For the jaded 9-5 employee, the idea of earning a “passive income” has become a silver lining. The prospect of generating revenue streams while you’re sleeping, or sipping mojitos in some tropical beach was the stuff dreams are made of, for someone who would like to give up working for income. But what does passive income really entail? This article will give you a lowdown on passive income.
What is passive income?
Investopedia defines passive income as earnings derived from a rental property, limited partnership or other enterprise in which he or she is not actively involved in. So basically, it’s anything you earn from ventures that you are not hands-on with for most part. It could be in a form of shares from a business you have invested in, but are not working on directly, or royalties you earn from the books you have published, or patents you have created.
What are the benefits of earning passive income?
When done right, you can reap the following benefits:
Extra revenue stream when combined with your day job. Wouldn’t it be nice to earn a bit of extra cash without having to toil for another 4-5 hour for a part-time job? Earning passive income lets you do just that: earn extra without having to get a second job to make ends meet.
Buffers. Think of it this way: if you get laid off from your work, or if you don’t have gigs booked for a month, you probably won’t have much to get by for the next four weeks. Earning passive income every month lets you ride through rough times until you can get another job, or get a gig.
Protection against inflation. The great thing about income from rental properties is that you have full control of the rental fees. This means you can increase every year to keep up with the inflation rates.
Improve your credit ratings. You’re more likely to improve your credit ratings when you rent out or lease properties, for as long as it’s officially registered and backed by bank statements.
You own your time. Being your own boss is probably the most obvious perk of earning passive income. For starters, you’re not answering to anyone but yourself. You’re in control of your time! Think about it: Can having a 9-5 job let you to spend more time with your family, or go yachting to the Bahamas? We can bet our bottom dollar you can’t. But with passive income, you can do all these and more, and still see the dollars rolling in.
Sounds great! Now where do I start?
There are many ways you can generate a steady stream of passive income. But these are the most common:
Become a landlord. Sure, you can earn huge capital gains from buying and selling properties. But wouldn’t it be better if your properties keep working for you, thus guaranteeing you positive cash flow regularly? Leasing out your house or apartment can guarantee you a steady revenue stream, provided that you have the right skills, the patience to deal with the most difficult tenants, and the 24-7 responsibility of maintaining the property you are leasing or renting out.
Earn dividends from income portfolios. Income portfolios are usually made up of different investments that will result to a predictable payout, according to moneycrashers.com. Investments can be in a form of bonds, dividend stocks that payout portions of a company’s profits, annuities, or microloans. While the returns are lucrative, income portfolios also come with risks, and it is important that you are familiar with these types of investments before you dive in.
Earning from interests from bank investments. Earning interests from bank investments entail lower risks, compared to earning dividends from stocks or investment portfolios. But depending on the type of savings account you applied for in a bank, interest rates may be lower. Case in point: some Australian banks may only offer more than 2% interest on savings accounts. But you can always consider high-yield money market savings accounts, if you want to yield higher interest rates compared to regular savings accounts.
Corporate and government bonds. When you’re investing on bonds (whether corporate or government), you are basically lending money to a government or a private institution at an agreed interest rate for a certain period of time. So what you’ll earn are: (1) the face value, which you’ll be getting back once the bonds mature, and; (2) the interests you earn each year. But just like any other investments, bonds can range from very safe, to very risky (though less volatile compared to shares). Hence, it is important that you know where you’re investing in.
Earn online through affiliate marketing. Affiliate marketing is basically the practice of rewarding one or more affiliates for each visitor or customer they have brought through their affiliate marketing efforts. Simply put, it’s earning revenue for each visitor who clicks on the ads posted on your website or blogs. To earn from affiliate marketing, you must first: Build a website with rich, relevant and helpful content (it could a blog, or a business website where you sell your own products, and advertise other products as well), and sign up for an affiliate program (such as those offered by Amazon.com or Google.com) and choose which products or services you can feature on your website. The sellers will provide you a unique affiliate code you can use to refer traffic to the target site. If you love to write, or showcase your knack for graphic designs on your website, you can earn on the side by signing up for an affiliate program, optimizing your website, and keeping it updated with fresh and relevant content.
Now, the caveat
Do take note that “not actively involved in” does not necessarily mean not getting your hands dirty from time to time. A website that’s not updated and optimized according to Google’s most recent algorithms won’t guarantee you revenue, just as a rental property that has fallen into disrepair won’t invite tenants.
As Patt Flynn of Smart Passive Income puts it, “There’s no such thing as a 100% passive income”. Any form of revenue streams will always involve time, passion and effort to put up and maintain, including passive income.