The aim of this post is to explain what Passive Income is and how it differs from Active Income. I define Passive Income broadly as an income that you get even when you aren’t actually working, even while you are asleep. Another name for this type of income in Residual Income.
Active Income VS Passive Income
In contrast, Active Income is money that stops coming in when you stop working. Active Income is usually paid by the hour and is the most common type of income associated with having a traditional 9 to 5-day job. If you quit your job or get laid off Active Income (your salary) stops.
Similarly, if you perform any sort of contract work clients who pay you, for example, doing web design for a company. If you stop doing web design for that client you stop getting paid. This is also Active Income. Even though you might be self-employed and have more flexibility by being able to choose your own hours, you still have to do the work to get paid.
Passive Income differs because you will keep earning money whether or not you do any meaningful work. With this type of income, you need to do the majority of the work upfront without getting paid for your time. But eventually, you get to a point you begin to make money from that Passive Income stream. At this point, you either stop working on this income stream or continue to grow it to increase your income.
I want to be clear Passive Income is not a lump sum payment such as a lottery win or an inheritance. It is income that it paid at regular intervals such as monthly, bi-monthly, quarterly or yearly. Passive Income does not mean a permanent income. These income streams can last years, decades, or centuries but all forms of income will dry up eventually for one reason or another.
Passive Income is not always perfectly 100% passive with no maintenance required. With most income streams you will need to do some maintenance to keep it going. An example might be having a Kindle book and needing to log in and schedule a free 5-day promotion every 90 days to be able to keep making sales. That is about 2 minutes work every 3 months. This is actually something you could pay a Virtual Assistant to do to make it completely passive.
Examples of Passive Income
- Book Publishing – Kindle Publishing, Createspace, ACX.
- Print On Demand Tshirts – Merch By Amazon, RedBubble, Teespring, etc.
- Affiliate Marketing – Making money from an email funnel.
- Real Estate – Property.
- YouTube videos – Once you have enough subscribers to qualify for royalty share from ad revenue.
- Selling Video Course – Udemy.
- Selling Information Products – Clickbank, JVZoo, etc.
- Music Royalties – From CD sales, merchandise and iTunes downloads.
Semi-Passive Income
Some income streams can be semi-passive such as blogging. While you do make money while you sleep you still need to write new blog posts on a weekly or monthly basis to keep the blog alive and keep readers coming back. An excellent example of this is Pat Flynn at SmartPassiveIncome.com. Pat earns over $100,000 per month, 90% of which is passive through information product sales and affiliate income. But he still needs to add new blog posts every week and update his podcast to keep his readership happy.
Passive Income Isn’t Passive For Everyone
Passive Income does not mean it is passive for everyone involved in your business. Your VAs, graphic designers and bookkeepers will all still be earning Active Income to enable you to be able to earn Passive Income. But this is ok, most people are happy earning this type of income and are not interested in trying to earn Passive Income.
Passive Income Is Not Getting Rich Quick
I want to finally distinguish Passive Income from another type of income which for the purpose of this blog post we will call Scammer Income. Scammer Income is the get rich quick schemes you see on banner ads online. Unscrupulous marketers peddle these get rich quick schemes to people who want to make money but don’t want to do the work on the front end first, which is a core principal of Passive Income. They want to just push a button and make $10,000 per month just like that. This does not exist, every income stream takes some time to set up so it can begin to make money. For example, my Kindle Publishing business took 18 months of working in my spare time for me to be able to quit my day job as a web designer. I had to do all the work on the front end (which I wasn’t getting paid to do) for it to then pay off later down the line and it continues to pay off for me now.
Conclusion
I hope I have given you a good overview what Passive Income really is. If you would like me to go into more detail in a follow-up post please comment below with what you would like more information on. Also if you have any questions please ask them below.
Thanks for reading! Cheers.
PS here is a video that goes into more detail about Passive Income.
Thank you, Brendan, for the very informative article.