What Many People Misunderstand About Passive Income

December 31, 2022

What Many People Misunderstand About Passive Income

Earning money while we sleep sounds like a pretty sweet deal. But why then isn’t everyone already enjoying the fruits of passive income? Many people misunderstand that while passive income is very real, the hard work required for it to show up in their lives is also real. Passive income is a bountiful harvest from the planning, toil, and patience of focused effort typically over a long period of time. I’ll show you how passive income works for me and the very active steps I took so you can begin seeing passive income in your life too.

When you buy through my links, I may earn money from my affiliate partners. Learn more.

What is passive income?

Passive income very simply put is making money without expending direct effort to get it.

The key here is direct effort to get it.

Passive income is all about timing.

If the timing is right, it’s passive income.

If the timing is wrong, it’s active income.

Let me explain…

If you work a traditional job, you are paid an hourly or yearly salary in exchange for your effort. While you may see the money come once a week or once every other week, traditional work is still viewed as active income because if you don’t show up each and every hour, you won’t get paid.

Passive income as a polar opposite to active income then means it’s only passive if you get paid when you don’t show up each and every hour.

In fact, the less you have to show up and still get paid, the more beautifully passive the income is.

But it’s here that many people get confused.

Is Passive Income Misunderstood?

Let’s do an easy social experiment.

Go ahead and sit back.

Relax.

Just wait around for a while.

Maybe take the whole day doing nothing work related.

Go exercise.

Watch a movie.

Make a delicious meal.

Now, check your financial accounts.

Check everything connected to money.

Did you get any?

Don’t feel bad if you didn’t.

Most people don’t have any daily passive income.

But what if you did this for a week…a month…or even a year?

The SEC suggests 6 in 10 households have some form of securities account, meaning 60% of people living in the United States of America have an investment portfolio of some kind.

Can investment portfolios be passive income?

Yes!

Now, they can also LOSE money passively, but that’s a different story for a different article.

Sadly, many people’s understanding of passive income ends there.

They think in order to make money while they sleep (or play), the only path is investments.

But there are so many other forms of passive income.

The biggest question though isn’t which form of passive income is for you. It’s how much active work are you willing to do to get it.

Real passive income requires work

At some inherent level, we all know this to be true.

For an investment account (think index fund, mutual fund, stocks, bonds, 401K, Traditional or Roth IRAs, money market account, and even cash in a bank), it can’t grow with interest if it doesn’t exist.

To watch investments grow, you must invest.

Investments of money or time are time consuming.

Investments require effort.

It’s not easy setting money aside in a tight budget.

Nor is it easy carving out time in a busy schedule to build something that the marketplace finds valuable enough to pay you for (while you sleep).

This is why many people don’t have passive income streams.

But maybe you’re different.

Maybe you are willing to learn and then toil towards the goal of a passive income lifestyle so you can focus your time and energy into more meaningful pursuits.

How can I create passive income streams?

Realize up front this is no cake walk.

And for those without kids not familiar with this analogy, a cake walk is a child’s game where nearly everyone gets a cake for walking in a circle.

Creating passive income streams is hard but simple.

Here are 5 basic steps to be on your way of creating passive income streams:

  1. Read, read, read about passive income sources and how other people make money passively.
  2. Make a list of 5-10 passive income methods that you are interested in or suit your realistic abilities.
  3. Prioritize your list starting with the easiest to achieve first and most difficult or most time consuming last.
  4. Focus completely on making progress on your highest priority passive income stream.
  5. Once your first passive income stream is developed, nurture it while you build other passive income streams.

Here’s what passive income streams looks like for me to help you see this play out in real life

During my first job after college, I began automatically investing in a Traditional 401K (Passive Income Stream #1) through my employer. I consider this my first real passive income stream because what money I had in cash at a bank was only enough to live on paycheck to paycheck.

Sending a percentage of my paycheck every two weeks to my 401K was not enjoyable and the gains from interest were truly microscopic. But it helped that my employer was matching some of my investment (free money!!!)

But I knew that over time, if I kept at it, it would be worth it. We’ll come back to this point.

A little while into my new career, my supervisor encouraged me to meet with his financial advisor who taught me about Roth IRAs (and countless other financial products I won’t mention here).

It turned out, a Roth IRA could be opened for as little as $50 as long as I was on an automatic investment plan of at least $25 per month.

This was good for me because that’s about all I had at the time to spare!

I opened up the Roth IRA (Passive Income Stream #2) with the minimal amount and let it fly on auto pilot.

I had been interested in personal finance for a long time and shortly became more involved in single stocks (Passive Income Stream #3) and index funds (Passive Income Stream #4).

These investment accounts grew with compound interest (known as the 8th Wonder of the World) month after month without me doing anything beyond putting money in when I could.

During hard financial times, I sometimes stopped my auto-investing.

During good financial times, I often put in extra.

While having four passive income streams in my early 20’s sounds impressive (maybe to some), all of my accounts were pretty tiny.

Seeing an additional $50 in value appear out of thin air (followed by a loss of $500 the next month) isn’t all that amazing but you must understand this is where it all starts.

Tiny beginnings is how the massive passive income snowball begins.

Soon enough I got married (praise the Lord!) and my became ours and we added another Roth IRA (Passive Income Stream #5) to the mix.

Our focus financially at this point became more about making ends meet with a growing family, a home, cars, etc. and so what we could invest in our 6 financial accounts simply became whatever we could afford.

I switched employers and began getting an annual Employee Stock Ownership Plan (ESOP) (Passive Income Stream #6) paid for by the company.

For those who are not familiar with ESOPs, they are basically company provided stock plans where the amount of stock you receive is based off the amount of money the company gives each employee and then the value of the account is simply total number of shares times current stock price.

Soon we had enough financial space to create an emergency fund of 3-6 months of living expenses, and tucked the money away in a money market account (Passive Income Stream #7).

Money market interest rates are typically low (2%-4% per year) but also liquid and easy to get if needed.

You can see how all seven of our early passive income streams were financial account related (401K, Roth IRA, stocks, index funds, ESOP, and money market).

Nearly 5 years ago, I decided to take my writing seriously and pursue publication and dedicated blogging.

The efforts went hand-in-hand for a few years.

While blogging, I learned about ads (Passive Income Stream #8) and affiliate marketing (Passive Income Stream #9).

One day, I hope to have additional passive income streams for digital products and hardcopy books. I also dabbled in cryptocurrency but won’t consider it passive income until it actually goes up for me!

How my passive income works and what makes it passive

That was a lot of information but I applaud you for making it this far and hope you appreciate the transparency.

All nine of those passive income streams I mentioned are truly passive.

I can go take a nap, a walk, or a 6 month long vacation, and every single one of my nine passive income streams will continue flowing in.

The financial accounts will ebb and flow with the markets they’re in but historically grow through stock price increases, capital gains, and dividends over time.

Every time a reader visits my blog or purchases products they want through my affiliate links, I’ll receive a small compensation through advertisers paying for eyeballs and affiliates paying for sending people their way.

All of this is passive because the time at which money comes in is far enough removed from the work it took setting it up.

It is really a numbers game.

The bigger the numbers, the bigger the reward.

I’ve found that the more active I am on the investment side, the better my passive income returns are.

This plays out very well with blogging.

The blog you’re reading right now I started writing at 4:00am. It’s now 5:30am and I’ve still got quite a bit of editing and polishing to do before I can hit that magical publish button on WordPress.

Search engines won’t even index this page and begin serving it to people searching for the right mixture of keywords for days, weeks, and sometimes even months!

And early on, I may only have a few readers coming across it.

But over time, as has happened with my other posts, it’s a snowball.

One reader turns into two.

Two turns into 10.

10 turns into 100.

And each set of eyeballs that visit this page or my many others causes advertisers to pay a few cents into my account while I nap, walk, and take vacation.

Similarly, when one of the thousands of readers clicks on an affiliate link for a product they’re interested in, if they end up buying it I receive a very small commission.

But over time, and with enough readers, these pennies add up.

The hard work writing and crafting a valuable article pays off for decades to come.

The hard work creating margin in a budget to put money in investment accounts pays off for decades to come.

Now you may be thinking, enough about your story let’s focus on mine.

That sounds like a great idea!

9 passive income ideas for building wealth

Here are 9 passive income streams that are realistic for you to build a snowball. They’ll take hard work up front but over time can become truly passive.

In the comments below, tell me which ones you already leverage or plan to work on developing this year:

1. Investing in someone else

Know a friend you trust that has a unique skill but not enough money to get started?

There are many stories of people who invest in someone else and earn a portion profit down the road.

It’s important here to only invest what you’re willing to lose, have a solid and clear contract, and never invest in someone who’s relationship you aren’t willing to be damaged if they don’t follow through.

2. Investing your time into content creation

Invest your time into things like blogging, writing books, creating e-books, or creating other digital products like graphic templates, spreadsheets, and printables.

Time investments, while difficult due to over-booked schedules, are low risk and high reward.

Today, people are making a killing with digital products and there is still lots of time to carve out digital space for yourself.

3. Dividend stocks

Single stocks can be a risky investment, so do your research before jumping in. Some stocks pay dividends annually, quarterly, and even monthly.

Some dividend stocks, known as Dividend Aristocrats, have been paying dividends for over 25 years and are typically large, well managed companies.

These mature firms often have lower dividend payouts but also have less risk than newer, volatile companies that try to lure in new investors with promises of 9% or higher dividends.

4. Buy crowdfunded real estate

I’m no expert here but I do enjoy Real Estate Investment Trusts (REITs).

REITs are stock investments where companies that qualify pool investment money to purchase and manage typically massive real estate deals.

REITs are required by law to pay out 90% or more of their profits, which is a very good deal for us investors.

Others choose to find personal connections and invest more directly with real estate deals.

Simply put, if you can find the right individuals who know what they’re doing in the real estate space, you may be able to join them through your time/effort or capital.

Whether you go the REIT route or through personal connections, be careful and only invest what you’re willing to lose and use your early investments as learning opportunities.

5. Affiliate marketing

Affiliate marketing is just a fancy word for helping other people sell their products.

Bringing in a buyer through a link, social media post, or newsletter is often rewarded with a small commission that doesn’t cost the buyer anything. It’s paid out of the company’s profit for that product.

It’s a win-win-win situation.

The buyer gets what they want at the price they’re willing to pay.

The seller gets the product sale and makes a profit.

And you get a commission from the seller’s profit.

With today’s technology, it’s easier than ever to encourage people to buy products you love.

Consider starting with well known companies like Amazon before seeking out smaller sellers or products.

6. Sell photography online

Do you have an eye for a great picture?

Put your hobby to passive income use by posting your pictures online for sale.

Content creators like me and even in-print companies source thousands and thousands of pictures.

Research which sites might be easiest for you to work with or carve out your own path and create a treasure trove on a personal website.

Just remember to make the purchase quick, easy, and affordable so you can focus on photography while the customers keep rolling in.

7. Rental income

Some may argue managing a rental is anything but passive.

Developing rental income properties is well outside my purview so I’d suggest reading up on the topic before diving too deep.

Rental properties can be a big win or a huge loss so it’s critical you are move cautiously on this.

Some have found success renting single-family homes while others say multi-family apartments is the only way to go.

Regardless of which path you take, know that there is money to be made in the rental space if you can find the good deals and good tenants.

8. Create a course

Creating courses is a form of digital product where you use your experience to train others.

Except rather than training on-the-spot over and over again, which is a massive time suck, you create the digital course once and then sell it.

Customers interested in your course will purchase it and proceed through it at their pace whether on a website or via automated emails.

The key here is automation and value.

The course must be excellent and worth someone’s time and money.

If you create one excellent course, not only will it be a huge passive income stream for you, it’ll unlock the door to create additional courses that your previous customers will be excited to take.

9. Traditional Investing

Here’s where the saying “It takes money to make money,” really comes from.

Investment accounts like 401Ks, IRAs, mutual funds, index funds, stocks, bonds, CDs, money markets, and even high-yield bank savings accounts are critical components to any passive income stream plan.

If you’re not saving and investing for the future in these, I’d start here.

Tax-advantage retirement accounts like 401Ks and Roth IRAs allow investors to reduce their tax burden on the investment capital (what you are putting in) or the investment return (what you take out as it grows).

It’s important to seek financial advice from an expert to leverage these properly for your unique situation.

Does passive income really exist?

Yes!

Passive income is ripe for the taking and all it takes is a little elbow grease up front (or over time) to reap the bountiful harvest.

It’s never too late to start your passive income journey!

If this content spoke to you, consider 3 things:

  1. Leave a comment below and share what you’re doing or what you’ve already done for passive income down the road.
  2. Subscribe to my newsletter so you get more content just like this delivered right to you. I hate spam too, so I’ve made my newsletter a 1-click unsubscribe at any time you change your mind. Encouragement and insight will be in your inbox for FREE!
  3. Share this message with your social network, friends, or family. All of us can become more equipped to create passive income streams and be able to focus our time and energy on our most meaningful pursuits.
Love it? Share it!

By Rhys Keller

Rhys Keller is a licensed Professional Engineer, writer, and entrepreneur. He helps people overcome life's roadblocks and setbacks through intentional living and a heavy dose of encouragement. Contact Rhys today if you're interested in life coaching services or collaboration.

Leave a comment

Your email address will not be published. Required fields are marked *