Imagine a life where you sit back on the beach and sip the drink of your choice while listening to the waves crash. That’s the life you can live if you take the time to create passive income.
Coming back to reality, most of us are trading time for money. Meaning, you work an hour, you get paid an hour. And that’s how you make money to live.
And that’s what I want to talk to you guys about today: passive vs nonpassive income.
Passive vs. Nonpassive Income
Nonpassive income is the income you make by doing some sort of work. For instance, when I used to work in an office, I made a weekly salary for coming to work every day and performing a job.
If I stopped going to that job (which I have now, but that story is for another day), I would stop making money.
Same goes for businesses. Starting a business is definitely considered nonpassive income at first because it takes so much of your time to get started to make money.
If you stopped working on your business in the beginning, you would likely stop making money.
However, businesses are a unique situation. If you set your business up right and hire the right people, you can get your business running with very little involvement from you.
Then it becomes passive income and can be a pretty significant amount of income. But we’ll talk about this a little later.
On the other hand, passive income is income you make while you sleep…or do other things. Basically, you are making income by NOT doing work.
Examples of Passive Income
There are many different ways you can generate passive income. Typically, you must put a little work in upfront to earn a passive income stream.
Whether it be starting a business, saving, or investing, passive income streams are the most amazing way to create financial freedom.
Index funds are one of the most passive investments you can make. If you follow these frugal living tips, you should be able to save a ton of money and sock it away in index funds.
Learning how to live cheap is crucial to save enough money so you can reap the benefits of this passive income stream.
Typically, I recommend index funds over individual stocks as they have performed well over time, and you need little to no knowledge about the market to invest here.
Unless you’re a highly seasoned stock broker, your ability to choose winning stocks is a gamble. Index funds will always serve you better.
It takes a little work upfront as you need to find the properties, buy them, rehab them (if you need to), then hire a property manager to manage them. The property manager is key as this is what makes the investment passive.
I currently own 13 properties that I have a property manager manage. The most work I have to do is approve larger expenditures as necessary.
For instance, I just had to replace a water heater in a house and it cost $1K. I had to approve that. It took 30 seconds – pretty easy if you ask me.
The properties should bring in cash flow every month on top of the mortgage (if you have one). In addition, you have tenants paying down that mortgage while your property continues to appreciate.
If you did it right, you only put 20% down on a property that you will own right out in 15 or 30 years (most of mine are 15 year). And your tenants paid for the rest.
It’s awesome. Especially because it earns you a passive income as well as continuing to build your wealth. You can learn a ton about rental property investing by heading over to Bigger Pockets.
Blogging is not passive in the beginning. It takes a ton of hard work and grit to get to the point where you are making money.
But once you are there, you can hire people to do the tasks you don’t like and just work on the parts you enjoy. Which makes it less a job, more a passion.
Or you can hire people to do everything and make it completely passive.
Even if you decide not to hire anyone and to continue working on your business, blogging is an area that you can take breaks from and continue to make money. I take a month or two off every year and the income continues to come in because I produce evergreen content that people are always searching for.
Affiliate income is another area that takes a little bit of work upfront to set up, but once you do you can just watch the Benjamin’s roll in!
I loved the course Making Sense of Affiliate Marketing as it provided me with a good string base to start marketing. I do most of my affiliate marketing on the blogs, but you can use other methods (email, Pinterest, Facebook, Instagram, etc.).
Again, businesses take a ton of upfront investment – both time and money. You will put in a lot of time to get the business started and then even more time developing systems so it can run without you.
But once those systems are developed and you get the right people in place, you can have a business that effectively runs without your involvement.
I love this income stream as well, because as your business grows (even without your involvement) it also increases in value allowing you to have a pretty significant payday if you decide to sell it.
Plus, honestly, it gives you something to do even if you’re not involved with the day to day. I don’t know about you, but I actually need to have something to work on in my life.
I just don’t want to HAVE to work on it to make money. And that’s what financial freedom is all about.
Angel investing is a way of making a private investment in a company. Typically, an angel investor will invest money in an already established company, that shows a lot of promise, for a share of the equity.
They expect to see an exit strategy for the company where they can get their money back through a public offering of an acquisition.
The angel investor is not involved in the operations of the company. Work upfront will need to be performed to learn whether investing in a particular company makes sense.
But after that initial research, any money made in the form of equity is passive.
Angel investing can be very risky, so I would only recommend taking this route if you’ve got a pretty substantial nest egg and you’re ok losing this money.
There are a ton of people out there looking to borrow money to buy real estate, start businesses, consolidate debt, etc. You can make a pretty decent amount of interest by lending your money.
I lend money to others for house flipping from time to time. I get anywhere between 8-12% interest on my money.
You need to make sure you’re connected with the right people and have a team of people you trust before doing this. Don’t just led your money to any person.
There are also peer-to-peer lending options through platforms like Lending Club and Upstart. These platforms connect borrowers with lender are are a wonderful opportunity to make a great return on your cash.
Lending money does come with some risks as well. I always say if you can’t afford to lose the investment, don’t invest in something riskier.
With great risk comes great opportunity. LOL.
Back in the day, I used to have a CD (certificate of deposit) that paid 5% interest. Those days are gone.
However, interest rates can always go up in the future and this can be a great, low-risk way to make passive income. There are still some banks like Ally that pay higher interest rates.
It’s still pretty low, but these types of banks are good if you’re saving for a short term investment like a house or rental property.
You can also invest in Treasury bonds or Municipal bonds which are relatively low risk and will pay a higher interest rate than a regular bank account.
Create an Ebook/Informational Product
Obviously writing a book or creating a product is not passive. But the ongoing income it generates is passive once the book/product is complete.
I have a couple ebooks that I make passive income off of and it’s awesome! Consider a topic you know a lot about or something you’re passionate above and start developing a book or product based around that.
To Sum it all Up
The key difference for passive vs nonpassive income is the amount of work required. Nonpassive income requires you to work for your money, while passive income can be made any time, regardless of whether you are sleeping or hanging at the beach.
Have you generated a passive income stream? Comment below and let us know what it is and how it’s going for you!