What is passive income? Just the mention of the phrase “passive income” makes people’s eyes light up and mouth water. For the uninitiated passive income is just what it sounds like. Income that you don’t have to actively work for to earn. Just sit back, kick your feet up and let the checks come rolling in. Sounds like a pretty sweet deal, right?!
So naturally, the next question you’d ask would be “how do I make passive income?” That’s where things get a bit tricky. If you’ve ever read any other blogs or done a Google search for passive income you’ll usually read a bunch of similar things. “Buy a rental property”, “Write a book”, “Start a website” and so on…
The problem is, none of these things are really all that “passive”.
No landlord I’ve ever talked to has ever described his or her experience owning a rental property as “passive”. In fact, it’s usually very much the opposite.
Writing a book may be my favorite suggestion that pops up in these passive income discussions. As if you can just vomit a bunch of words onto a page and then sit back and live the good life as thousands of people buy your book for years to come. It’s certainly possible, but I would have to think it’s not going to work out so well for the majority of us.
The same goes with starting a website. I can tell you first hand that even a site as simple as the one you’re currently reading takes a lot of time and effort to keep up. Generating content, building an audience, and then maintaining that audience is anything but passive. Think about it, how often do you visit a website that hasn’t been updated in 2 years?
I’m not saying that any of these ideas are bad ideas. I’m just saying that they’re not “passive” ways of making money.
So how DO I make passive income?
In my mind, unless you DO have a New York Times bestselling book, or starred in a hit movie a few years back there are only a few means of generating truly passive income.
They are: interest income earned from cash held by your bank, dividends earned on shares of stock and other investments, inheritance received from a wealthy family member and interest earned on loans made to others.
I don’t know about you, but I don’t have any millionaires in my family tree. So the inheritance is probably out of the question. For that reason, I’m going to choose to focus on the other three income streams.
My favorite of the three is receiving dividends from stocks and other investments. I’ve previously written about dividend investing and I think it’s a very solid strategy for producing a stream of passive income. Whether it’s from well-known companies such as IBM or Johnson & Johnson or from other investments such as REIT’s or MLP’s. Dividends are a great way to earn passive income.
The same goes for interest income earned from your bank. Either from money in a savings or money market account, or in a
5-year CD as part of a CD ladder as I discussed in my last post. It is truly passive income, but the problem is, to make any real money you need a lot of money to start with.
Another option I’ve personally begun to explore is peer-to-peer (P2P) lending. Led by sites such as Prosper.com and Lending Club.com. P2P lending is becoming a more popular way to invest (and to borrow). I plan on writing a full review once I get a little more experience under my belt. Basically it’s a way of lending that cuts out the middle man, hundreds of individual lenders invest small sums of money into a loan to make up the full balance lent to the borrower. As an investor you have full control of what quality of borrowers you lend to, and what types of loans you’ll lend for. By investing small sums ($25) across many different loans you also spread out your risk if any one borrower defaults on his or her loan. I’m still new to P2P lending, but my experience so far has been a good one.
Other than that, I don’t know of too many passive ways of earning income. If you have any more, please let me know by leaving a comment!
What to focus on instead
While passive income sounds great, I don’t think it’s what we should really focus on. Instead, I would advise focusing on creating diverse streams of income.
I’m sure I don’t really need to explain that no matter what your job, or who your employer is, they can decide to give you the ax at any time for whatever reason they need to justify cutting jobs for. That is why it’s smart to prepare in advance and focus on diversifying your income and creating multiple income streams. This is where starting a website, owning a rental properties, teaching guitar lessons, or
dealing drugs whatever else you can think of to earn a few bucks comes into play.
Depending on how much effort you put in, and how much success you find with your multiple income streams you may not only find yourself meeting your financial goals faster, but may even find yourself able to leave your 9-5 in the rear view mirror at an earlier age than you ever imagined.
What kind of things are you doing to diversify your income, passively or otherwise?