October 12, 2021

Passive Income And Why You Need To Know About It

Passive income has to be one of the most delightful ways to make money. Passive income is money which flows in regular intervals without the need for putting in a considerable amount of effort to create it.

The reason why passive income is appealing is that it requires little effort to make money. This is what is often referred to as making your money work for you. Generally, you invest your money in a product that will generate an income.

But beware, passive income is taxable. However, don’t let the tax deter you from creating a passive income. Passive income is taxed differently than active income, but it is still taxable so be knowledgeable before investing.

What is Passive Income?

The goal of passive income is to earn money while you sleep. This is how to get your assets working for you. You invest time in building something upfront that will generate income down the road with little effort on your part.

Building a business that requires time upfront but allows you to work less as the business gets going is a great way to generate passive income.

Investing in financial products that produce dividend income or interest income and appreciate in value over time is ideal.

Passive Income for Beginners

There are many ways a beginner can start investing and making money. As Warren Buffet is known to say, “If you don’t find a way to make money while you sleep, you will work until you die.”

Often when people need more money they turn to a part time job or side hustle. The better option would be to stop trading time for money and create passive income.

1. Bonds and GICs

A common method for passive income is investing in financial instruments such as bonds or GICs. The financial instrument protects your initial investment and offers interest payments in exchange for you lending them money. They are a safe investment, but the drawback is they offer lower interest payments.

2. Investing in the Stock Market

There’s more risk in investing in the stock market as there are no guarantees, but the idea is to purchase shares in exchange for those shares to appreciate in value. The good shares will offer dividend payments as well.

3. Rental property

Investing in rental property can be passive if you hire someone to do the maintenance and repairs in the building. Ideally the building you invest in will appreciate over time and you will be earning rental income each month.

4. Royalties

A royalty is a legally binding payment made for the use of assets such as copyrighted works (books, music), franchises, and natural resources.

5. Affiliate Marketing

This is when you earn a commission for selling another’s product or service. Many bloggers and podcasters use affiliate marketing to add to their income streams. There is no work involved on your end when you sell other peoples products.

[Wikipedia: Affiliate marketing is a type of performance-based marketing in which a business rewards one or more affiliates for each visitor or customer brought by the affiliate's own marketing efforts.]

6. Selling your Own Digital Products

Creating an educational product to sell to others, creating membership sites and creating templates or tools to sell to others are a great way to make passive income. The work goes in at the start to create the product, but once that product is created, there is very little to do. Just watch your product sell.

7. Fractional Investing

Tech companies are disrupting the traditional methods of investing and allow people to invest in fractions which is more affordable. Real estate and stocks are crowdsourced and this makes investing more affordable.

The bottom line is getting your money to work for you is a smart way to earn money. It frees up your time pursuing active income and it’s an excellent way to protect the value of your money. Ideally you are investing your money in appreciable assets that offer passive income as well.

Note: This article was first published by Melissa Houston in Forbes on July 7, 2021.

Generating Passive Income is a Desirable Goal. But it's never a self-runner and not everything is for everyone.

Four Criteria to Select the Right Option

First of all, the seven options to generate passive income are very different. Based on four different criteria the options are evaluated.

- Time until return of income.
- Required financial Investment.
- Financial Risk (of capital loss).
- Return on Investment (income potential in relation to input).

Looking at all criteria with a traffic light evaluation (red / amber / green = negative / neutral / positive) leads to a recommendation.

Of course this evaluation can look differently, e.g for a successful author who can generate high royalties for her bestselling books.

Neglecting cases like a bestselling author we recommend to take the minimum investment and low risk route.

The options Bonds, stock market and real estate require financial investments. In addition, the stock market,  has the risk of capital loss if the targeted markets do not develop as projected.

Returns form Royalties, e.g. books and music, require specific skills and most likely a lot of patience. In addition, the returns in relation to input of time and money oftentimes are not very attractive. The assumption to achieve celebrity status with high income as a writer or musician bears a high risk of realisation. Very few will achieve it.

Selling Own Digital Products and Fractional Investing show similarities to books and the stock market, however on a smaller scale of risk with more down to earth topics.

And the Winner is - Affiliate (and Referral) Marketing.

Taking all criteria into account, affiliate marketing is the most attractive option.

However the setup looks like, selling someone else's products bears a low risk with solid earnings in case the products are selected wisely and the business potential has a sound relationship to commission levels and the required input in time.

Most important: the best affiliate marketing programs require no investment in inventory and all aspects of fulfillment and financial transactions are covered by the product owner.

One of the best programs available is the Lifeplus referral system which is built on word of mouth recommendations from customer to customer. Commissions are paid based on the product purchases by referred customers.

Building a Passive Income Reqires a Building Phase

Many People strive to achieve the proverbial squaring of the circle: quick, if not immediate results and money rolling in continuously without much work and a low level of risk.

This is simply not going to work, it is unrealistic. One of my most important business rules applies with almost no exception and it is especially true if it comes to passive income.

Action = Reaction. Nothing In = Nothing Out.

A business, started from scratch first, requires a high input by the founde-entrepreneur. With a business specific time line it takes a while until an organisation is developed, customers are found, sales are generated and money is cashed in.

Over time, especially as a team is built, the income level increases while the business owner can reduce his input and delegate tasks to the organisation.

This also applies to affiliate marketing, regardless if carried out from a solo entrepreneur, in a layered structure or as a classic hierarchical corporate organisation.

The founder-entrepreneur will most likely keep the role as the inspired driver, motivator and creative head of the business.

Interested in my business, how it works and how you can probably benefit from my work? 

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Books are the plane, and the train, and the road.
They are the destination, and the journey.
They are home.

- Anna Quindlen

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