What is Passive Income and How Can You Earn It?

Have you ever heard of passive income? How about regenerative income? These terms don’t often come up in general conversation, but if you learn what they mean and earn money passively, you could become very wealthy in the not-so-distant future.

What is Passive Income?

Most of us have only ever been taught about earned income. This is where you go out into the world, find a job that pays a certain amount of money per hour or yearly (with a salary) and work just hard enough not to get fired. This way the company gets a certain amount of work done for them and you receive a steady paycheck each week. If you want to earn more money, you either have to prove that you’re worth more than your paycheck, or you have to find a side-job that will pay you money for those hours.

With this earning method, money is finite. There are only so many hours in the day, which means you can only earn so much money. Even lawyers have a finite amount of money that they can earn. Sure, it might be more than you, but a lawyer that earns $100,000 a year cannot suddenly work ten times the hours to earn a million. There just aren’t enough hours in a day.

“If you can make a thousand dollars, then you can make a million.”

The quote above makes absolutely no sense when we consider earned income, but it describes passive income perfectly. Passive income is money that you work for one time, but are paid many times over. One of the best examples recently is the apps that you find on your phone. Angry Birds was created by a few individuals (I assume – I have not actually looked into this story) and was published in the App Store. They did the work up front for no payment, but thought it might pay off if some people downloaded the game onto their phone. Β Boy, did it ever! This one game has produced thousands (probably millions) of dollars every month, and no work is really being done anymore. At this point, Angry Birds is developing passive income.

Other forms of passive income are song writing, book writing, real estate, and systematic business ventures.

20120204 - stack of moneyHow Can You Start Earning Passive Income?

Since the popular success of Angry Birds, every Joe Schmo thinks they have the next big idea in the App world. While some Apps do earn quite a lot of money, most of them fail miserably and earn absolutely nothing. So what is the best way to earn passive income these days?

The best form of passive income has historical been in real estate. In order to do this the safe way though, you need to have large sums of money, which many of us do not have. But, this is why I continually advise people to get rid of their debts. By riding themselves of debt, they dramatically increase their cash flow, which can then be saved and invested.

The best real estate investments are often in multiplexes, where you can purchase more rental space for a lesser amount of money (in comparison to individual home purchases). Rent is still fairly high for these units, which allows you to earn more money for less square footage, which will then allow you to repeat your real estate investment into another complex. Once you own a couple of multiplexes and owe no debts to the bank, retirement may just be around the corner. Because remember, the money (with passive income investments) will keep coming in and will keep growing with each reinvestment.

Book writing still produces passive income today as well. The only problem is, fewer people are reading books and it is increasingly simple to write and self-publish your own. At this point, there are far more books out there than there is demand.

Passive income is not limited to certain segments of business however. You could produce passive income in any business. You just have to own it and develop a system so it can run smoothly without you. Β For example, you could own a restaurant that, when a proper system is applied, would run almost entirely without you! If it is profitable this way, then you could open another restaurant, and then another. Soon, your restaurants aren’t just producing food, but are also producing lots and lots of money – all without your magic touch. Direct your focus toward passive income and you won’t regret it.

Do you plan to produce passive income in the future?

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20 comments to What is Passive Income and How Can You Earn It?

  • Another form of passive income is through royalties. The descendants of Elvis Presley are still enjoying the money from the career of the late King Elvis. Now this is a million dollar blog. Just by reading this makes me excited. One thing i don’t understand about your article though. Is the networking by author Robert Kiyosaki an example of what you mean a systematic business ventures?
    Jeff @Project Ikonz recently posted..This million dollar blog was nominated for a Liebster

    • Yes, royalties are a form of passive income, but it’s a little difficult to set that up… πŸ˜‰ Networking is one example of systematic business – but I am more referencing The E-Myth – how any business can be turned into passive income with a proper system. Thanks for the great question!

  • Another form of passive income would be dividend paying stocks/funds. I just had another $100 dropped into my IRA thanks to owning 100 shares of SDRL (well $98 really). Next time around it will be $196 since I bought some more because it dropped in cost to pick up some more. It equates to about 10%/yr in dividends. At the same time, I believe my 401k added another $310 in dividends. Very thankful am I! πŸ™‚
    One of my goals is to generate $50k/yr in dividends and other passive income as I approach retirement. If we are able to payoff all our bills including mortgage by that time, we’ll be sitting pretty comfortably if SS is still around.
    Chris recently posted..Your biggest expense should be you!

    • That’s a pretty sizable goal Chris! But if you have enough money invested to receive $50k back from dividends, you definitely be sitting comfortably. πŸ™‚ Thanks for the comment!

  • Many years ago I launched a website about digital music and MP3s – long before Itunes and similar companies gained in popularity.

    It very quickly began ranking in Google and driving affiliate revenue and stuck to the top of the search engines for 4-5 years before eventually dying out.

    After the first 6 months or so of work I never touched the site again apart from renewing my domain/hosting each year. It kept on drawing in traffic and earning me commissions without any influence from me each month.

    While most websites require regular maintenance/upgrading/expansion this was the best form of passive income I’ve experienced over the years.
    FrugalityMagazine.com recently posted..Why I Accepted A Job I Hate (And Why I’m Still There Now)

    • That sounds awesome! I doubt we could get away with a site ranking that high for that length of time these days. Google just changes things too quickly and has that updated algorithm that almost requires us to update our site on a consistent basis. That must have been an awesome experience for you though. Thanks for the comment!

  • I think the ultimate passive income investment is dividend investing but the quickest way to riches is probably through real estate.

    • Dividend investing is good, but the non-dividend side of the investment (the actual stock price) often goes unmoved. So yes, the stock does pay money out, but it might actually return less money as an overall investment portfolio that only increases based on the stock value. I do love your comment on real estate investing. That’s the direction I’m headed!

    • Actually, I’d have to say the quickest way to riches is first-and-foremost tied to how much of your hard earned income you put aside (just like Sam over at Financial Samurai suggests).
      After all, if you put away 50% of your paycheck each and every year, that means you’re only living on 1/2 of your paycheck. So every year you work, you also save at least a year toward your ER – early retirement.
      Chris recently posted..Making the choice to pay more taxes … just to pay more taxes

  • […] If you increase your income wisely, then you should soon be able to work less and earn more (via passive income). If you put in the extra hours now, you can not only amass wealth, but you can almost certainly […]

  • Your post is quite helpful! This will encourage especially the beginners to pursue with their writing and earn passive income. Keep on writing great and informative tips here!
    Jackie Bolen recently posted..Top 10 Passive Income Ideas

    • Thanks Jackie! I’ll be writing more about passive income in the near future since we just started our first real estate venture 6 months ago! It’s been a blast so far and the income is exciting!

  • Looking forward to your future posts on passive income. I’ve been into this for quite some time now but I still learn many new things from reading posts like this.

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