Make Money While You Sleep

...not really.

Passive income seems to be a word that Financial vloggers are using to take Instagram are by storm. So what is it?

Passive income is unearned income typically derived from investments. That’s pretty simple, so there has to be more to it, right?

Let’s dive in and explore what passive income is, if passive income is actually real, the different types of passive income, and some of the technical aspects of passive income.

What Is Passive Income?

In the broadest sense, passive income is “unearned” income. To distinguish, you have income you work for (at a job, business, side hustle), and you have income that you don’t work for — passive income.

The goal of passive income is to earn money while you sleep. This is how to get your assets working for you. You invest time in building something upfront that will generate income down the road with little effort on your part. Building a business that requires time upfront but allows you to work less as the business gets going is a great way to generate passive income. Similarly, investing in financial products that produce dividend income or interest income and appreciate in value over time is ideal.

The most common example of passive income is a savings account. You simply deposit your money into the account, and your earn interest for doing no work. That interest would be considered passive income. We tend to think of Pasive income most commonly from the retirement point of view, where you have enough saved and invested that you generate enough income to live off of.

Passive income is always derived from an investment - you can invest your time or your money. Most passive income opportunities require a combination of both.

For example, you can invest your time in creating a song or photograph, which you can sell and earn royalties on.

Or, if you have money, you can buy a stock or real estate and receive income from it.

In a combination approach, you can buy a fixer-upper property, invest your time fixing it up, and then rent it out to receive higher passive income. If you’re boosting your rent through “sweat” equity, that counts as passive income.

While active income originates from your day job, Freelancing or Owning a small business,

passive income consists of money and losses generated from an enterprise in which a person is not actively involved.

How “Passive” is “Passive” Income?

Passive income is real but you have to do something upfront to realize the income later. That something either involves your time or money. The goal is to do work or use your money at one point and enjoy the rewards of that passively (i.e. by not having to do more work or invest more money) over time.

While passive income is typically viewed as a positive, there are pros and cons.

Pros

• You can earn income without any work!

• You can gain extra cash flow

• More financial freedom

Cons

• Some forms of passive income may be less-liquid, meaning you can easily access your principal

• Depending on what you invest in, your return may not be great

• Using your time (rather than money) is unpredictable

How Does One Build Passive Income Streams?

The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends. (I mention IRS, because yes, Passive Income is taxable)

The question of which passive income source is best depends on several factors, but some of the most important include the amount of money you have to invest, the total opportunity size, your interest and ability in the area, the amount of time you need to invest and the potential to succeed. Typically, the lower the barriers to entry, the more crowded the field of competitors and the lower likelihood of success.

So you’ll need to weigh the opportunity against these factors and see which passive income strategy works best for you. But it can be helpful to have natural ability and an interest in your target area.

Passive Income With No Seed Money

If you have little or no money to start, you’ll have to rely mostly on your own time investment to power you through, at least until you build up a little money. That means focusing on passive income sources that take advantage of the following traits:

An area where you’re an expert. Here you can build your expertise out into a useful product or service for consumers, e.g. design, software coding and others.

An upfront work-heavy opportunity. You’ll need an opportunity that requires a time or work investment, such as creating a course, building out an influencer profile or other options.

In effect, you’re substituting your time for your lack of capital, until you can get enough capital to expand your set of opportunities.

1. Content

Are you an expert on travel to Thailand? A maven of Minecraft? A sultan of swing dancing? Take your passion for a subject and turn it into a blog or a YouTube channel, using ads or sponsors to generate your income. Find a popular subject, even a small niche, and become an expert on it. At first, you’ll have to build out a suite of content and draw an audience, but it can create a steady income stream over time, as you become known for your engaging content. A way to build passive income at home is through payments for the use of intellectual property that you have created yourself, or for which you've purchased the rights. Creating content can be a lot of work, especially for work that is engaging and reaches a large enough audience to generate income. But once you've created something that people are using, it’s possible to generate revenue through display advertising, using a program such as Google Adsense, or to run sponsored content, which means companies pay you a fee to publish a post on your platform.

Another way to monetize a social media platform is affiliate marketing, which allows you to earn commissions if your readers purchase a product or service you’ve recommended or linked to. You may, however, find that creating content is not as hands-off as you might expect; there's always pressure to create more content or update what you have to keep it viable.

Passive Income With Seed Money

Money can provide you with more passive investment opportunities. If you have money to invest in a passive opportunity, you have not only the opportunity set above but a new range, too. Money is a prerequisite for taking advantage of the following passive income areas:

1. Dividend stocks

One way to build an income stream is to invest in dividend stocks, which distribute part of the company’s earnings to investors on a regular basis, such as quarterly. The best ones increase their payout over time, helping grow future income.

Dividend stocks typically are less volatile than growth stocks and help diversify your portfolio. Investors can also choose to reinvest dividends (learn more about dividends and how they work).

2. Dividend index funds and exchange-traded funds

You can also invest in index funds or exchange-traded funds that hold dividend stocks rather than picking and choosing individual stocks to buy. This is a form of passive investing for those who prefer a more hands-off approach.

Index funds hold a well-rounded selection of many stocks that aim to mirror the performance of a given index, such as the S&P 500. A dividend index fund will invest in a selection of stocks that pay dividends. Index funds can help balance portfolio risk, as market swings tend to be less volatile across an index compared with individual stocks.

Dividend ETFs offer the diversification benefits of index funds while mimicking the ease with which stocks are traded. To invest in dividend stocks, index funds, ETFs or other publicly traded assets, you’ll need to open a brokerage account if you don’t already have one.

3. High-yield savings accounts

Another way to earn passive income (albeit at a lower level than stocks and bonds) is a high-yield online savings account, which can be ideal for growing your emergency fund (why?) .The interest paid by savings accounts is added to your balance.

High-yield accounts are a type of federally insured savings account that earns an interest rate that’s often much higher than the national average. The APY of these high-yield accounts may vary slightly, and over time, those small differences add up to real cash, so it pays to shop around for where you put your savings.

4. Rental properties

Purchasing properties to earn rental income is another way to build passive income. Long-term rentals can provide a reliable source of cash if they are located in a healthy market for renters, but they also carry long-term stressors like maintaining those properties, as well as paying multiple mortgages, property tax bills and other costs.

You could also focus on short-term rentals through a platform like Airbnb, which is dependent on a steady flow of visitors to your area. Or, start small: Rent out a room in your house to begin to bankroll your rental property empire.

The reason why passive income is appealing is that it requires little effort to make money. This is what is often referred to as making your money work for you. Generally, you invest your money in a product that will generate an income. In short, passive income is important because it creates stability, security, and gets you closer to freedom in your financial life - if you are willing to put in the effort up front. You have the financial momentum to manage yourself, your time, and your assets effectively when you have passive income.