This is the ultimate passive income 101 guide for beginners! Most people make active income, but aspire to make passive income. The biggest difference between the two has to do with how time is traded for money.
Passive income is a steady stream of income that does not require active maintenance. Passive income may take an important time or financial investment to setup, however, it can provide non-active income for years. Active income requires physical presence and time in order to produce revenue.
So for example, those making active income are trading time for money based on an hourly rate, whereas those making passive income do not need to physically be present to produce that income. Keep reading to learn more about the difference between passive and active income.
Definition of Active Income
Active income requires physical presence and time in order to produce revenue. Getting paid an hourly rate, a per-project rate or a flat fee and trading time for money is an active income. Active income can be produced by a 9-5 job, working per-project, based on active commissions or sales.
If you are making active income working for someone else, theoretically, you have to wake up in the morning, go to work, and complete tasks throughout the day for your boss and colleagues. If you are absent one day, you may not get paid. If you are sick or go on vacation, you may not get paid.
Making active income is the most common way for people to earn an income. It provides a sense of “income security” and can be a great way to make money to provide for yourself and family on an ongoing basis. However, if you get laid off, in most cases the income stream disappears.
Definition of Passive Income
Passive income is a steady stream of revenue that does not require active presence to produce. It may take an important time or financial investment to set up, however, passive income can provide ongoing, non-active income for years. It can be produced by financial investments or passive businesses ventures that produce ongoing recurring revenue.
Usually an important amount of time and or money is required to build a successful passive income stream. However, once it is productive, a passive income can provide income at any time of the day. If you put in the initial time and effort to build a passive income stream, it can provide you money while you are playing with your kids, taking the day off, are on vacation or even while you are sleeping.
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So, if you worked very hard to build a passive income blog by copywriting, and it is making you $5,000/month after two years, you can reap the benefits of your hard initial work for years to come.
If we took the example of blogging again, in the case of active income, you would be working on your boss’s or client’s blog in a 9-5 format job, or as a freelancer. In that case, you are working to build a passive income blog for someone else, while you invest your time and physical presence to make an hourly or flat rate.
Passive Income Is Not a Myth
Passive income is not a myth and is commonly created through traditional means of generating passive revenue such as stocks, bonds, and passive financial investments. It can also be generated through more ‘modern’ means like online ventures, peer-to-peer platforms and brick and mortar businesses. Some examples include blogs, rental properties and laundromats.
Passive income is not a myth. Many famous, rich people are no longer trading their time for money (active income) and are making passive income from streams they created years ago. Think of famous investors, writers, musicians, speakers, business people, and actors.
Much of the online content about passive income describes it in a way that makes it almost sound too good to be true, like a myth. There is a general tendency giving the impression that passive income can be made overnight, that you only have to work a couple of hours to produce millions of Dollars and “get rich quick.”
This is all far from the truth. Passive income takes time, effort, dedication, motivation, perseverance and skill to build. And this is the case no matter what passive income stream you plan on building.
5 Passive Income Sources to Build Wealth
There are five main sources of passive income which include traditional financial investments, passive brick-and-mortar businesses, monetized online businesses, side hustles that are eventually outsourced, and peer-to-peer economy sources that are rendered passive. Examples include stocks, laundromats, blogs, ridesharing, and AirBnB rentals.
- Peer-to-Peer Economy Income Sources
- Passive Brick-And-Mortar Businesses
- Monetized Online Businesses
- Side Hustles That Are Eventually Outsourced
- Passive Income With Financial Investments
These sources of passive income can be ways to classify them into categories. Let’s look at some more specific examples of these sources of passive income below. The following sections will define each passive income source while providing you examples, so you can decide which kind of passive income may interest you.
1. Traditional Financial Investments
The most common type of passive income is financial investments. These may include real estate, dividend stocks, and corporate bonds.
Although hundreds of (well known, successful) people have made money this way, these passive income sources require in depth market understanding, financial savviness, important monetary investments, high tolerance to risk and a lot of research. Therefore, they may not be the quickest way to build passive income for beginners. Here are some beginner friendly passive income financial investments.
Cashback Credit Cards
Cashback reward cards can also be a very passive way of making money. These kinds of cards give you a certain cashback on the money you spend on the card. If you know you have to make certain expenses every month (ex. groceries, utilities, etc.), paying with a cashback credit card will allow you to receive a small return on your spending. In Canada, these cards can provide you with a return around 1% depending on what you buy. It’s an easy return on the money you would have spent anyway. However, be sure to only spend on what you actually need to buy, otherwise it’s completely useless.
Opening and regularly feeding, a savings account is not only a great way to save for retirement, but it’s also an excellent way to start making a little passive income. However, keep in mind that banks are not offering the same interest rates they did in the ’60s. Rates vary between 0.01% and 2% for most accounts. This hardly covers inflation rates in most developed countries, but it can be a good and easy start setting aside some money for a beginner.
Get Out of Debt
This isn’t really a passive income source but it is a way to avoid (ridiculous) passive expenses. Most people don’t want to do this because they are afraid of the results they will see, but take a minute to calculate how much your debt is costing you each month. We bet the second you see the number, you will be very motivated to never have to pay those recurring fees again. That is passive income you are providing your bank, not yourself.
“Internet-only banks typically offer the highest interest rates of 1 percent or higher, while traditional brick-and-mortar banks stay around 0.01 percent. On $10,000 in savings, it’s the difference between earning $100 and $1.” (Source)
2. Monetized Online Businesses
Common passive online businesses include blogs, YouTube channels, podcasts, audiobooks, eCommerce stores (print-on-demand, dropshipping, digital products, flipping items), membership sites, gaming, monetized chatbots, flipping domain names, and affiliate marketing.
Everyone is talking about making passive income online. You can easily create a YouTube channel or a blog these days, and they can be excellent sources of eventually passive income. However, these passive income sources need to be well monetized in order to make money.
Here are some ideas of online sources of passive income. Click on the items you are interested in to learn more. They will lead you to articles on this site that go into much more detail on how to build each passive income source with pros, cons, and more:
There are proven ways to create your online projects so that they follow a formula for success. In Project 24 by Income School, Ricky and Jim explain exactly how to make passive income through blogging. They provide a very clear, proven way to replace your 9-5 by passive income from a monetized blog. Their course is called Project 24 because it generally takes about 24 months to be able to make a full time passive income from blogging. They have a very clear, proven way to do it, but if you don’t put in the work, sadly it won’t happen.
According to Income School, a well monetized blog could make over 7,000$ / month of passive income once the traffic reaches about 170k monthly page views (which takes about 24 months).Income School
Source: Learn more about Income School here.
Gaming is becoming a more and more popular way to make passive income online from a hobby. Using Twitch or YouTube, you can monetize your gaming skills by livestreaming and collecting donations. We interviewed a gamer who started making $1,000 per month after six months and quit her job. She worked very hard to get there, but loved every second of it.
3. Side Hustles That Are Eventually Outsourced
A side hustle can eventually be made passive via means of delegating, automating and outsourcing. Side hustles that can be made into passive income streams include data entry, copywriting, editing videos, selling stock photos and videos, ghostwriting music, or flipping cars.
Starting a side hustle is an excellent way to get started in the passive income world. If you currently have a 9-5 job that you cannot leave, a side hustle is an excellent opportunity to generate extra income after work. At beginner’s passive income, we call it the “5-9.” Side hustles are dependent on your time but allow you to build your skills and can help you transition to working for yourself. Once you have a base of clients, you can start to outsource your side hustle and eventually make it passive
Here are some side hustle ideas. Feel free to click on the items you are interested in to learn more. They will lead you to articles on this site that go into much more detail:
4. Automated Brick & Mortar Businesses
Some small businesses that can eventually be automated and outsourced for passive income include storage space rentals, ATMs, laundromats, vending machines, game machines (Arcade Style), self-service kiosks, self-service coin-operated car washes, food trucks, and ice cream shops. In order to outsource these businesses, you will need to hire employees to replace yourself. Some will require you to be very actively present at the start.
Businesses are a way to generate passive income, however, they need to be built with the goal of becoming passive. If not, having a business will be a very active endeavor. However, you can build a business with the goal of making it entirely passive by eventually automating and outsourcing parts of the work. Here are some ideas of businesses that can be made passive:
- Self-Service Storage
- Automatic Car Wash
- Self Service Store
- Selling Ice Cream
- Flipping Cars
- Food Truck
According to Business News Daily, in an interview with America’s ATM, ATM’s are “a great secondary source of income that could equal between anywhere between $20,000 and $30,000 extra per year” (Source)
Automating an Existing Business
You can automate an existing business by automating repetitive tasks and processes, outsourcing parts of the business, and delegating to employees or third parties.
Learn more about automating an existing business in the video above or in the article here.
5. Peer-to-Peer Economy Income Sources
The peer-to-peer economy is a decentralized business model that consists of two individuals (an provider and a buyer) interacting to buy, sell, or rent goods or services directly from one another, with the help of a platform or marketplace that puts them in contact. Popular examples include Craigslist, AirBnB and Uber.
Although the peer-to-peer economy has always existed through trade, it has never been easier to find people searching for what you have to offer thanks to online peer-to-peer marketplaces. These sites and apps are some of the easiest places for beginners to get started making passive income. There are many examples of how you can make passive income from the peer-to-peer economy on our site (click for examples and guides on our site):
Renting your things on peer-to-peer marketplaces is one of the fastest and easiest ways to make passive income as a beginner. Most of these passive income sources do not demand too much of your time, some require very little time at all (ex. renting your parking spot).
Many peer-to-peer exchange platforms allow their users to provide rentals. Over the past decade, literally hundreds of startups in the peer-to-peer rental space have appeared and are offering marketplaces to put renters and owners in touch. But the most popular is probably still AirBnB which allows you to rent your home to travelers.
“The average active Airbnb host received approximately $14,200 a year in total booked revenue” (Q1 2016)Learn AirBnB
Of course, from that you have to subtract expenses, however, it is an encouraging indicator of how much income you can make from renting your place. If you have a self-locking system and hire a cleaner, rentals can be entirely passive
Passive Income Criteria
Before starting a passive income stream, it should be considered under several criteria including passiveiness, scalability, cost, difficulty, time, risk, seasonality, and return on investment.
It’s very easy to get started working on a side hustle (you can go right onto Fiverr and offer your services today). It’s also fairly easy to start a blog. But these income sources need to be well monetized and made into passive (not active) streams of income. If you do not actually build them with the goal of being passive. Here are a couple of factors you should study before you choose an idea with the goal of generating passive income.
In order for the income source you are building to provide you passive income, it actually has to be passive. If the income source is demanding all of your time after many years of building it, it’s not passive. Build your passive income sources with the goal of being passive. Automate or outsource the processes that are demanding your time.
In order to be a successful passive income source, it should be scalable. If the income source solely depends on you being physically present, it is not scalable. A scalable income source should have a very wide target market and be able to expand while requiring little extra resources or need to change or adapt it to new situations.
If your passive income source is an only profitable one or two months out of the year, it is highly seasonal. Holiday-related passive income sources (ex. Halloween Blog) are highly seasonal. Passive income sources that are reliant on the weather or seasons are also seasonal (ex. Renting your bike may not be possible in the Winter months depending on where you are located in the world). Try to avoid seasonal passive income sources if you would like to generate significant revenue.
How to Build Passive Income Sources
One of the best ways to build successful passive income sources is by learning from others from videos (YouTube), books (local library or Amazon), from online courses, and from podcasts and blogs.
If you are just starting out, learning from others will save you a lot of time to build passive income sources. Here are some ways to do so.
1.Watch YouTube Videos
One way to learn more about passive income is to watch YouTube Videos. Subscribe to our YouTube channel where we will be providing educational content about passive income for beginners.
2. Head Over to Your Local Library
Your local library is an excellent place to learn more about passive income. We have a number of recommended passive income books you can find for free at your local library.
3. Learn From Online Courses
Learning from others is key when wanting to save time building passive income sources. Here is our list of highly recommended online courses (link brings you to our course recommendations). For example, Income School teaches a clear formula to build a successful niche site. We love their approach because they show you with actual sites they have built and a timeline providing income milestones.
Passive Income Ideas
Some examples of passive income include traditional financial investments such as stocks, bonds, rental income and passive brick-and-mortar businesses. Other modern means of generating passive income can be carried out online and include blogging, YouTubing, affiliate marketing, dropshipping, and print-on-demand.
Our website is full of passive income ideas and guides. Here is a list of a few ideas and examples of passive income to get started:
Click on the links above to learn more about each passive income idea. Also consider downloading our list of over 300 passive income ideas here.
Benefits of Passive Income
Some benefits of passive income include lifted income limits, less commuting to work, more free time for hobbies and family, ability to pursue personal passions, potential personal growth, more free time and in some cases better tax breaks compared to active income.
We already had a look at the difference between active vs. passive income. But if you still aren’t convinced of the numerous benefits of passive income, we would like to invite you to read this article on our blog that contains 12 benefits of passive income.
But as a quick overview, lifting income limits is a big benefit of generating passive income vs active. If you have an active job you need to be physically present to make money based on an hourly salary. Whereas, if you make passive income, you do not have to be physically present to get paid. You can make money at any time of day and night. And since you do not have to be physically present, limits are lifted on the amount of income you can make. Learn more here.
The Rich’s Main Sources of Income Are Passive
Passive income can make you rich if you have multiple, scalable, sustainable, income streams that demande little to no time to maintain. If your passive income assets exceed ongoing expenses and debt, you are financially free.
“The poor and the middle-class work for money. The rich have money work for them.” If you have ever read Rich Dad Poor Dad by Robert Kiyosaki, you know that having “money work for you” is actually passive income. Passive income can be earned through financial investments, online endeavours or businesses.
However, the definition of “rich” is a game of perspective. What it means to be rich for one person can be very, very different to another. What’s important is what you believe.
What Does Rich Mean to You?
- What are your dreams and aspirations?
- How much will these dreams and aspirations cost?
- What are your current monthly costs and expenses?
- How much debt do you own?
- How much will your cost of living be, once you are living your dreams?
One way to calculate this is by creating a “dreamline,” a term coined in The Four Hour Work Week by Tim Ferris. As important as it is to dream when you are thinking about the future you would like to build, it is just as important to be realistic about your current costs of living. If you do not know your current costs of living, it is imperative you download this free budget spreadsheet to get a general idea of your personal expenses.
Once you have a good idea of how much your wildest dreams will cost you, calculate your target monthly income. Have a look at how much life is currently costing you. That is the gap you need to fill in order to achieve the riches you desire. Here is more info about how the rich live from passive income sources.
1. Rich People Have Multiple Sources of Passive Income
Rich people have multiple sources of passive income. For example, real estate tycoon Grant Cardone not only owns thousands of rental properties, he also sells online courses, runs a very active YouTube Channel and has multiple best-selling books. These are all passive income sources. Even if he wrote his first book in 2008 (Sell to Survive), it still sells today, making him passive income as he becomes more and more known around the globe.
2. Rich People Have Scalable Sources of Passive Income
Scalable sources of income have a very high to an almost infinite potential of producing income. An indicator of scalable income is market size and the projected evolution of that market.
An example of scalable passive income could be Mark Zuckerberg’s Facebook. When Facebook was only available to college students at Harvard, the target market was very small and scalability was highly limited.
Once it was made available to the public in 2006, Facebook became very scalable. Now that it is available in over 50 languages, Facebook can target the entire planet’s population with an internet connexion and while generating revenue through multiple means (including ads and acquisitions, ie. Instagram).
3. Rich People Have Sustainable Sources of Passive Income
Sustainable income is a continuous stream of revenue that covers all the expenses, debt and needs of an individual or corporation. When analysing passive income streams, it is very important to be aware of seasonal income sources.
For example, if you are thinking of starting a Bike Rental Business, you should be aware that your income will fluctuate throughout the year if you are located in a country that has harsh winters. For most people located in the Northern Hemisphere, a Bike Rental Business will not be profitable in the Winter months and may even have to be temporarily closed in the Winter. In this case, this business model can be considered seasonal, and therefore somewhat unsustainable.
4. Rich People’s Passive Income Demands Little of Their Time
This aspect of passive income is what interests most people – the fact that it eventually demands very little to none of your time. However, it is ultra important to realise that the initial time investment when building a passive income source can take months to many years. Anyone selling you a get quick rich scam is not telling the full truth.
Hundreds and thousands of hours of focused work are required to build sustainable passive income sources that will generate revenue for many years to come. This is true no matter what type of passive income you would like to generate. If you are interested in Real Estate and have never purchased or sold a home before, you will have to spend thousands of hours learning about this industry. Some things will take longer than others to learn and apply.
Thankfully, there are courses that can save you thousands of hours of research, trial and error.If you would like to create a passive income website for example, according to Income School, it can take 14 to 15 months to create a blog that brings in 1,000$ of passive income. But when you think about it, it is highly worth your time. If you spend 15 months grinding, making incredible content for your blog following Income School’s tested formula, you can reap the benefits of your hard work for many years to come.
How Long It Takes to Make Passive Income
Building a passive income source takes a lot of time. How long it truly takes depends on a number of factors including your motivation, dedication, execution, mindset, skills and personal investment in building your dream. How long it takes will also depend on how passive, expensive, difficult, time consuming, risky, seasonal and scalable the passive income source you are building is.
I like to compare making passive income to the “Startup Dream.” Everyone likes to talk about Jeff Besos working in his garage, and then poof! The eCommerce empire Amazon appeared. We never like to talk about the years of grueling work he put in, between the photo of him in his garage and his now billion dollar empire.
Never lose from sight that it is doable, but also that your idea may fail, that you may have to pivot, and that it may take months and years of hard work and learning new things to build a truly profitable passive income stream.
Efficiently Building Passive Income
According to Gallup’s World Poll, 70% of American workers are not engaged at work (source). But you can’t afford to have that mentality if you are working for yourself.
In the video above, I tell a story above about my neighbour who was trying to stretch out his hourly job to make more money. Don’t be like my neighbour when you are working for yourself. If you are working on any passive income source, dedicate yourself to your work and get it done efficiently. Use the right tools you need to save time and money. You will be cheating yourself and wasting your time otherwise.
The content on this site, Beginners Passive Income, is dedicated to helping motivate people interested in learning about making passive income and provide ideas, guides and ways to be more efficient in building passive income. However, only you can execute and get the job done. You have the choice of being like my neighbour and picking up the leaves one by one, or grabbing a rake and getting the job done efficiently.
Buying an Existing Passive Income Stream
It’s possible to buy a passive income stream (a stream that already earns money passively). An example of this is buying an existing business or passive income website. You can buy a site that is making monthly income, improve the site’s monetization and continue earning passive income from it.
Although it sounds more conducive, buying a successful, sustainable passive income stream may not be easy. You need to carry out due diligence, take a risk and invest money to buy the stream. You may also have to dedicate your time to update it.
Automating for Passive Income
Business process automation involves streamlining business processes and operations to simplify and automate them in order to reduce costs. By automating your business, you put up infrastructure and tools that allow the business to run efficiently with minimal supervision. This includes using software applications, integrating applications, and restructuring labor resources.
For example, let’s say you own a car wash business. You can automate it by putting up infrastructure to make it a self-service car wash. You can outsource surveillance and maintenance work to other companies. That way, you earn a passive income since software and robotic machines do most processes on your behalf.
Outsourcing for Passive Income
Outsourcing entails hiring professionals that are not employees or third parties to perform tasks that would otherwise be performed in-house. Outsourcing is a cost-cutting measure that helps you minimize labor and other overhead costs.
For example, instead of printing shirts yourself, you can outsource all the activities to a print on demand service (e.g. designing, printing, and shipping products), and earn passive income once the product is sold and delivered.
Let’s say you own a Laundromat business. You can automate most business processes and outsource surveillance to a third party company. That way, you earn a more passive income because most processes are carried out on your behalf.
Creating Multiple Sources of Passive Income
Creating multiple sources of passive income can mediate risk, increase revenue, and provide more security in case one passive income stream disappears or fails.
If you have a successful YouTube channel, rent a property on AirBnB, have a couple of monetized niche blogs, a couple of ATMs around town, no debt, and a garnished savings account, you can be making significant passive income and benefit from financial freedom.
By diversifying your passive income sources, you have fewer chances of running into issues if one of the sources is no longer generating the expected income. But there is one ultra-important determining factor before your dream of passive income can come true, and that’s your upfront effort.
How Much Passive Income Can You Make
You can make $0 to over $1M passive income. How much money you actually make also depends on your skills, the time and effort you invest, but also on how scalable, seasonal, sustainable, time-demanding, expensive, difficult, risky, and eventually passive and profitable your choice is.
We actually cover each of these criteria in our passive income beginner guides:
- Startup Costs
- ROI (Return on Investment)
When choosing a passive income stream, you need to keep in mind that it takes time, sometimes months and years, to build a truly passive income source. Some may also require a financial investment. Of course, this is not financial advice and you should consult a lawyer, tax specialist, or financial planner in your area to ensure you comply with local rules and regulations depending on your choice.
The Keys to Passive Income
Keys to successfully create a successful passive income stream are effort, business skills, intrinsic motivation, autonomous learning, perseverance, dedication and some luck. Requirements include time and money. The passive income stream should be scalable, sustainable, and demande little to no time to maintain.
There is no passive income without upfront effort, period. Everyone sells the startup dream, from the garage to the front page of Times. But in-between, there are thousands of hours of grueling hard work. You will have to learn new things and apply your knowledge in a methodological, organized way. There will be ups and downs, and motivation, perseverance, and dedication to your passive income dreams will be necessary for you to push through the hard times.
You may have to work hard upfront and anywhere between a couple of months to ten plus years. However, if you stick to it, you will generate passive income and benefit from your hard work for many years to come. The choice at hand is working a 9 to 5 job for over 40 years of your life, or working 80h weeks for a couple of years to benefit from passive income for many years to come.
How do I Start Making Passive Income?
Before you get started making passive income, know what your goals are (how much money would you like to make), and how much passive income you can generate. Then choose a passive income stream depending on your skills, needs and personal financial goals. Execution is key.
Can Passive Income Make Me Rich?
To become rich from passive income, you will need to execute the right tasks with the right skills over a certain period of time, while remaining motivated and dedicated to building your dream. The more passive, inexpensive, low risk, non-seasonal and scalable, the more income you can expect from your passive income source.
How Much Passive Income You Can Generate?
How much passive income you can generate is unlimited because it is independent from your physical time and presence. However, how much passive income you can generate also depends on your sources of passive income, as well as upfront effort, motivation, perseverance and skill to build non-active, scalable, sustainable passive income sources.
Do I Have to Quit My 9-5 to Make Passive Income?
You do not have to quit your 9-5 to start making passive income. One way to do this is to also work a second 5-9 shift when you get home from work to work on building new passive income sources. This second source of income can be used to complement your current salary, and eventually replace it.
Do Rich People Make Passive Income?
The world’s wealthiest people have multiple streams of passive income. Generally they are rich because they have multiple, scalable, sustainable, income streams that demand little to no time to maintain and provide enough ROI (Return on Investment) to exceed their debts.
How is Passive Income Earned?
Passive income is revenue that can be earned without trading time for money on an hourly or per-project basis. Although “passive”, it can take a lot of time, effort, dedication and skill to build a profitable passive income stream.
Can Anyone Earn a Passive Income?
Anyone can build passive income streams, however it can take months, sometimes years of hard work, motivation, and dedication to build a sustainable passive income stream. But once it is successful, you can make passive income from your past work for many years.
How Long Does it Take to Earn Passive Income?
How long it takes to build a passive income stream depends on the idea you choose to undertake among other factors. How long it takes may depend upon the idea your choose, your personal investment, successful outsourcing and automation, your goals, skills, and budget among other things.
Can I Combine Passive Income Streams?
Yes you can combine passive income ideas to create multiple passive income streams. Online ideas are especially prone to this, for example, combining a blog with a YouTube channel and a Podcast. So long as you are able and willing to dedicate time and effort, you can undertake two or more ideas simultaneously.
How can I Make Passive Income With no Money to Invest?
You can make passive income with no money to invest by using peer-to-peer platforms offering rentals (AirBnB, renting your bike or your parking spot), or other by other means including side-hustles (copywriting, being a virtual assistant, creating audio books etc.)
Learn more about making passive income with no money to invest in this article.