How to make passive income: build long term success with 11 questions

For precise ideas and inspiration on what to do, please read our other article Passive income ideas.

It is the result of 1-week of research about passive income and many years of experience generating passive income. I am personally financially secure. It means my basic expenses like shelter and food are covered. I applied the principles laid out here to reach that.

Many websites are misleading about how to make passive income. The information here corrects many misunderstandings between passive income and side hustles.

The Gist (“Too Long Didn’t Read” version of the article)

You can make passive income with an upfront investment of time or money. It is no get-rich-quick scheme. But after the initial effort, you should be able to not work actively on it to generate income. That’s what makes passive income so enticing.

Here below the 11 questions about how to make passive income:

1. Why passive income? (Motivations)
2. What is passive income?
3. What is not passive income? Properly identify it
4. How to make passive income?
5. Active Income vs. Passive Income – Which Is Best for Me?
6. What are some examples of passive income?
7. Does passive income really work?
8. Where can I invest to get passive income?
9. What are the most popular passive income ideas?
10. How much passive income can I earn?
11. How can you choose the best passive income idea for you?

1 Why passive income? (Motivations)

Many expressions circulate on the web that entices people to make passive income. Phrases like “Make money while you sleep” and “If the only way you have to make money is to go to the office, you will never be able to quit”. Even Warren Buffet states that “If you don’t find a way to make money while you sleep, you will work until you die [1].

Passive income will give you more time to do things you love: time with family, travel, and a flexible schedule. It does that thanks to the less time of daily work you will need.

Don’t get me wrong, you can also find a work you are passionate about. Then passive income will give you even more choices with your time.

But the biggest value of passive income is to protect your time. There are many money-generating activities but not all are passive. So, what is exactly passive income?

2 What is passive income?

To the IRS, “Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity” [2].

For the purpose of this website based on research done, passive income is to make money without active daily work.

• We should avoid thinking that passive income is getting something for nothing. Passive income ideas require an effort upfront of money or time.
• It is not a get-rich-quick scheme. Those are typically scams. People invest at least 1 year (time or money) to get their passive income running. There are exceptions, of course. People having already the skills needed would reap benefits faster. Or people having money to invest put it in an interest-generating asset and reap the rewards. But even in those cases, it is not a get-rich-quick method.
• The only way to make money is to provide value. Making passive money implies providing value in a way that is not dependent on the use of your time.
• Passive income allows you to put effort today into something that will repay you every single day of your life.

Once the amount of passive income you can generate equals or covers more than your expenses, you can stop working entirely.

On one hand, you can create something that generates money even when you’re not actively providing your creation. For instance, a blog, course, e-book, video, or an online store. You might have decided to record the information to share and sell it. In that way, you do not have to be directly providing the information, like in a live course. On the other hand, you can make passive income activities, like saving or investing with high returns.

3 What is not passive income? Properly identify it

• A job: because you have to be every day at work to be paid.
• Side hustles
  • These are great ways to boost your income. However, they are generally active. With the right setup in place. Like systematizing, industrializing, and delegation, they could turn more passive.
  • A passive income activity can start as a side hustle because it requires money and/or time effort initially. But then, it should generate income without your active daily work on it. Verify whether the hustle can become more passive in the long-term or not
• Consulting/Coaching.
  • Good ways to make more money. They are just not passive. To turn them into passive, consider creating a course and selling it as mentioned in our article Passive income ideas.
• Trading
  • Many people confound passive investing with active trading. Both consider financial instruments. Trading requires your constant involvement to track price changes and economic events. Passive investing considers a rate of return. Once set up, you receive rewards at expected dates. Dividend investing is a clear example of passive income. Because you know that at a given date you will get a given return. For active trading, you get money only when you sell the investment. Besides, keep in mind that when the value of your assets increase (or decrease), that is not yet materialized. It is not yet in your bank account.

For more examples of active and passive activities, check our article Make money from home. Then you will not consider passive activities like surveys, delivery, ride-sharing, and others as unfortunately many sites do.

• If you are taking a significant amount of time to maintain what you think is passive income, it is not really passive. If the effort is done at the beginning and you structured it to generate income without you actively looking at it every day then it’s passive. Of course, you can choose to keep working on it to make passive income rewards bigger in the future.
• Do not mislabel convenience as passive
  • It is possible to work online from home while you do another convenient activity like housesitting. However, that is not passive, as you still need to be there to be paid.
• Active side hustle and its passive equivalent
  • Coaching/consulting
    • A course was recorded once and sold many times.
  • Freelance development (like computer programs and mobile apps)
    • Create software once and license it many times or create a subscription to access it.
  • Freelance writing
    • Writing a book and getting royalties on sales.
  • Working in construction or active investing in real estate
    • Investing passively in real estate with REITs or crowdfunding.
  • Driving for Uber or doing delivery
    • Rent your car or put ads on it.
  • Photography sessions
    • Upload stock photos to many sites that reward you every time someone buys your photo.

4 How to make passive income?

• Upfront effort
  • Upfront financial investment or
  • Upfront time investment (to get the skills needed)
• Assess your resources:
  • Boost your savings (check our article on How to make a budget).
  • Weigh your skills
    • What are you good at? What are you passionate about? Take a quick inventory, and research the ways others have used those skills to build income streams.
  • Weigh your time, money, effort readiness, and availability
    • Do you have more time than money to set up passive income activities? Have you already saved and are you ready to invest?
• Delegation:
  • Freelancers can reduce your active work. Dedicated sites like Fiverr and Upwork are a talent marketplace to find the right freelancer. In-demand Skills and on-demand courses at Fiverr Learn
• Long term inspiration
  • What greater purpose in addition to money could keep you motivated? Does the passive income activity let you also enjoy a hobby, brag about something or learn what you truly want?
• Combine activities:
  • Multiple income streams can be complementary. You can start a blog. Then, a linked YouTube channel. Previous 2 can use Affiliate Marketing and once successful start selling courses.

5 Active Income vs. Passive Income – Which Is Best for Me?

• Every income source is valuable and important. But when it comes to getting income without your active daily involvement, passive income is the one to prioritize. This could let you reach other financial goals like financial freedom.
• Active income
  • Is what most of us make. We go to work every day and trade our time for a salary.
  • If for someone it is the only source of income, it becomes a problem. It is more evident when that person loses his job and has no other way to pay for basic needs like food and shelter.

6 What are some examples of passive income?

Dividend investing, savings in high yield accounts, real estate renting, etc. See our article on Passive income ideas.

7 Does passive income really work?

Yes. It is not difficult to find many success stories on YouTube channels. CNBC also interviews many successful passive income entrepreneurs. They put the upfront effort of money and/or time and then reap the rewards. Here below a few success stories:

• Greg Gottfried [3]
  • Working from age 17 to 21 at a $17 per hour commission =$2,720 per month
  • At 22 started money online activities after being fired at 21. Without money. He invested his time. By 24 he had 7 income streams.
  • Now making 5 times what he did before: $10k per month. Don’t make the shift until you get the income you rely on.
  • An enterprise is in the business of making money. Not making your salary bigger.
  • Build 1 stream at a time to not lose focus and get it profitable. Once it is profitable and you’re happy with it you might want to consider another.
• Gia Graham [4]
  • Worked as a designer for 11 years.
  • In 2019, with around 7,000 followers on Instagram asking her for advice, she decided to launch a course in SkillShare (30-Day Free Trial with Code: DAD SKILLS). Get 40% off your annual subscription with code FLASH40 (valid until 10/21/22).
  • She earns on average 6 cents per minute watched and her monthly minute views range between 80,000 and 152,000. This means monthly income between roughly $5,000 and $9,000 per month.

8 Where can I invest to get passive income?

• Dividend stocks (requires active research first to choose reliable enterprises. It is not wise to pick the stock with the highest dividend without verifying the long-term enterprise profitability).
• For a safer approach, you can invest in a money market account or CD to get a risk-free return if the money is FDIC insured.
• There is a dedicated category “Invest” in our article Passive income ideas.

9 What are the most popular passive income ideas?

• Invest the money you already have: stock market, crypto, etc
• Rent things you already have: home, room, car, parking space, designer clothes,etc.
• Save in high-yield accounts.

10 How much passive income can I earn?

As much as you want. As it is no getting rich quick scheme, identify whether you can allocate more money or more time. Based on that choose a passive income idea and make it grow. As inspiration for passive income activities, check our article Passive income ideas. Many of them can be combined to earn even more.

11 How can you choose the best passive income idea for you?

• By personality: Maybe you are more like an introvert for whom it is easier to write in a blog than to speak in front of a camera and make a course.
• By interest: Are you the creative type who likes design creation? You can sell them on many websites. Or do you prefer a particular niche like a hobby or passion you could turn into a profitable blog?
• By skills mastered: do you prefer to follow a step-by-step course or do you prefer to get advice and follow your own path? Are you already experienced in online business ventures or have keen skills in a field? Then you might benefit from an online platform to sell the skills you already have. For instance, a course teaching your skills.
• By resources: Do you have more time or more money to generate passive income?

At the end of the day, the best passive income idea for you is the one that pulls you to work on it because there is a long-term reward. Pick the idea you can stick with until you make it successful.

What is the next step?

Check our list of Passive income ideas. To be prepared to allocate more money towards passive income, learn How to make a budget. And to know how your efforts match your financial goals, read Financial planning.

Sources

[1] Good Reads, Warren Buffett > Quotes > Quotable Quote; at https://www.goodreads.com/quotes/8760232-if-you-don-t-find-a-way-to-make-money-while (visited June 21, 2021).

[2] Internal Revenue Service, Passive Activity and At-Risk Rules; at https://www.irs.gov/pub/irs-pdf/p925.pdf (visited June 21, 2021).

[3] YouTube, How I Built 7 Streams Of Income By Age 24; at https://www.youtube.com/watch?v=ziA3LOerd74 (visited June 21, 2021).

[4] CNBC, How a mom in Atlanta makes thousands of dollars a month in passive income teaching graphic design; at https://www.cnbc.com/2021/06/04/how-a-mom-makes-thousands-of-dollars-a-month-in-passive-income-teaching-graphic-design.html (visited June 21, 2021).