publish your book and reach out to a wider audience to generate passive income.
Affiliate Marketing is one of the ways in which bloggers and influencers generate passive income. As a blogger, you can register with various Affiliate Marketing Programs offered by various brands, online influencers, etc.
These programs allow you to partner with them and sell their products on your website through a link. That is, you as a blogger earn a certain percentage of revenue. Provided the people coming on your website happen to click on the link and purchase the product of your affiliate marketer.
Likewise, various search engines allow you to display ads on your website or blog for which you earn a commission on a per-click basis.
Becoming An Influencer
You can become an influencer and create passive income if you have knowledge and expertise in a niche.Thus, you can simply create content around that niche and build authority as well as strong relationships with your audience. This relationship is built in such a way that it influences the buying decisions of your target audience.
Now, there are a number of ways in which you can create passive income from your huge number of followers. These could be:
- Creating your own YouTube Channel
- Starting a podcast
- Starting a blog
- Selling third-party products or services
- Selling stock photos, etc.
Selling An Online Course
Another great way to generate passive income is to sell an online course. You can monetize your specialized knowledge in a niche in the form of an online course. Thus, you can sell such a course to the audience seeking such knowledge.
People go online not only for e-shopping or socializing. Rather, they also use the web to learn, seek answers, or gain knowledge in a specific field.
For instance, you can give violin lessons to the target audience via an online course if you know how to play violin. Likewise, you can give coding lessons to the target audience if you have a sound knowledge in the field of web development.
Now, you could sell online courses through your own website or social media platforms. Or else, you can upload your course on an open online course providing platforms to sell your course to your target audience.
E-Commerce is one of the great sources to generate passive income. You sell either your own products or this-party products online to earn passive income through e-commerce.
There are a number of ways through which you can sell third-party products. These include:
It is an order fulfillment system where you as an online retailer are not required to store, manufacture, or ship products that you sell to your customers.
Rather, you partner with dropship suppliers. That is, when your customer places an order on your online retail store, you forward such orders to dropship suppliers.
Therefore, these dropship suppliers manufacture, stock, and ship products directly to your customers on your behalf.
Here, you register with various affiliate marketing programs run by brands, influencers, etc. As an affiliate, you sell the products of these brands on your blog or social media platforms.
Likewise, you can also sell your own products online to earn passive income. These could be selling ebooks, physical products, etc.
As mentioned above, one of the common investments that you make to create passive income is real estate. However, there are other investment avenues that can generate passive income for you.
One of the common ways in which people generate passive income is via investing in common stocks.
When companies earn profits, they distribute part of those earnings to investors as dividends.
The Index Funds are nothing but Mutual Funds marked to a Market Index. That is, these are portfolios of stocks or bonds that imitate the performance of a Financial Market Index.
Indexing offers a number of benefits like lower costs, diversification, etc. You earn returns in the form of capital gains when the index goes up or from dividends. Further, you can choose dividends to be reinvested in Index Funds.
Bank Fixed Deposit
This is one of the conventional ways of earning passive income. Individuals willing to take low risk prefer to earn interest on a certain sum of money that they invest with the bank over a fixed period of time.
Peer-to-Peer Lending is another investment avenue. Here you lend money to borrowers and earn passive income in the form of interest.
It is also known as crowdlending. Further, there are various P2P Lending Online Platforms that bring together borrowers and investors. These platforms connect you to borrowers whom you can lend your cash savings and earn a better rate of return relative to the traditional banks, Certificates of Deposits, etc.
Digital Products are another great source of passive income. These are typically are the products that are sold and delivered to your customers electronically and not physically.
Some of the popular digital products include online courses, PDFs, ebooks, photos, templates, worksheets, icons, illustrations, etc.
As stated earlier, creating such a content requires initial investment of time and effort. But once created, these digital products can be sold over and over again.
Also, it less risky to create and sell such products. This is because the only thing that you lose out on is the time invested and some amount of money if your customers do not happen to buy these products.
In addition to this, you get time on your side to create more such products since you need to put effort only once.
Further, producing such goods is less expensive since you are not shipping the products physically.
Instagram Sponsored Posts
Instagram is one of the fastest-growing social media platforms. From photo-sharing app, it has now turned into topmost social media platform since the time it was launched.
You can build a following on Instagram and sell either your products or third-party products to your followers.
Further, the organic reach of your post on Instagram is relatively high when compared to other social media platforms. This is only when you use the right hashtags and post content at the right time.
Thus, you can generate passive income via Instagram through a number of ways once you have a highly engaged audience.
You can sell physical or digital products through Instagram. It offers business accounts that has features like a shop button, product tags, in-app checkout, etc that make it really easy to sell both physical and digital products.
Likewise, you can register with the affiliate marketing programs of brands that offer higher payouts for promoting their products.
All you need to do is add their affiliate links to your Instagram account. You receive commission on generating sales for the affiliate products that you promote on your Instagram account.
Further, you can also create passive income via sponsored content if you have a good number of followers. That is, you can reach out to brands who are willing to promote their products via influencers and get paid for the promotion.