If you read, watch, or listen to any personal finance content, you’ll have heard of passive income. In fact, a pretty significant portion of the personal finance world seems to be positively obsessed with the idea of passive income. I blame Tim Ferriss.
There’s a pretty good reason for that obsession though, and it’s not entirely down to Tim Ferriss. Passive income is the Holy Grail, the pot of gold at the end of the rainbow. Of course, it is. It’s a way to make money without actually doing anything! What could be better than that?
But is passive income really that simple? Can you really make money without doing any work? Is the only thing keeping all of us from quitting our soul-sucking 9-5 jobs finding that gold mine of a passive income idea?
I’ll just spoil it now. It’s not that simple.
Most of us are not going to earn enough passive income to quit work entirely. But it indeed is possible to make enough to significantly improve your cash flow situation or maybe take a job that you feel more passionate about, but that doesn’t pay as well as your current gig.
It won’t happen overnight, and you’ll need a few different irons in the fire, not the least of which is a variety of investments, but if you want to make some extra money, we’ll give you some of the best residual income ideas that we use to make money.
What is Passive Income?
It’s not true that passive income is money you earn from doing nothing. It’s not like you can recite an incantation and money just shows up in your bank account. At some point, there is some effort involved, and sometimes the amount of effort is considerable.
What passive income really means is to largely divorce your time from your ability to earn money.
Having a job that pays you by the hour is the polar opposite of passive income. You’re only making income when you’re at work.
When you hit upon a passive income stream, you’re making money no matter what else you happen to be doing. You make money when you’re eating, sleeping, at the gym, and on vacation. It’s the ultimate financial freedom.
Why You Need Passive Income
There are 168 hours in a week. A big chunk of those hours is spent sleeping. Another big piece is spent working. So how many hours does the typical American work per year?
In 2015 (the last year for which this data is available), the average employee put in 38.7 hours a week and worked 46.8 weeks that year, according to a Pew analysis of Labor Department data.
“All told, this means that the average employed U.S. adult works 1,811.16 hours per year.”
We spend time cooking, eating, doing various chores, indulging in hobbies, seeing our friends and families, and all of the other tasks, some enjoyable, others less so, that make up our lives.
There are only so many hours in a day, a week, a year, life and even the most dedicated workaholics amongst us can’t spend all of them working.
But we like money and the things money can buy so we have to find ways to make money that aren’t dependent on the amount of time we dedicate to them.
Another good argument for earning passive income is the very possibility that you will lose your job to automation and in the relatively near future.
A McKinsey report, “Jobs Lost, Jobs Gained,” found that 30 percent of “work activities” could be automated by 2030 and up to 375 million workers worldwide could be affected by emerging technologies.
There are a few different forms of residual income, and while some of them require more skills or resources than others, there is at least one form that everyone reading this can do.
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Investing in Stocks
Investing is one of the easiest ways to generate passive income, particularly if you invest in dividend stocks. But you have to do it early and often. The barrier to entry to investing has never been lower thanks to companies like Betterment for investing in the stock market.
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You can start right now. Betterment has no minimum to start and you will just be asked a few basic questions to determine the correct asset allocation (generally the younger you are the riskier your allocation should be leaning more heavily weighted towards stocks over bonds).
But you can’t stick $100 in a Betterment account and call it a day. We should be investing in at least 20% of our discretionary income. And those investments need to be diversified.
Investing in Real Estate
Fundrise is essentially crowdfunded real estate that allows individual investors to invest in commercial real estate online through an eREIT (Real Estate Investment Trust) or an eFund. Their crowdsourcing model sets them apart from a traditional REIT allowing the average investor to participate in deals for as little as $500.
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If you’re ready to make the leap into owning rental property but don’t want the hassles of a traditional landlord, Roofstock is just what you’re looking for.
Roofstock is an online single-family home marketplace for real estate investors. Listed properties are independently screened, appraised, and certified so that the investor has a full picture of what they are buying. Properties also have tenants in place so that investments can cash-flow from day one.
Peer To Peer Lending
for investing in real estate but consider peer-to-peer lending as an additional investment to increase the diversity of your portfolio.
Lending Club allows you to make money the way banks do, by lending money. People can borrow money from Lending Club for personal and business reasons and often at lower interest rates than banks offer.
That money comes from everyday people like you. Andrew has been earning residual income by making loans through Lending Club for years. He even built a whole strategy around it.
You cannot build wealth unless you invest and you can’t be a successful investor unless you’re investments are diverse.
Lending Club requires an initial deposit of $1,000, but there is just a $25 minimum investment per note (loan).
Sell Your Own Product
There aren’t a lot of things you can sell to generate passive income. Think about it. If you own a pizza restaurant, you have to keep making pizzas, all day, every day. And you can only sell the same pizza once. Not very passive.
So you want to sell something that you only have to create once but can sell over and over.
Are you an expert in something? Are you engaging? You can create an online course and sell it on Skillshare. The site offers courses on dozens of subjects including graphic design, marketing, web development, and drawing. They also help you reach your target market.
Another great place to make money online is to host a course is Udemy, they also have a built-in audience which could help in selling your course.
Are you a teacher? Sell your lesson plans on Teachers Pay Teachers. Are you an amateur photographer? Sell your stock photos on Shutterstock.
If you don’t have a digital product to sell, you can still earn passive income selling physical items.
An online store takes some effort to set up, and you need to market whatever it is you’re selling, but you don’t actually have to handle any product. Drop shipping means the product is sold through your site but shipped to your customers from a supplier.
You’ll need to do some research to determine a good product to sell and a reliable supplier to provide and ship it. Ideally, it would be a subscription product, something that people need to buy on a regular basis like vitamins or razor blades.
You’ll have built-in repeat customers which means less marketing you have to do.
You don’t have to build a website; you can set up your online store with Shopify. Shopify even lets the most tech-challenged amongst us to have a beautiful online store up and running in no time at all.
We buy lots of things that sit unused the majority of the time. Maybe we only need them a few times a year, or maybe we bought something with every intention of using it but for whatever reason, never really did. So those things just sit around losing value.
But a whole economy has popped up around renting out those seldom used things.
Peer-to-peer lending doesn’t only encompass lending money.
Peer to peer lending lets you make money with things you already own by renting them to people with a temporary need for them.
Got an extra room? Why not rent it out to someone looking for a short-term rental on Airbnb. The average Airbnb host earns $924 per month. But homes are far from the only thing you can rent out to add a few zeros to your savings account.
While driving Uber isn’t can earn you extra cash it’s not passive income. But you could erent out your car with HyreCar or Turo. Rent out your driveway through SPOT or AirGarage. If you have an RV, you can make some money by renting it out on Campanda or RVshare. Got a garage full of power tools? Rent them out to fellow DIYers on Toolsity.
In the old days, rental property was the best way to make money from something you already owned, but peer to peer lending has opened a much wider field.
Building An Online Business
No matter how much someone loves podcasting or blogging, no one’s time is free. But there are thousands and thousands of podcasts and blogs out there so why would people pay for that content when there is so much available for free?
They won’t, but people who are selling products or services will pay to have access to your audience. That’s why podcasts sell ads and blogs include affiliate links.
Starting a small business is probably the most difficult and most time-consuming source of passive income to build, but it also has a low bar for entry, it’s very forgiving, and when you get it right, you can make a lot of money through affiliate marketing.
If you’ve started a blog and no one is reading it, you can feel like you’re just wasting your time, shouting into the void. The most important thing is to stick with it.
It took LMM a few years to start making any money it cost Andrew and Laura plenty of money in the beginning. But now LMM is their full-time job, and it makes $400,000 a year. Not bad for a business that is only six years old.
Since it’s going to cost you money in the beginning, make some money to help offset costs by earning some cash. You can find a ton of ways here. You’ll need to buy a few pieces of podcasting equipment so by it through Ebates, so you get some cash back for it.
You’re going to have to put in some work
At some point, to start earning passive income, you’re going to have to put in some work.
In the case of investing, there is some research involved. Even with Betterment, the easiest way to invest, you still have to do enough research to understand where to set your asset allocation.
If you’re going to invest in individual stocks, you have to do your due diligence to make sure it’s a smart investment.
Those who want to get into real estate investing by owning a rental property, have to find the right property in the right location. If you’re not going to buy a turnkey property and hire a management company, you have to handle things like renovations, finding a tenant, and on-going repairs and upkeep.
If you’re going to write an ebook, you have to well, write the book. Although there is a workaround. You can hire someone else through a freelancing site to ghostwrite the book for you.
If you want to start a blog or a podcast, you’re going to have to put out high quality, high value, consistent content. If you Google “personal finance podcast,” you get 94 million results. That doesn’t translate into 94 million personal finance podcasts of course, but it means there are a lot of them out there.
LMM got a big leg up by putting out seven episodes a week for several months early on. It was a lot of work, but it helped the podcast and the blog grow relatively quickly.
All of those podcast episodes and blog articles exist in perpetuity. That means they continue to generate money with no additional work from anyone.
Ideally, you’ll enjoy working on whatever it is you choose to do to generate passive income, but even the most fun job or project has its less desirable tasks. Nothing that earns money is all fun all the time.
The Good News
Here’s the good news. Thanks to the internet, it has never been easier to earn passive income. You can make a small amount of money, or you can earn a lot. There are tons of choices and something that will work for everyone.
Do you want to start investing in the stock market? You can do it in under five minutes.
Do you want to start an online business? You can set up a store with Shopify and with drop shipping, you never even have to set eyes on whatever you’re selling never mind store it, package it, and ship it.
If you need help marketing your product, Skillshare has dozens of classes that will teach you what you need to know.
If you want to start a successful blog, Andrew wrote an incredibly comprehensive article on the subject that not only tells you how to do it step by step but shows you the tools you’ll need.
Some of you reading this will get excited by the idea of earning passive income and try out a few of these ideas. But the thing is, to really make a difference to your bank account, you have to do two things. You must diversify, and you must stick with it.
There are lots of passive income ideas on this list, and we have more content on all of them that goes into much greater detail. You have to cultivate more than one passive income source.
You have 168 hours a week. How are you going to spend them?