what is passive income

What is passive income?

  • July 1, 2016

Passive income is money that still comes in when you are not actively working. It offers the promise of being able to leave a conventional job, where you trade time for money, and enjoy a life of freedom to work when and where you choose instead. Sounds pretty good, huh?

Taken to the ultimate, you can potentially spend your time doing whatever you want, whilst your income still rolls in. Whether that’s sipping cocktails on a tropical beach whilst working from your laptop, travelling around the world crossing off items on your bucket list, or simply raising your kids as a stay-at-home parent. Whatever you want. It may just mean the freedom to work for yourself, when and where you choose.

One thing it is not, is easy money. Not in the context that we’re talking about here anyway. Building a passive income stream takes a lot of work upfront. A lot of work. But what it then gives you is the ability to de-couple your income from your time. It could perhaps more accurately be called residual income.

In a conventional job, you have to put time in to get money out. The moment you stop working, your income also stops. So to maintain your lifestyle you have to keep working. If you love your job, that’s great. But most people don’t. There are probably a thousand things they would rather be doing instead, but they have to work to pay the bills.

That leads to the sad situation where most people spend all their time doing a job they hate, just to be able to afford a life where they keep on doing exactly that. And then, after 45 years, they can stop and do what they want for a bit. If they get there. Hopefully, they aren’t too old and tired to enjoy it by then.

Passive income offers an alternative to this. An escape route where you can spend your life doing what you want to do, and still maintain an income.

In fact, you can maybe not just maintain your income, but possibly earn more, even much more than you did by working. That was certainly true for me. Once it took off, my passive earnings far outstripped the money I made through conventional work (and I wasn’t poorly paid).

The trouble with trading time for money is that time is a finite resource — you only have so much time. Once you’ve traded all your time, there’s nowhere to go. There’s no gearing — your income is limited by the amount of time you can trade. With passive income, there is no such limit. Your earnings can quite literally be unlimited.

The other problem with trading money for time, is the moment you stop giving the time, you stop receiving the income. There is no residual income from all the time you have spent. That means you have to keep spending your time doing what you don’t want to do

Passive income – a definition

The American IRS defines passive income as coming from “trade or business activities in which you do not materially participate”.

That’s a reasonable starting point, but it includes many things that are outside our interests on this blog, for example, income from property rental, income from investments in stocks and shares, interest on savings accounts, peer-to-peer lending, licensing fees on patents, and royalties from your hit record.

You could also own and operate vending machines, advertising billboards, or a self-service laundry (laundromat).

All of these can provide a passive income of sorts, but they require some significant capital to begin with. Or a prodigious musical talent. Both of which are things that most people don’t have.

But what we’re looking at on this site, is passive income that can be generated by anybody, without needing these things. And what we’re really concerned with is generating freedom, as well as income. Do you want to have to visit the laundromat every week to stock up on soap powder, or drive round all your vending machines to restock them? Not really, that’s not the sort of passive income we’re looking for here.

Passive income – our definition

For the purposes of this website, when we talk about passive income, we are really talking about passive income that is generated online. This is what gives us the freedom to work from anywhere, and at anytime. That is the big goal of this passive income lifestyle that we are pursuing. It doesn’t mean we don’t work, it just means we have the freedom to choose when and where we work. So we want the option, even if we don’t choose to exercise it, of being able to work from a laptop on a tropical island (as long as it has wi-fi). Alternatively, you could rent an office, work from Starbucks, or just from your dining room table. Or all of the above, it really doesn’t matter — it’s your choice, whatever you want to do.

The first requirement, and this is the passive part, is that it should be capable of sustaining itself even when you are not directly working on it. We don’t want to have to keep working all the time to keep it flowing, otherwise we’re back to trading time for money again, just online this time. Realistically, you will probably have to put some time in now and again to maintain it. And you will have to put some time in if you want to grow it, but that’s your choice. You may have to put a shedload of time in at the beginning to get it up and running, but after that it should pretty much keep going on its own without too much work. Residual income is our goal. I have sites that still earn me money every month, despite not having been touched for years.

It should also not require a real-time presence. That is, you shouldn’t have to be present at any particular time or place in order for it to work. In a conventional business, if you sell something, you would have to be there to deliver it, so that is not passive. To meet our requirements, a passive income system should not depend on upon your presence or availability in order for it to operate — it should run on its own. You might have to answer the odd email from time to time, but the income stream should be automated so you can quite literally earn money while you sleep. That’s a very hackneyed phrase, beloved by internet hucksters and charlatans everywhere, but it’s a very desirable goal and therefore a fundamental part of our definition. And I can tell you from personal experience, there’s nothing quite like the feeling when you wake up, check your figures and see you made more when you were asleep than you used to do in a day’s hard work.

The next requirement for our passive income model is that it doesn’t require significant capital investment. You might have to spend a small amount on web hosting, software tools, email services etc, and maybe outsource some design or writing, or technical work, but not huge sums. Perhaps a few hundred, although you can start with less, but certainly not thousands. If you want a passive income from sources such as property rental, investments, or peer-to-peer lending, then you will need a few hundred thousand, to begin with in order to make any significant income.

The main investment you will have to make is time. And make no mistake, you’re going to have to invest a lot of that in the beginning. But consider the end goal — to be able to live and work anywhere you choose, work when you want, have no limits on your income, and have it continue even when you’re not working. Could you even imagine a better scenario than that? That has to be worth all the work you’ll put in at the beginning.

The fourth requirement for our type of passive income is it has to be something you can build up to. Something you can do on the side at first, and grow whilst you’re doing your day job, until it reaches the point where you can do it full time. That glorious day when you walk up to your boss and give them the good news… (with or without accompanying finger, see how you feel on the day). So you should not have to take a massive risk, and jump off a cliff without a parachute to start it.

I’m going to add one more requirement to our model, and that is that it should be something that anybody could do. It must need no qualifications other than a desire to succeed, the willingness to put the work in up front, and the ability to learn as you go. It should require no specialist skills or experience to begin with, you will learn those along the way

So for our purposes, passive income is:

Self-sustaining online income that doesn’t require a real time presence

And to get the maximum benefit, we are only interested in passive income strategies that:

  • Do not require significant capital investment
  • Are scalable so you can start without having to quit your day job
  • Anybody can learn

Now we’ve defined what passive income is, let’s take a look at some ways of earning a passive income.