All approaches to legitimately earning money can be grouped into two basic categories: The one is active income where you work for a certain time in exchange for money and the other is passive income which constitutes pretty much everything else. The only thing I left out is chance based income such as inheritance or gifts because these, in my opinion, are not an approach to earning money. Even gambling is a form of active income and if you work out the hourly rate, you’ll find that it averages pretty low and even below zero in many cases.
So what is it and how do you make money if it’s not for time and work?
It’s not that you don’t work at all for your money. Passive income (PI) can require just as much or even more work than active income but the crucial difference is that the money continues to flow in even after you stop working. For example, if you publish a book, you can earn from every sale that is made for the rest of your life even if you completely ignore it. Some other important examples are income from interest, renting out property or advertising space on your website. You’ll find a list of many more types of PI at the end.
Why passive income is the way to get rich
It's infinitely better for getting rich than salary based work. The main reason for this is that you can multiply your earnings indefinitely by accumulating different sources of income. Once you have finished a project that will earn you PI, you’re free to start another while the first one continues to earn you money. It’s like job hopping except that you keep getting paid for every job you ever had.
This type of income multiplication is not possible with active income because, for every job you have, the time you have left for another job is reduced. Most people can’t hold more than one or two jobs at the same time. One could say that PI is the field in which you can hold infinitely many jobs at the same time. Now you can see why it’s so powerful in making a lot of money.
Sure, you can get a raise in your job or you can find a higher paid job, but the potential is still very limited as long as your earnings depend on the time you sacrifice for it. Only through very high paid jobs, is it even remotely possible to get rich and become a millionaire but these are hard to come by and require many things beyond just expertise in your job. And even if you get such a high paying job, you still have a constant limitation on how much money you can make with it. Somebody who makes a 6 digit figure every year can save up to become a millionaire, but they will never become a billionaire. You do not have such limitations with PI. This is also what lies behind the phrase “if you want to get rich, don’t have a job”.
Why working for hourly pay usually sucks
Aside from the point above there are the following reasons:
- When you have a job, you’re basically working to make somebody else rich. All you get is a little piece of their wealth. I realized how extreme this can be when I was offered a teaching job at an hourly pay of $21 dollars by a one-woman business while the students paid $40 for one hour. So for each hour I worked, she’d make $19 even though she didn’t lift a finger in that time and wouldn’t even be present.
- As soon as you stop working, the money stops coming in. So every holiday you take costs you not only what you spend on the holiday but also what you didn’t make while you were on it. And when you retire, you’re dependent on a retirement fund that was probably decimated by inflation.
- You’re typically stuck on one job in one field and, though you can switch, it’s not really something easy to do. In passive earning, you can start a new career pretty much at will. In fact it’s better to do this for the sake of diversification.
- It’s extremely hard to switch from a full time job to making PI because there is so little time while it’s relatively easy to switch the other way round. You can even get a job on top of your passive earnings if you really like the job.
- You’re highly dependent on that pay check. Getting fired is no less than a disaster for most people. It can destroy your lifestyle and break up families and it can happen any time depending on your contract. So you’re dependent on one or two other people’s assessment of you which leads me to the next point:
- You’re far more vulnerable to problems with discrimination because it is often only one person who decides if you get and keep your job or if you get promoted. What if your interviewer hates ginger people and you’re one? In Europe, for example, there’s large scale sex discrimination in most if not all top corporate jobs and it’s imposed by politicians calling it “gender mainstreaming”. The same is happening in universities and most public sector jobs. Besides, any company that favors ideology over results is a sinking ship so it’s better to get off now before the masses do.
- You’re far more vulnerable to being incapacitated through injuries or illnesses or anything else that can go badly wrong. If you have enough PI, you won’t need life insurance or the likes.
Benefits of passive income
Well first of all you get all the advantages that come with being self employed, such as not having a boss, choosing your own working hours, holidays and retirement age and deciding exactly how much time you want to put into your job in a week. On top of this, you get the following advantages:
- You are financially free and independent just as though you were so wealthy that you can live off of interest.
- They say that getting paid doing a job you love is the best kind of earning but I disagree: Money that just comes in for no direct effort is the best thing ever - while you’re lying at the beach with a cocktail you’re earning money. Seriously, that beats anything. If you want to do a job you love on top of this, you’re still free to do so - but on your terms and in your time.
- You leave a legacy. Even after you die, the income usually keeps going so your children and family benefit from it for many years after you’re long gone. And they can even pick up and expand it.
- You can also sell most sources of PI. I know, why would anyone do something so stupid as to sell a source of money but perhaps you need a big lump sum for a house or something.
The downsides to Passive Income and why it’s not for everyone
Despite all the many advantages, this path is not suitable for everyone. Here are the difficulties and problems that you will run into:
- Initially, you have to work many hours for no income at all. This could take a long time depending on what you decided to do. When I first started publishing online, it took me about half a year before I saw my first payment and even that was only just over $100.
- Until you earn enough from it to live off of (what I call reaching financial escape velocity), you don’t have most of the advantages that I mentioned above and reaching that point is the longest and hardest step. Probably, most people never make it that far.
- In that starting period, if you count up your working hours and work out how much you earn for each hour, it will look pretty pathetic. But remember, you’re working for future payments, not for immediate payments.
- A great deal of projects and therefore working hours will fail and end up being for nothing. Not everyone is willing or able to deal with that.
- The advantage of choosing your own working hours can also be a disadvantage because, if you loose motivation it can be very hard to stay disciplined enough to keep at it.
- Nothing about earning passively is repetitive. You’re constantly learning, creating, adapting and thinking up new ideas. Some people prefer to just be told what to do and then do it.
- There are different levels of passivity. In some cases you have to do a certain amount of maintenance. Websites, for example, need to be kept up to date and checked on for problems. Property also needs to be dealt with and flats need to be renovated for example. Of course, you could always outsource these things and pay somebody else to do them.
APPENDIX : Types of passive income
This (unordered) list is not exhaustive but I will gladly add to it as I bump into new methods or people point them out to me. Please don’t hesitate do so in the comments below.
Interest from capital
If you leave your money in a savings account, you collect interest from it (though you need an awful lot of money in order to make any substantial income). Other variants of this are bonds, dividends or lending money. Essentially you get paid to leave your money somewhere. Some people refer to this as portfolio income.
from books you’ve written or recordings you’ve made. If you like writing, then consider publishing a book. You could start by writing an e-book and get paid for downloads. Once the book is written, it’s free money. Same goes for recording music.
Renting out property
If you have the funds, buy a flat or a house and rent them out. You could also rent out other things, such as tools, books, laptops - anything that people might want but can’t or won’t buy.
Start your own business
Once it’s profitable, you can hire people to run it for you and anything you make on top of that is PI.
Online content creation
Write articles or make videos and sell or rent out advertising space on them. You can also offer subscription services depending on the content. Another kind of content is photography. Something called microstock photography allows amateurs to upload their photos and offer them for download for a small fee (usually up to 1$ per download). It’s not much but due to the passive nature of the earning, you can continue making photos while your previous photos still earn.
Passive Residual Income