For the last several years, passive income has been hailed as a near-perfect approach to generating wealth, appealing to entrepreneurs, investors and average working professionals alike. But the promise of effortless income generation sounds suspicious on its surface. Is there really a way to generate revenue without hours of work? And if so, is it accessible to the majority of the population?
The Idea Behind Passive Income
Strictly speaking, passive income is any kind of recurring income that is generated without ongoing demands for your time and effort. Wages are paid hourly and salaries are paid on an annual basis, with both forms of compensation contingent upon your working a specific number of hours; these are not passive. Instead, a passive income source would be one that sends you a check in the mail periodically, without any effort on your part.
Common Examples of Passive Income
To better understand what passive income is and how it works, let’s look at some of the most commonly cited examples of passive income in action:
- Dividend-paying stocks. First, there are dividend-paying stocks. Stocks represent fractional shares of ownership in public companies. In many cases, those companies decide to distribute profits regularly in the form of quarterly dividends; shareholders can count on a set amount of quarterly income based on the number of shares they hold.
- A monetized blog. If you start a blog that generates a sizable amount of traffic, in the realm of thousands of visitors per month, you can start monetizing it with the help of ads, affiliate links, premium content or other paid features. You’ll earn a share of revenue based on the number of people you attract, the number of sales you make or other factors.
- Rental properties. With rental properties, you can buy a property, attract a tenant and collect an amount of rent that exceeds your monthly expenses. With a decent profit margin and a few properties under your belt, this can add up to be a lot of income.
- Digital goods. You can also make passive income with the help of digital goods, like eBooks or stock photography. After developing these digital goods and marketing them consistently, you may be able to generate recurring revenue from all their future sales.
The “Passive” Income Myth
All these methods are proven to be capable of generating income. More than that, they’ve been responsible for developing many self-made millionaires. But it’s not the “income” part of the term we’re concerned with as much as the “passive” part of the term.
Passive income is rarely passive in the truest sense; while these (and other) passive income sources may require less effort than a full-time job, they may require effort in other formats and in other contexts.
Let’s take a look at each of these:
- Stock research and initial capital. It’s not hard to get involved with dividend stock investing, but you’ll still have to spend time researching which stocks are available so you can maximize your return. Additionally, you’ll need a sum of initial capital to achieve a meaningful stream; many dividends only pay 2 to 4 percent annually, so investing $100 won’t give you much of a return.
- Blog setup and maintenance. According to The Blog Starter, “It’s easier than ever to start a blog — but even with a good plan in place, there’s no guarantee you’ll be successful. It takes a lot of time to create content for the blog, research your target audience and refine your approach over time.” Since you’ll also need to produce new content on a regular basis, even a successful monetized blog will require at least a part-time job’s worth of effort.
- Property research and maintenance. Investing in rental property requires significant upfront capital (not unlike investing in stocks), and to be successful, you’ll need to carefully research and vet each prospective property. You’ll also need to maintain your properties and manage tenant turnover, or else cut into your profits by working with a property management firm.
- Digital good development. If you want to sell an eBook or stock photography, you’ll need to produce those assets first, then find a service like Shutterstock where you can sell them. This often requires dozens, or even hundreds of hours of upfront effort, and then you’ll need to market your work.
Some people have claimed that passive income is a myth, but that may be a little extreme. Instead, a more accurate assessment may be that passive income isn’t truly passive. No matter what, you’ll still need to put in the time and effort to make your income-generating strategy work; it’s just in a different format than your conventional job.