Earning passive income is thought of as the holy grail in the personal finance community.
What a life it would be to just kick back and relax on the beach with a pina colada as money comes in the door!
Passive income is one of the reasons why so many of us follow the dividend growth investing (DGI) strategy. However, there are still things about earning passive income that surprise people.
That’s why I wanted to write about this topic.
What is passive income?
Passive income is simple to define. It means once you do a certain amount of work money comes in without doing much further work.
Passive income can come in at any time. It’s 24/7. You earn passive income while you sleep, while you’re out with family/friends, and even while you’re eating.
Now, there are different degrees of passive income, which I’ll get into. However, by in large, passive income is a great thing to have. If you truly want a quality retirement life, you need to get start building passive income streams.
Good passive income streams just don’t show up over night. They take time to build up. However, if you are patient, you could very well retire rich on passive income.
Here are some surprising facts about earning passive income that you may not know.
1. There are varying degrees of passive income
There are different tiers of passive income. I like to divide them into two categories: volume based and fixed.
Let’s talk about fixed passive income. Fixed passive income would be something like rental properties. If you sign a lease with a tenant you know exactly what he/she will be paying for the next year.
No matter what happens you know how much cash flow will be coming in.
In contrast, variable passive income is the exact opposite. You DON’T know how much income is coming in every month. Let’s say you run a blog and generate advertising income from it. That’s passive income.
However, you have no idea how much traffic is coming in every month. One month can be very good and the next month is very bad. You can make $200 one month and $50 the next month.
So, which is better? In my view, it’s best to have both variable and fixed passive income sources. They have their ups and downs, but income is income, right?
2. Passive income streams can die out
For some reason, people think a passive income stream is forever. That’s not true. A passive income stream can die out. A natural disaster could wipe out your rental property (like the Hurricanes in Florida/Georgia earlier this year).
No source of income (even passive income) lasts forever. As a result, you shouldn’t depend on once source of passive income to live off (even if its dividend stocks).
I would recommend getting at least 3 – 4 sources of passive income cash flow to be conservative.
Three of the best sources of passive income are:
- Dividend stocks
- Rental properties
- Blog/website income
If you master three of these passive income sources, I am confident you’ll do very well in retirement.
3. Passive income is not always superior to active income
While passive income is simply amazing, that doesn’t mean active income is inherently bad.
Passive income get’s a bad rap because people associate it with their day job. Maybe you worked as a cashier, or a barista, or a receptionist at some point in your life. Those jobs are great examples of active income.
With active income, you earn a certain amount each hour and that’s it. You’re basically trading time for money. You have to work otherwise you don’t make any money at all.
And to be honest, all of the jobs I just mentioned aren’t the most glamorous. However, that doesn’t mean all active income is bad.
Consulting is a very lucrative business. I’ve done a few small consulting projects where I’ve made $150 an hour! If you find a good consulting niche, you could very will be making $100,000+ a year working part time!
In contrast, it’s very hard to generate $100,000+ of passive income without having huge amount of cash/capital.
4. Passive income is worth more than you think
From my discussions with readers and friends, people rarely place a value of their passive income. The only exception is with rental properties because a price is readily available in the market from brokers and sites like Zillow.
If someone has a ebook business, then they rarely place a value of what it is worth. This is because that business isn’t quoted.
I have an ebook publishing business that generates $1,500+ a month in passive income. That turns out to be ~$18,000 a year.
Let’s do a quick exercise. 30 year bonds with the U.S. government are currently yielding 2.82%. That means I would need to invest ~$638,000 into these 30 year bonds (at 2.82% interest) to generate $18,000 a year in passive income!
I couldn’t believe my little ebook business was “worth” that much!
It’s a good exericse to really think how powerful non-traditional sources of passive income are.
5. Passive income requires regular maintenance
No type of passive income (whether it be variable or fixed passive income) is sustainable long-term without some sort of “maintenance.”
The best example of this is with rental properties. All real estate needs periodic maintenance to extend the life of the property. Your property will need to be repainted occasionally. The house may need a new roof. The place might need new carpets or a remodel might be in order.
The point is, all sources of passive income will degrade over time if it is not properly taken care of with maintenance.
This is even true with online sources of passive income like running a website. You might need to update the site with new content to keep things fresh. Sometimes your website may crash or you need to update software to keep operations running smoothly.
Passive income always requires some level of regular maintenance to keep the income stream coming in. Don’t forget this very important role of passive income!
Readers, do you think I missed anything important about earning passive income? Let me know in the comments!