What the heck does passive income mean anyway?
You’ve heard it from the make money online YouTube bros.
They make it sound like laying on the beach with your laptop while the money just comes rushing in.
That can’t be.
So, what is it, really?
And is passive income even real?
First, let me tell you that people differ on what passive income is and is not.
Let me start you off with a definition of passive income.
Passive Income = income that is earned without you actively having to work for it.
The income is either earned from work you did previously to set up a business or investment that primarily runs on autopilot or…
You already had a bunch of cash invested, and it pays you interest or dividends automagically (I mean, automatically).
Ok, so I asked AI to explain passive income to an 8th grader.
Here’s what ChatGPT had to say about passive income:
“Imagine you have a magical piggy bank that can give you money every month without you having to do anything.
That’s what passive income is like.
You know how sometimes people have jobs, and they have to work for hours every day to earn money?
Well, with passive income, you do some work or invest upfront, and then you keep getting money from it regularly, even if you’re not actively working on it.
For example, let’s say you write a book. Once you finish writing it, you can publish it and start selling copies. Every time someone buys your book, you earn money.
Even if you’re not actively writing or promoting the book, you still get paid when people buy it. That’s passive income!
Another example is if you own a rental property. You buy a house or an apartment, and people pay you monthly rent to live there. You might have to take care of things like repairs or finding tenants, but once everything is set up, you keep getting money from the rent without doing much else.
So, passive income is like having a unique way to make money that keeps giving you income even when you’re not actively working. It’s a way to make your money work for you instead of you always having to work for money.”
Well done ChatGPT, well done.
I agree with the story, and it makes sense.
I heard this quote about passive income, and I LOVED it and have said it ever since.
“I’ve never heard of passive income that didn’t take a lot of work.”
So, I think we now know the question of…
Is Passive Income Real?
Heck yeah, it is.
It’s just not easy to make as some folks make it out to be.
Getting to the point where you can actually make money in your sleep takes a lot of hard work first.
You have to get an asset running (mostly) on autopilot, where it can generate cash for you.
You just need enough of a cash nest egg where you can live off of the returns that are automatically generated.
Currently, interest rates on savings accounts are above 4%!
For every $10,000 in savings, I can generate $400 per year (before taxes).
So let’s just use the gross (before tax) numbers.
$100,000 = $4,000 per year.
$1Million = $40k.
That’s a cool $400k paid to you for doing nothing.
That’s Passive Income.
To get $10M, SOMEONE had to do a lot of work.
So you can’t get around that part.
Ok, well, shoot. I don’t have $10M.
Ok, so what are some different ways to make passive income?
Passive Income Ideas
Let’s name some ideas.
I’ll order them from the most passive to the least passive.
Truly passive. As explained above, if you have enough of it, you can just live off of the interest that the cash generates. Now, of course, there’s inflation and taxes. But we won’t get into those for the sake of these examples.
Some stocks pay dividends. These payments are truly passive. Money while you sleep.
The US stock market also has a pretty nice historical track record of going up over time (7-10% over the last 100 years, depending on what data you look at).
That’s not bad. Using the rule of 72 (one of my top personal finance rules!), this means your money would double every 7-9 years or so.
That’s passive, baby!
This can become passive once sent up properly. Imagine having an entire apartment complex that’s fully managed by a company. If you don’t have to ever think about it, that’s passive.
But I can tell you that even with a management company and a few rental properties, it’s still an investment that I am required to think about and make decisions for.
I still have to have insurance, pay taxes, and answer management’s questions.
Creating Digital Products
This is a great example of something that can become passive after getting it fully set up.
Imagine making things like e-books and online courses that people can buy and consume.
Once you create them, you can sell them online forever.
You can earn money whenever someone purchases them.
Affiliate marketing is similar to other digital products. You can recommend products or services to your followers, and if they buy through your unique link, you earn a commission.
It’s you being a middle person connecting buyers and sellers.
And if you can get a consistent flow of traffic to your offerings, then this can also be a nice passive income play.
Want to learn a bit more about affiliate marketing?
This overview and list of programs will get you started.
So, these examples lead me to ask…
Is Passive Income a Lie?
Passive income isn’t a lie.
But the way it’s sometimes sold online by ‘gurus’ makes it sound easier than it is.
But no worries.
You’re now a passive income sensei.
Now get out there and create some passive income!