Passive income is beginning to be an internet craze. Sometimes people define it pretty loosely (like when I suggest that a blog can generate passive income). This often leads to some confusion about what is passive income.
For example, I post a monthly update on my extra income (that isn’t from my day job). I have labeled these updates passive income reports because I am working on developing a passive income stream from my blogs. It currently isn’t truly passive because I am investing a lot of time to build up my sites. But I have labeled these passive income reports because they will be eventually. So, what makes it passive or not?
What is Passive Income?
Passive income is money that you have earned without any significant investment of your time. In other words, it is all about producing a business of some sort that will continue to produce income without your time. The hype behind passive income is that you are creating a system that will keep going after you stop putting in your time. Work hard now with a continual cash flow later.
A popular means to generate passive income is to create a profitable business that you can pay other people to run and let you keep the profit. Many people are able to scale their business to the point that they can own the business, hire enough people to run and manage it, and enjoy the profit without having to do very much. The money literally rolls in while you sleep.
What Passive Income is Not
While I have tried to define what is passive income, sometimes it is better to explain it by giving examples of what is not passive income. Here are some things are not to be confused with passive income.
- Side Income: A side income, while very beneficial, does not equate to passive income. In other words, the large side income that I am generating with my blogs is not passive at this point. Since I am still investing a lot of time to manage them, I would hesitate to say that these are passive.
- Raise: While you may get more money for your time when you get a raise, it still requires your time to earn that money. Analyzing your hourly rate is important to consider if you are trying to build a passive income, but it should not be confused with passive income. If it still requires you to work at your day job, it isn’t passive. Passive income is about establishing a cash flow that will continue if you stop working.
Understanding the definition of passive income as creating a system that will generate income with no (or perhaps very little) work will help you on your way to build passive income. Often times, passive income is only made possible with money that you already have, but it is possible to create it with very little upfront costs, like what I am attempting to do with my blogs. This site is an attempt to inspire you to create your own passive income.
Nice summary! One thing I would add is the obvious – passive dividend and interest income from investments.
Thanks Marie – That’s a great suggestion. I have been thinking about dividend investments as well.
I’m starting to see passive income really happen on my sites through Adsense. To me, Passive Income is a matter of working now so you get an income stream later. That’s how I feel about Adsense. After 18 months of writing articles, I just crossed the $500 adsense mark for this month. It’s an awesome feeling! Gotta love adsense and passive income!
That’s awesome Tim. I am hoping to break the $100 mark every month by the end of the year… I have a long ways to go to break $500.
That’s what I thought too…until I got $90 in a month, then $197, then it seemed to jump exponentially! Just keep it up and write good stuff – you’ll get there faster than you think!
Great job explaining the differences between passive and not passive income. From the comments, I’m getting that Adsense is counting toward passive income?
I would say so. While you are still writing on the blog, adding in adsense doesn’t take any extra effort and you still bring in some money.
I am a newbie at this so I really appreciate your explanations. It’s great to know the difference between side income and passive income.
I’m glad Pam. I think you will be surprised how fast you will learn when you start reading lots of pf blogs.
This is a timely article for me. I have friends who started a daily deal site at the beginning of 2011. They have a great leadership team and have grown their company wisely. The CEO started an ecommerce site right before the dotcom bust in 1999 (art.com). They are not a huge daily deal site, but I have had a bit of passive income coming in through their site. The reason is they have a different type of network affiliate program that grows for you. It isn’t an MLM because it doesn’t grow perpetually (the affiliate program).
You get paid 2% of purchases for their deals.
One of the first friends from church I talked to about this has 2 inflatable playground centers here in Austin. He told me yesterday that his deal was running today. I didn’t think much about it, but my affiliate network has leaped 5% today alone.
My passive income is our family vacation fund (I gave my passive income a job!). It has grown 10% today. Now, that isn’t normal for me. I see anywhere from $30 to $50 a month, but I do nothing to get that.
Anyway, passive income…great and timely post today!
I should have noted my affiliate network has grown 130 today–not typical, but exciting. A whole bunch of mommy bloggers are promoting the site.
I’m just getting started on the passive income through blogging. Very exciting because I’m enjoying generating content. Another passive income option I’ve been looking at is P2P lending. I’ve heard some really good things and some mixed reviews.
I have heard some good experiences with p2p too, but for right now, it sounds too risky.
The time to buy high yield bond funds was back in 2008 and 2009 They were yielding over 20% because their was an assumption of a 1930′s like depression on the horzion of course that did not happen and the price of high yield bonds skyrocketed. Now thats passive income at its best.
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