I may be the furthest thing from an expert on the topic of passive income. Or anything else, for that matter. But it is possible that this will be the most important post I ever write for someone out there. Anything is possible, right?
In fact, I have been wanting to write this post ever since the inception of this blog. It forms one of the key cornerstones of this new life I am currently trying to build. And anyone else wanting to take a stab at something similar should understand the basic concepts of passive income.
What has taken so long to write this if it is so important?
Me writing about passive income at this stage in the game feels a bit like me getting my white belt in Tae Kwon Do (the default one you are given at the start of training), and then writing a book about Tae Kwon Do. A tad premature. Or at least that is how I felt for a long time.
But I guess it could make some sense if there were people out there who had never heard of Tae Kwon Do. Or did not understand any of the benefits of practising it. In other words, you do not need to have a black belt in Tae Kwon Do for it to be okay to tell people all that you know about it. Whatever that may be.
Similarly, I have taken perhaps ten yoga classes in my life and have told many people I think it’s a great thing to do, and that they should do it. I certainly don’t need to be a yoga master to be able to say that.
So why all of a sudden now?
Passive income is something that requires a great deal of time and energy to get setup. Perhaps years, even. And my waiting until it is working for me to say, “See – it works!”, is too late for this blog and its followers. People need to be in the know now, and hopefully the interest of a few will be piqued and they will have a go at following suit.
But I will be sure to write that “See – it works!” blog post when the time comes. Don’t worry.
Passive Income: A Definition
From Wikipedia, passive income can be very broadly defined as:
“…an income received on a regular basis, with little effort required to maintain it”
After copying, pasting, and re-reading it a few times, it doesn’t seem like there should be any surprises there. It is exactly what it is, after all. I quite like that definition, in fact, it forms a great baseline to start from.
What the definition lacks though is any reference to how to achieve this outcome. That of course is the hard part.
But what it all boils down to is, getting away from directly trading hours of your life for money at some x:y ratio. Instead, you invest extra time and/or money in the beginning setting things up, then continue to reap the rewards long after your initial investment has passed. This concept should be nothing new to any entrepreneurs out there.
A few examples should help us to move forward from here.
Examples of Passive Income
There are many types of passive income. Interestingly, the classic, old-age pension fund is itself a form of passive income! Unfortunately though, you need to trade thirty to forty prime years of your time for it. Not good enough for me.
Some other examples:
- A stock and bond investment portfolio that you preferably self-manage
- A YouTube channel, or a blog like the one you are reading right now that sees enough visitors to earn a little cash (Don’t worry, this one does not. Yet.)
- A book you wrote and published
- A rental suite in your home that you manage
- A website or app that you built or had built
- A business, potentially online but not necessarily, that you setup and made yourself the middleman for
And so on.
Again, the concept is nothing new here. It just needs to be thought about in a new light.
Perhaps the biggest hurdle causing people to reject passive income as a reliable source of income, is the unlikelihood of finding one, single stream the makes enough to live on.
That is where the idea of ‘nano streams’ comes into play.
Similar to the way some people earn income living in small towns as I’ve come to learn, the idea is you generate multiple, smaller streams of income that add up to a whole. A big enough whole to live on.
As a potential, very loose scenario, a person might be earning money from five of the six streams noted above. If they can get their spending down to $30,000/year, and we assume an even split between the five for a moment (which of course is highly unlikely), each stream needs to generate $500/month.
Many people seem to think that quitting your job and attempting this sort of thing is a risky prospect.
It is actually the opposite: holding on to your one job that pays for everything is far more risky. Lose that one income stream, and you are in trouble. Losing one of your passive, nano-streams won’t be nearly as detrimental if done right (refer to the above scenario).
And remember, you can always go back to what you were doing before if you can’t make it work out. I promise you that.
I am currently working towards five of the above noted income streams:
- Investing the money we just earned from selling our house
- Renting one of our cabins on airbnb which goes towards all maintenance and improvements on the property
- Working on a video game that is due out later this year
- Working on converting my year-long Africa blog into a three-part, self-published series of books
- Building an audience on this blog so that I can potentially one day make a little on the side from ad revenue. (Of course this blog is anything but passive. It is in fact quite a lot of work. Lucky for me, I enjoy doing it.)
I have many, many other ideas for the future too, but one thing at a time of course. Or five, I suppose.
If ever you thought I was planning on moving to the woods and retiring as a hippie after I quit my job, hopefully this section will set things straight once and for all!
Much of it comes down to figuring out what you specialize in. What you are good at.
For me, I’m good at both saving and investing money, I enjoy writing, I love traveling, and I can somewhat program computers. Hence, my above stated goals that I’m working towards. I have other specializations too that I plan on capitalizing on later.
So. What are your specializations? What do you have a lot of knowledge about? What are you good at? Most importantly, what excites you?
This isn’t something you can just look at the ceiling right now for ten seconds and come up with an answer for. You need to reflect for a while about it. Put the distractions away. Go for a walk. Sit by yourself on a park bench for a while. Pour yourself a whiskey and go ponder on your balcony. Or something like that.
Love it or hate it, or him, The Four Hour Workweek by Tim Ferriss was what first got me thinking on these terms. It is a great book and you should read it if you have any interest in any of this. Which you probably do, if you got this far.
Pat Flynn is also the Man when it comes to this stuff. He is the creator of the Smart Passive Income blog which you can find a link to on the Blogroll at the side of this blog.
There are many, many books on the topic these days. The $100 Startup is a notably good one.