I know I have already done a post on passive income. I was sitting down one day and wrote out some more by hand. Sorry if some of this is a repeat.
Passive Income vs. Active Income
What is passive income and why do you want it? Basically passive income is making money while you sleep or vacation. How would you like to go on vacation and come back with as much or more money as when you left? (And not because you hit the lottery while you were on vacation.)
This is basically your salary, your paycheck. The problem is that you are trading time for dollars. You only get paid for the hours that you work. If the work is something that a lot of people can do, it doesn’t pay well. For example, washing dishes or digging ditches. You can be really good at it and you still won’t make much money.
The more unique your skills, the more you can make per hour. Lawyers make $200-500 per hour and sometimes more. A doctor is similarly highly paid because of their specialized knowledge. But even among doctors, some with unique skills are paid much more than other doctors.
BUT. They still only get paid while they are working. If they take time off or go on vacation, they aren’t making any money. So their income is capped by the hours they can work unless they have another source of income.
Passive income is not dependent on how much time you put in, but on how smart you are in how you use your time, resources and money. Passive income can take various forms. Following are a number of examples of passive income.
One way many people do it is investing in stocks or bonds. The assumption is that you will receive income from dividends and also that the value of the stock will go up over time. The problem is that sometimes the value drops so you not only aren’t getting passive income, you are losing money.
Another way is to loan money and earn interest. A wise person once told me that smart people (and often also wealthy people) earn interest and that foolish people (and usually poor) pay interest.
Hard money lenders
One example of this are hard money lenders. These can be anybody. There is a doctor locally who is a well known hard money lender. They lend money to people rehabbing houses. Frequently they take a fee of 5% of what is loaned and the interest rate is often 12-15%. Why would someone borrow at such high rates and with such high fees? Hard money lenders are more flexible than banks. (But they aren’t stupid. If you don’t perform, they will end up owning your house, although for most, this isn’t their goal.) You don’t need all the paperwork associated with a bank loan. It can be done much faster. And what if you have a ding on your credit and can’t get a bank loan? The hard money lender only cares about if the deal makes sense and not your credit rating.
You would never use a hard money loan to buy a house and rent it out. You would lose your shirt. The loan makes sense when you buy a house, take 1-3 months to fix it up, then sell it. So you are only paying the high interest rates for a short while and if you did the rehab right, you have significantly increased the value of the house and you will make a nice profit despite the high interest rates.
But, for the hard money lender, rather than making 2% interest in a bank account, they are getting 5% of what they loan and then 12-15% interest. And, if the rehabber is fast, they can do this with their money 3-4 times a year. It only takes them a few years to double their money.
Book and Music Royalties
If you write a book or write a song or sing a song that is popular, you can earn a lot of money on the royalties. Of course, many people write books and songs that aren’t that popular and never make much money. But the idea is that you put in the time on a one time basis and then you can make money from it for years to come.
TV and Movie Royalties
Similar to book and music royalties. If an actor is in a TV show or a movie, they will get royalties whenever it is shown or a DVD is purchased. If it is popular in reruns, they can make money for years for the short period of time they did the acting. However, this isn’t true for all actors. Performing on stage is like having a salary. You only get paid for the performances you act in and the salary is limited by the size of the audience in the theater. But for TV and movies there are two effects that make for a much greater income. The first is that the audience can be in the millions and therefore the pay is greater. The second has already been mentioned in that you not only make money at the time, but each time it is show in the future which can’t happen with a play or musical.
Inventors, Patents and Royalties
Another way is to be an inventor. You can then patent the product or process and license it to a company who pays you a royalty for the use of the invention. Another way is to create a company around the invention that grows and if run well, allow you to step away while other people run the day to day business.
Starting a business
Some people start a business and they spend even more time working on it than they did when they had a job working for another company. The key is to create systems so that other people can be trained to do the work and you don’t have to be putting in crazy hours all the time. There is a great book on this topic called the eMyth Revisted by Michael Gerber.
Another way is to write a piece of software or an app or plugin which people then buy. Or you can set up a marketing / sales funnel on the internet which brings in leads or sales automatically for you.
These are just a few ideas for passive income.