Income can be categorized into three main types: active, passive, and portfolio income:
Active income is earned when a person’s time is physically traded for money, like a salary or a wage. Usually, a certain skill is traded for that time and money, and the degree of efficiency for an hour’s worth of work may or may not be monitored by a boss. The amount of money traded is usually based on a fixed salary that is decided based on a variety of factors (such as skill, competencies, responsibilities, role…). If the person is absent from work due to sickness or other, they may or may not be paid.
Passive income is income that is earned without trading time for money on an hourly or per-project basis. Not trading time for money means income is not bound to a fixed rate or a 24h/day limit, thus lifting many limitations of active income. Passive income can, however, require a very large financial and/or time investment to set up. It may take months or years to set up a successful passive income stream. Building passive income streams can be made more passive by outsourcing or automating aspects that require you to be physically involved. Once a passive income stream is up and running, it should provide sustainable income in a passive manner.
Portfolio income, on the other hand, is income earned from investments in the form of dividends, royalties, capital gains, and interests for example. Portfolio income is also a form of passive income because you can earn money from investments that generate income passively.
How is passive income earned? Passive income is income that can be earned without trading time for money on an hourly or per-project basis. There are many types of passive income streams, ideas, side-hustles, and investments you can undertake to build a passive income portfolio. Keep in mind this can take a lot of time, effort, dedication and skill.
In this article, we will look at passive income and everything you need to know about it as a beginner. Although earning income passively can be highly lucrative, turning an idea into a sustainable passive income source requires a lot of patience, effort, and dedication at the beginning. Let’s dive in.
What is Passive Income?
Passive income is income, money or benefits that can be earned without physically trading time for money on an hourly or per-project basis. Once a passive income stream is set up, it should provide sustainable income with little, or without any, need for physical/time involvement. Other types of income like portfolio income (e.g. capital gains, dividends, interest, royalties, profits, rental income etc.) are also categorized as passive income. This is because portfolio income is generated from streams or investments that already generate income. At Beginners Passive Income, we have defined eight key passive income criteria and five passive income sources for beginners. The following videos go into detail on each of these.
As a quick summary, when you look at a passive income idea, you should consider your skills, interests, and motivations among eight key passive income criteria. These criteria include the level of passiveness (once the passive income stream is up and running), scalability, startup costs, difficulty, time to set up, risk and seasonality. Sustainability is also an important aspect that should not be neglected. Of course, we only provide general ideas and information on our site and it’s up to you to carry out your own due diligence before getting started.
In the video above we have a look at five possible passive income sources for beginners, from online ideas to peer-to-peer ideas, side hustles, businesses, and investments. Of course, some of the passive income ideas we provide on our site could be put into more than one category. See more ideas on our site here.
“Passive Income is Money Without Effort” [NOT!]
The content of this video contains a very revealing discussion of the general impressions people have about passive income. A man asks the following:
“[…] so if people just sit on the couch thinking about what they desire, the money, and asking for the money, and giving off the vibrations and feeling, the emotion of receiving that money that which they asked for, but they take no action to create any value which people will pay for, then how is their income and money just going to come to them if they take no action?”
Of course, Abraham Hicks tears this man’s definition of passive income apart, with reason. As we have already stated here, passive income does not just fall from the sky and it does require focus, dedication, motivation, energy, and skill to build at first. You will not be trading time for money, but you will be creating. Inspire your action with ideas and themes that excite you, and that you are passionate about.
Difference Between Passive & Active Income
Active and passive income differ in many ways. However, the main difference is how income is earned. Whereas passive income is generated without trading time for money, active income requires you to be actively involved in the process of making income. Many 9-5 jobs are active income sources where employees work in return for a salary or wage. In most cases, the business owners or investors, however, earn a passive income because activities are performed by those employees on their behalf. Learn more about the differences between passive and active income in this article on our site.
Other notable differences occur during taxation. Passive income may be taxed differently than passive income, and in some cases, it is more favorable to have passive income streams. It is for this reason that many investors prefer to own passive income streams to active ones. However, applicable taxation amounts and laws do depend on a variety of factors. If you have questions about taxes and passive income in your location or for your specific situation, feel free to contact your local certified accountant for more information.
Time & Financial Investments
Most income-generating idea requires patience, dedication, and most often, some form of monetary and time investment to create. Active income streams require you to trade your time for money on a regular basis but usually do not require you to spend money. As an employee, your boss pays for most business expenses (furniture, office space, heating, materials, computers, etc). But passive income streams may require you to spend a lot of time and money to build them. They may not be profitable for months or years but then can provide income over the long term once the stream has become passive and sustainable.
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.
An active income source leaves you with little time for yourself to enjoy with family, vacation, to relax or anything else. Although creating a passive income source requires a lot of dedication and sometimes a financial investment, once you establish it and make it passive, you can create more free time for yourself. Ultimately, your involvement and investment (time and money) should be significantly reduced.
See More Differences Between Active & Passive Income
How is Passive Income Earned?
Passive income can be made in a couple of ways, from creating a passive income stream to buying one or making an existing business more passive. Whichever way you choose, remember that patience and dedication are key in the beginning before you can start earning passive income.
Creating a Passive Income Stream
You can create a passive income stream from scratch and build it up to earn passive income once everything is set and running. Building a passive income source can be time-consuming, and sometimes, getting it to the point where it generates sustainable income passively is difficult and requires dedication, patience, and skill.
For example, creating a blog is actually easy, but successfully monetizing it and creating enough content can be more difficult. You need to dedicate long hours to carry out extensive research on your niche, create and post content, and generate traffic to establish a sound audience that you can them monetize (through ads, affiliate marketing, selling physical and digital products…). Of course, you can save time by following courses that work. Learn more about making passive income blogging here.
Buying a Passive Income Stream
Alternatively, you can buy a passive income stream (a stream that already earns money passively), update it to boost the passive income it earns if possible, 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. For more info about buying passive income streams, check out our guide.
Making a Business More Passive
In order for a passive income stream to be passive, it actually has to be made passive. Otherwise, it will most likely remain active until a change is made. You can turn an active income-generating idea into a passive income source through automation or outsourcing.https://youtu.be/SxBhThA2Xjk
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 is another way of turning an active income idea into a passive income source. It entails hiring the services of professionals 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 it and outsource the services of an individual attendant to oversee the smooth running of business operations. That way, you earn a more passive income because most processes are carried out on your behalf.
Types of Passive Income Streams
There are many passive income streams available today including passive income ideas, side-hustles, investments, and businesses. It all depends on what you are willing and capable of doing.
- Passive income ideas include online ideas like blogging, copywriting, podcasting, creating niche sites, chatbots, affiliate marketing, niche membership sites, eCommerce, print-on-demand, etc.
- Passive income side hustles include food delivery apps, peer-to-peer rentals, pet and house sitting, charging scooters, flipping items online, etc.
- Passive income investments include peer-to-peer lending sites, discount and reward programs, cashback credit cards, etc.
- Passive income businesses include self-service stores and storage, automated car washes, Laundromats, Food trucks, etc.
Passive income ideas are unique in their own ways. Passive income brick and mortar businesses, for example, generally require a larger financial investment than some online endeavors like blogging. Others, like passive income investments, require less of a time investment than online ideas like blogging. The amount of money you earn passively also differs. Some ideas earn more than others depending on the products sold or services offered.
Moreover, some ideas are easier to undertake than others are depending on your interests, skills, motivations, budget and more. For example, online ideas like blogging, podcasting, and YouTube could be easier for some compared to building a passive income business like a laundromat.
Remember to choose something you are passionate about and willing to learn even more about. Set your budget and carry out your own due diligence before getting started. If you have any doubts, feel free to consult with a local business incubator, qualified attorney and certified accountant.
As long as you choose an idea that you are passionate about, stick with it, build your skills, remain motivated, dedicated, and carry out actions that bring you towards success, you can earn passive income from it with time. Need some assistance in staying motivated and setting goals? Check out our Passive Income Journal. Initially, all ideas require your constant attention and involvement before you can start earning passive income from them. Earning money passively is easy but getting to that point requires a lot of patience and dedication. With the right strategies, you can make money passively in due time. The best part? You can combine passive income streams and earn more passive income from them.
Can anyone earn a passive income? It doesn’t matter who you are, there is certainly an idea that you can undertake to turn into a passive income source. Choose something you love and are willing to dedicate your time and money towards. 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 work for 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? Combining passive income ideas can boost revenue. Online ideas are especially good for 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.