It occurred to me one day recently that I am starting to receive a significant amount of traffic to this site via search engines, and one of the search terms that commonly leads people to my site is “passive income.” One day a couple weeks ago I received traffic from a person or persons who were searching for an answer to a single question.
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What is passive income?
That question was the search term typed in. That was when it dawned on me that even though I and many others out here in the personal finance world spend a lot of time talking about passive income, it is not immediately obvious what this means.
How can income be passive?
There are two kinds of income: Active income, which you actively trade hours of life for in order to earn money. The most common example of active income is money that you receive in the form of a paycheck from your employer. But other sources of active income could be different types of side hustles: dog walking, blogging, freelance writing, etc.
The other type of income is passive income. With this type of income, you may receive money from something that does not require that you actively spend hours working for it. You have either already put in the time or the hours or the money and you receive income based on work done or money invested in the past.
Some common examples of passive income are investment income (dividends or capital gains from stocks owned, etc), royalties (e.g., you wrote a book ten years ago and you still receive money, or royalties, from its sales today), rent (you own a rental property and the tenants pay you rent every month), etc.
Which type of income would you prefer?
Most of us would prefer to have as much passive income as possible, because that would essentially mean that you receive money for work already done. Or money invested. You yourself do not have to do any more work to earn that money. Now that’s what I call working smarter, not harder!
Why is passive income so great?
The big benefit of passive income is that it takes YOU out of your money-making equation. You can be lying on a beach in Jamaica or sick in bed with the flu and still be making money. Put simply, passive income can buy you freedom. Hate your job? Then create enough streams of passive income to cover your expenses.
Even if you like your job, if you have some passive income in the form of royalties, dividends/interest, or rent coming in, you may find yourself in a position to be able to choose to work less hours. Or perhaps choose to work a lower-paying job that would have more personal meaning for you. The options are limitless. That’s why passive income is, for many of us, the holy grail of personal finance.
How to Start Making Passive Income
Some think according to the old dogma that “it takes money to make money.” It’s true that some forms of passive income will require money to get. For example, it’s hard to earn any dividends or capital gains on your money if you don’t have any money invested. Rental properties can be excellent sources of passive income (be warned: being a landlord can be a dirty job!), but in most cases you will need some sort of a down payment on the property when you purchase it.
There are, however, ways to create passive income with either no money or little money invested. Creating something such as a website, starting a blog, or writing a book are examples of things that you can create that would require little money down and possibly bring in money for you for a long time to come. Make no mistake, though- these things can require an incredible amount of work! Especially running a website or blog requires ongoing maintenance and content creation, which for most of us takes it out of the realm of “passive” income.
Every dollar of passive income that you generate can help your net worth climb higher and higher, especially if you find a way to reinvest the money that you make passively (by reinvesting dividends, etc). These days the internet has made it easier than ever to keep tabs on things like passive income and net worth. If you don’t want to track down all your numbers and creating your own spreadsheet, the best FREE online resource that I know of to help you monitor your net worth is Personal Capital (review here).
Even though we’ve long kept our own net worth spreadsheet, I also have an account with Personal Capital. It’s a terrific resource to help see where your money is going and establish a better budget, as well as better plan your retirement savings strategy. And it’s FREE- doesn’t get much better than that!
What sources of passive income are we working on?
Currently my hubby and I own one single family home that we are renting out. We also have been diligently investing in our 401(k)s and Roth IRAs as well as a taxable account for the last eight years or so; at this point we earn a nice amount in dividends and/or capital gains every month. Right now we are not taking the dividends as cash since we don’t need the income; instead we are currently reinvesting all earnings. We’ve also considered renting our space on Airbnb, but have not pulled the trigger on that yet.
I also make a modest income from this blog, which has increased since I took the Elite Blog Academy course (EBA is an awesome course, by the way! It only runs a couple times a year but you can get on the waiting list for it at this link).
We hope to continue to grow our real estate portfolio and our passive income sources in the future! Our long term goal is to be able to cut back from our jobs at some point, with the option of quitting paid employment altogether if we want to. It will take us years to get there, but through careful planning and continuously setting goals we think we can get there. 🙂
How about you? Have you made passive income a goal? If so, do you have any sources of passive income at this point?
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Photo: fergregory/Depositphotos.com
Great post, Dee. It’s awesome to hear that you have two single family homes, but I hope you are able to sell the one that is losing money and invest it in something that will make you money. It sounds like we have the same goal of living off passive income as soon as we can (which could and will be years from now).
Same here! Our real estate agent says that the market back there is hopping so we are hoping to get it listed soon and sell it!
We are totally interested in pursuing passive income. So far, we’ve got several books published, and we are working on dividend paying stocks and real estate rental income next. Hoping that soon our passive income plan will really start to gain steam!
That’s awesome that you have several books published! I am definitely thinking hard about writing a book in the future- I have a good story in mind and I’d really like to be able to further diversify our passive income portfolio that way.
I’m working on a book right now but I’m not really counting on it as a major passive income source. I guess it’s hard to imagine being a best seller with all the amazing books out there.
That’s true- it is hard to imagine being a best seller- but even modest success I think could potentially bring you some amount of income for years to come (or at the very least potentially lead to future writing gigs). I look forward to reading your book!
I always get sad when I read about your rental losing money. It sucks when you get caught up in a bubble like that. It sounds like you’re doing the responsible thing though. I hope it sells quick when the time comes!!!
Thanks, us too! The good news is that our real estate agent back there tells us that the market is hopping there right now, so we are hoping to sell relatively quickly once we get it listed.
I always think of active income as me working for the money and passive income as my money working for me. I hate seeing people commit too much cash to a bank account when they can use that cash to generate more passive income. I always say that you need to make your money work harder for you.
That’s a great way to say it. And it’s so true- money if harnessed correctly can be a great tool to bring you even more money!
I’m interested in getting passive income in the future that’s one of the reason why I started investing in stocks, and I’m planning to keep investing on it for the next 20 years.
Good for you!
Dee, I love that you’re spreading the knowledge regarding passive income. It’s something rarely taught in regular schooling, and the more people can learn about it, the better! It’s amazing how things change once you do learn the benefits of passive income and make it happen in your life.
You’re so right Natalie, I made it all the way through high school and college, took tons of math classes, and I’m honestly not sure that I once heard about passive income in school. It wasn’t until I got a job and became interested in bettering my financial situation that I started reading personal finance books and learned about it.
Passive income is a future goal of mine. I’d love to own some rental properties and invest in dividend paying stocks. I’m not sure if I was really aware of what passive income was before I started reading PF blogs, and this is a great post on it. I hope all goes well with listing the house for sale!
Thanks EM! We’ve been working hard on the passive income thing for several years now. It starts off slowly, but we’ve gotten to the point that we have a nice amount of passive income every month- a few hundred dollars usually at least. We’re most definitely hoping to grow it in the future!
Passive income is the best. Most of my income is truly active, but I am working on the passive part with more dividend stocks. I hope to create a nice portfolio that pays me each and every month or at least every quarter.
Awesome! That’s what we are doing too. Right now we don’t take any of our monthly dividends as distributions (we reinvest instead), but there’s certainly the possibility that we could do that in the future, which is great. That’s one of the best things about passive income!
I’d love to make money in bed with the chicken pox! I think most passive income takes some action up front, like you said, but it’s hopefully worth the extra effort. We hope to have rental and dividend income to cover our expenses down the road. I’m not sure we’d have ever pulled the trigger on the rentals without so much help and influence from the PF community either. It’s exciting that other people are looking for that as well.
I think that building streams of passive income is really one of the best ways to get ahead financially. If you can build a stream of income that will continue to pay you long after you’ve put in the initial money or effort, that’s going to be a powerful financial force over the long haul!
Hey Dee, like you and most people reading here, I’m a passive income freak. I’ve spent the last several years trying to create realms of passive income. So far, it’s going great. I still work my butt off, but I do have a couple of sites that are ranking well and making me money with little effort. Talking about rankings, congrats! It’s awesome to come to that “Holly crap, I’m getting search traffic!” realization!
That’s awesome about your passive income streams! Which streams do you have going so far, if you don’t mind my asking?
We don’t have nearly as much passive income as we’d like. Rent from our old home and our roommates comes to $1800 a month minus property taxes and whatnot. My eBooks bring in about $50-$100 a month. And we make some dividend money from our stocks and retirement savings. I actually think we’ll be investing in another rental home soon since that seems to work around here really well (Houston, TX).
That’s awesome! I’d love to be raking in a steady $1800+ per month! Congrats on the eBook income too! I’m looking at writing a book here soon and hope that can be us some day too.
No passive income here. I wish though! I am definitely interested in owning a rental property, especially once we buy our own home. In fact, we were at some open houses the other day and we both poo-poo’d any house that didn’t have a rental potential!
Best of luck with the home sale! I hope you can finally get that negative gone!
That’s the way to be thinking! We were exactly the same way when we bought the house that we currently live in. We knew we weren’t going to stay in this town very long so we purposely bought a house that we could easily turn into a rental. We can’t wait to move out- we won’t have to endure the pain of selling a house AND we can get some tenants in here who can start providing us with a source of passive income!
I have a little bit with the detached garage I rent out each month since I don’t park there and don’t need it as storage (shh, don’t tell my landlord). I’d like to work on more though maybe in the form of an ebook or online video training class. It’s just when I can find time to do that upfront work.
I totally hear you there. I have a lot of ideas for a book, but it’s hard to find the time- especially since I’m already doing a lot of writing on the blog!
We are planning to buy a motorcycle for rent because it’s a main source of transportation here in our place. We already have one and we are thinking to add three motorcycles. But I really want to own a rental house or an apartment, I’m saving for that one.
It would be pretty great to have something like a motorcycle to rent out!
I find that a lot of people talk about passive income, but in reality they end up spending a lot of time on something that is supposed to be passive, but obviously isn’t.
I myself have a number of these “passive income” ideas and ventures. Some really are passive, but the ones that bring in the most money are not passive at all, and in fact actually take quite a bit of time to run and maintain.
Still, it’s better than working a day job.
I know- initially when I started blogging I thought it might become a source of passive income. Boy was I wrong- blogging takes so much work that there is no way it could ever be considered passive!
I’ve been successfully earning an active income online since 2006 – eBaying, completing online surveys, etc. This year (and mostly in the last 3 months) I’m focusing on developing a passive income. It has become my key term, and something I’m working to achieve. Active income is great when I need a cash boost, and I can see my earnings increase almost instantly, but I think passive income is a goal for everyone!
We’re really working hard on this goal. I think passive income is the ultimate way to buy your freedom from employment, which is a goal for many of us who are on the hunt for passive income.
In the past I built a few websites that did very well and generated passive income for me. However over time they’ve either seen a traffic drop or have been sold off so my passive income right now is far less than it used to be.
Having said that, I’m just starting to dip my toes into the Kindle marketplace so hopefully I’ll start to see some results from this over the summer.
That’s cool- are you selling e-books on Kindle? Good luck!
It’s all about passive income for me with my dividend investments. Just knowing that ever increasing dividends, as a result of new capital invested, dividend raises and compounding occurs, helps me sleep well at night. To have the ability to invest for 20 or 30 years without taking dividends as cash can be a great way to ensure a long term passive financial income stream. Thanks for sharing.
I would love to increase my passive income.
Excellent! Is that something you guys are working on right now?
Nice post! This is very helpful for those who want to increase their savings through passive income. Thanks for sharing!
Thanks for stopping by!
Don’t forget employer 401K matching is a great passive income opportunity.
I guess I was thinking more of income outside of retirement accounts (like could be used for expenses if you were working toward a goal of being able to retire early). But that’s an excellent point that the 401K match is a fantastic way to pick up free money with very little effort after initial setup!