Everyone needs to make money to survive and thrive, but most of us earn it by working. We make money on an hourly basis, or in the form of an annual salary paid out biweekly, and understand that our income is based on the work we put in.
But what if there was a way to have earnings without putting in ongoing effort?
That’s the idea behind passive income; it’s a way to generate income without requiring you to invest a significant chunk of your daily life. But is passive income a realistic idea to strive for? And if so, what’s the right way to manage it?
Why Is Passive Income Beneficial?
The perks of passive income are somewhat obvious. You won’t need to invest much time to make this money, which means you can pursue a full-time job in addition to generating it. You can also establish multiple lines of passive income simultaneously, stacking them on top of each other and ultimately snowballing your earnings. And because you don’t have to invest much money or make many decisions (beyond your initial investment), this is relatively low-stress.
Examples of Passive Income
It’s easiest to understand the concept of passive income with real-world examples.
These are some of the most common:
- Rental properties. You can generate semi-passive income by investing in rental properties. After purchasing a property, you’ll rent it out to one or more tenants, then collect rental income in excess of your expenses. If you choose the right area and screen your tenants carefully, you can usually count on a reasonable monthly profit from this endeavor. You’ll be responsible for property upkeep, but if you hire a property management company, like Los Angeles Property Management Group, you can make this a truly “hands-off” passive income source.
- Dividend-paying stocks. You could also invest in dividend-paying stocks. Some companies distribute company profits in the form of quarterly dividends, issued to all stockholders; you can often make 2 to 4 percent of your investment annually just in dividends. However, you must own stock to reap the rewards here; it’s not something you can start without capital.
- Peer lending. If you have available capital, you can lend it to others via a peer lending service online. You’ll make a fixed rate of interest based on the risk profile of the person you’re lending to; the higher the credit score, the lower the interest rate (and the lower the risk). However, the high barrier to entry here makes it a less popular choice.
- Blogging and content creation. If you have a blog, a YouTube channel, or another channel for content creation, you can make money in a number of ways. For example, you can advertise on your channel and make money based on the number of people who see or interact with the ads. Or you can include affiliate links, making money based on the number of people who purchase a product you recommend. The caveats here are that you need to have a sizable audience and you generally need to create new content regularly.
- App income. You can also make extra money with the help of an app. You can charge people to download your app, offer paid extras for app users, or even monetize the app with advertising revenue. There are many options; as long as your app is popular and well-received, you can benefit from it.
Why Passive Income Isn’t Always Passive
As you’ve already seen, passive income isn’t always truly passive.
- Upfront costs. Many of the most common strategies require upfront capital to work. For example, you can’t make dividends unless you own stock. You can’t generate rental earnings until you own a rental property. You’ll often need to make upfront investments to establish an app or a blog.
- Upfront time requirements. If you don’t need upfront money to make passive income, you probably need to invest time upfront. For example, it takes time to code and polish an app that can generate earnings for you. It takes time to research potential properties to invest in. It takes a ton of time to build an audience for a content channel.
- Ongoing time requirements. Even though many sources are technically considered to be “passive,” they still require your attention, at least occasionally. To retain your content audience, you’ll need to create and publish new content on a regular basis. Without a property management company, you must tend to your property and find new tenants when your old tenants leave. Even collecting dividends, it’s important to rebalance your portfolio regularly.
Even so, passive income is great for building wealth and making consistent earnings.
Tips for Passive Income Management
If you want to make the most of your passive income strategies, there are some important tips you’ll need to follow:
- Have a strong primary source of income. Before you start dabbling in passive income, it’s a good idea to establish a strong primary source of earning. Get yourself a full-time job capable of giving you all the money you need to invest in the passive income sources of your choice.
- Set realistic expectations. Passive income is an alluring concept, but it’s one that’s frequently misunderstood. Before getting involved, it’s important to set realistic expectations for yourself. Understand the nature of your investments and acknowledge that “get rich quick” schemes aren’t going to work.
- Diversify your portfolio. Finally, consider diversifying your portfolio. Every source has strengths and weaknesses. You can balance these against each other by making use of multiple sources simultaneously. You should always guard against risk by investing in multiple types of assets.
Regardless of your past experience, your risk profile, your current job, and your current investments, passive income can be a beneficial addition to your portfolio. Do your research and choose the generation strategies that make the most sense for you and your needs.