Passive income sounds like a fantastic idea: receiving a continual source of money for no direct effort. While it is often not quite as simple as that – and typically requires a lot of upfront effort, there is something attractive about creating a consistent source of income that you can rely upon either as a primary or supplemental source of income. This article explores the concept and whether it makes sense for you.
What is passive income?
Passive income is income that you receive without direct effort. One example is interest from money in your bank account or dividends that you receive from stock that you own. For these, and many other sources of passive income, the benefits can be enjoyed for many years (or decades) in the future – making a great way of supplementing income or if substantial enough, a possible source of funds to retire on.
Of course, with interest and dividends, you actually already need a lot of money for these to be a substantial source of continued income, however, there are other ways of building a source of income that doesn’t necessarily require you to have as much advanced capital.
Sources of passive income
The key thing with passive income is that it requires little continual effort to sustain the source of income. Now for some of these, such as interest, the levels of continual income – for others, such as home rentals, there may still be some continual effort, but by and large continual effort that is required is lower than what would be required from a traditional job.
- Interest, dividends, and pensions: This is one of the most common sources of passive income – returns from your capital or prior investments. Of course, while it is great to have this source of income, it is a lot harder to establish.
- Rental income: This is another key source of passive income – money received from renting out a property. This may include properties dedicated to long-term rentals, or potentially converting a room for rental on AirB&B or other creative uses of your property, such as converting a barn into a wedding venue. Again, not necessarily the easiest way of creating a sustained source of money, unless you are already fortunate to possess a substantial source of money or a second location.
- Royalties: This is another possible source of income – think the Christmas #1 song that is able to provide a sustainable source of money for years to come. A more realistic (although also not easy to pull off) example is the royalties from book publishing.
- Digital sales, including online courses: A slightly different way of establishing passive income is via digital sales online, for example, online courses. While you will likely need substantial skill in a particular area to justify someone signing up for your specific offerings, if you are able to create a successful offering, it can be a consistent source of income.
- Advertising: Online publishing is another source of income – the advertising either on websites, video content, or podcasts.
Recognizing an element of continual effort required
While some sources of passive income require no direct effort to sustain (think interest), others at least require some element of continual effort to maintain the income.
Rental income is a good example of this – although it is easy to think of it as self-sustaining source of money, you may still need to invest time in maintaining unit, managing contracts, and potentially evicting non-paying tenants. Not only is this potentially much more work than may be envisioned from the outset, but there is also more risk (and stress) than sitting back and letting the money flow in.
Similarly, although there may be some element of continued income from past blog posts or podcasts, in general, you will likely end up needing to continue to publish articles or podcasts to sustain the income.
Being realistic with the amount of potential returns
Passive income sounds great in theory, but can be hard to pull off. The more realistic the option appears, the more people out there will be also trying to get into the space. Making money through a blog, or launching your own podcast are both appealing ways of making money, however in-part because they have low entry barriers for others to get into, there are so many other people out there also trying to get into that niche.
The fact is there are a lot more struggling authors out there, each having difficulty getting traction on their self-published works, than there are individual making substantial royalty from prior works. While some people have incorporated passive income as a part of their income (and maybe particularly those who have developed unique offerings that connect well with their prior skills), the general proverb of ‘if it seems to good to be true’ also holds with passive income – establishing a continued source of revenue, and particularly one that can substitute for a full time job, can be incredibly difficult to achieve with very little work.
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