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What Does Passive Income REALLY Mean and How to Create it?

Few concepts are more appealing and misunderstood than passive income. Many people think of passive income as a quick-rich-scheme where a few lucky ones found a formula to get in exchange for nothing.

While the vast majority of people make their income by actively exchanging their time for a salary, passive income means you continue to earn money with little to no daily effort to maintain, once the initial work has been done. 

Passive income streams require an upfront investment and a lot of nurturing in the beginning. But after some time and hard work, these income streams start to build and are able to maintain themselves, bringing you consistent revenue without much effort on your part.

It’s important to mention that the IRS has its own definition of passive income for tax purposes, which only includes income from rental activity or business activity in which the investor does not materially participate.

What Does Passive Income Mean and Why is it important?

“If you don’t find a way to make money while you sleep, you will work until you die.” Warren Buffet

When I was working my 9 to 5, even one I loved, the thought of being dependent on it to get my bills paid month after month, would overwhelm me. Plus no matter how much I worked or how good my salary got, there was a limit to how much time I had in a day, hence, how much I could make.

I know that is how the vast majority of the world works but, chances are if you are reading this,  you would also like some more freedom and wealth.

Developing a way to generate passive income provides many benefits, like:

  • Increases your wealth-building plan
  • Creates an opportunity to retire early
  • Protects you from a complete loss of income if you lose your job
  • It provides an additional source of income when you’re no longer able to work or if you outlive your retirement fund.
  • It gives you an opportunity to explore other interests or passions.
  • The amount of wealth you can create is not limited by your time.
  • In most cases, you can build it and maintain it from anywhere.

Does passive income really work?

Yes! Passive income is not another internet scam, It’s how the rich continue to get rich. When you don’t have money, you can leverage your time and effort to create income streams that will grow into the future. As you accumulate money, you can deploy that money (and even combine it with your time) to generate more and more passive income.

Passive income myths to forget about

If you’re serious about creating passive income you can’t afford to fall for these myths.

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1. Passive income requires “no work”?

Passive income always requires something upfront: time or money. However, the idea that it becomes passive after you do the work is what’s attractive about it. Say you spend 6 months writing and promoting a book to enjoy the royalties for the rest of your life.

Doing more work to promote it or create partnerships will boost your income, but there is a permanent element that requires nothing more from you to keep earning you money.

2. “Set and forget”

One of the most dangerous myths of passive income is that you don’t need to do any additional work after the initial set up. While the majority of the work is put up-front, you will still need to do some maintenance or hire someone to do it. Blog visitors expect new content, course buyers expect personalized support, etc.

3. You can get started in a week

If you are unfamiliar with content creation, is easy to assume you can toss together a blog or another passive income source in a couple of days. Actually, creating a source of revenue that will deliver lasting results requires a lot of time and work before you see any profit.

4. One source of passive income will do

Another dangerous myth of passive income is that you can rely in a single source of revenue. While you can definitely create a decent income from a single source, it’s better to diversify your income sources, especially if you’re planning on having these revenue streams replace your current job.

Most chances are, once your first income revenue requires less of your time, you will be hooked and ready to create the next one.

5. Real estate is king

With home and property values increasing at a rapid rate across the country, people are falling for the idea that property management and flipping are guaranteed methods of generating passive income.

In reality, repairs, dealing with bad tenants and other unexpected expenses eat away the income you could generate.

6. You need a business idea

When you read about passive income, it can be easy to get caught up in the idea that you need to become an entrepreneur or buy up property. But for many individuals, passive income means simply by putting money in savings and retirement accounts.

While it doesn’t sound as lucrative as an exciting new business idea, these have a much lower risk can make a big difference in the long run.

7. You need money to make money

Investing in the stock market or starting your own business might sound like it requires a lot of capital. However, you can start investing in the stock market with as little as $1,000 or start your blog for less than $8 per month.

If you don’t have a lot of money to begin, you will need to put up more time, but don’t let that stop you from starting.

How much can you make from Passive Income?

While this is a logical question, it is also as broad as asking how much can a business make.

Before you quit your day job, know that passive income generally won’t make you wealthy overnight. Creating multiple income sources is definitely not a short-term strategy, but it can build some serious money on the long haul. We’re talking anywhere from a few thousand dollars to hundreds of thousands of dollars—depending on the income stream.

While some people make a great living from one form of passive income, it’s better and more common to have a few different sources bringing you cash.

Choose a few things that sound interesting to you and try them out. Something will emerge that either you enjoy the most or is making the most money. Focus on that thing. Put some time and effort into it, then put some more time and effort into it.

Passive income ideas

what does passive income mean

1. Try out index funds.

Index funds provide you with a way to invest in the stock market that is completely passive. For example, if you invest money in an index fund that is based on the S&P 500 Index, you will be invested in the general market, without having to concern yourself with choosing investments, rebalancing your portfolio, or knowing when to sell or buy individual companies. All that will be handled by the fund which will base the fund portfolio on the makeup of the underlying index.

2. Make YouTube videos.

You can create videos in just about any area that you like and use Google AdSense to display automatic ads on them. When viewers click on those ads, you will earn money from AdSense.

There is a learning curve and a good bit of work that goes into creating videos, but once a video is done it can become a completely passive cash flow source for a very long time.

3. Try affiliate marketing

This strategy is perfect if you have a blog, website, or want to create one. Once you start getting readers, you can sign up to promote certain products or services on your site and get paid a percentage for sales completed through your referral link.

4. Put your photography skills to work

If you are already passionate about photography, Shutterstock and iStockphoto can provide you with platforms to sell your photos. They may offer either a percentage or a flat fee of each photo that is sold to a site client.

In this way, a single photo could represent a completely passive since it can be sold again and again. The key is uploading a good number of photos and get a sense of what the buyers like so you can do more of that.

5. Become a published writer

There has never been an easier time to publish your own book. This can be a lot of work up-front, but once the ebook is created and marketed it can provide you with a passive revenue stream for years. You can either sell the ebook on your own website, Amazon or offer it as an affiliate arrangement with other websites that provide content related to your ebook.

6. Get cash-back rewards on credit cards.

Did you know there are credit cards that provide cash-back rewards ranging anywhere from 1% to 5% of the amount purchased? If you are not doing this, you are literally losing ‘free’ money.

7. Invest in real estate.

This falls in the category of semi-passive income since an investment in real estate is always at least a little bit of an active venture. Still, once you have a property that is established and fully rented, it’s mostly a matter of managing the property and keeping it performing well.

Additionally, there are professional property managers who can manage your property for you, usually for around 10% of the monthly rent. This professional management can make the investment much more passive but will take a bite out of your cash flow.

8. Invest in real estate investment trusts (REITs).

Think investing in real estate, but in a truly passive way. You can do that through a real estate investment trust. This is something like a mutual fund holding various real estate projects. The fund is managed by professionals, so you never have to get involved.

They typically pay higher dividends than stocks, bonds, or bank investments.

9. Rent out unused space with Airbnb.

Airbnb allows you to rent your residence or part of it to accommodate guests and earn extra money just for renting out space in your home.

How much you will make will depend upon the size and condition of your home and your location. Naturally, if your home is located in a high-cost city, or close to a popular resort, your income will be much higher. It’s a way of earning money on space in your home that might just be sitting empty otherwise.

10. Create an online course.

There is probably something you know that people want to learn about. Why not create an online course and let it make you money while you sleep?

There are a number of ways you can produce and host your own online course. One very simple way is to use a website like Udemy as over eight million students and is a great way to get your content in front of others for their consideration.

Final Thoughts

Whether you’re trying to bring freedom to your life or find a better way of financing your retirement, pursuing a dream of generating passive income isn’t always easy, but it’s far from impossible.

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