The Basics of Passive Income

What is Passive Income?

Passive income is the opposite of active income. Active income is when you earn money in exchange for effort. You either get a salary, a per-hour paycheck, or work for commisions or tips. This includes the majority of full-time and part-time jobs.

However, with passive income, your effort and pay are not linked. So you cannot realistically calculate a wage per hour, because there is no direct link between time and earning.

Examples of Passive Income

Examples of passive income can be found in real estate, investing, content creation, online teaching, and even webcam models.

You could create a website or app that sells digital products all over the world. Of course, you need to spend time to get to your first sale, but after that there’s nearly no difference in selling 10 or 1,000 digital products.

It’s the dream come true. Make money while you sleep. Literally.

How to make money while you sleep

If you still think that passive income is some kind of fairytale fantasy, you need to wake up. Examples are all around us. I’m sure you’re already familiar with some good examples of passive income. Think of the pensioned couple who are subleasing their second apartment, the rich neighbors that live off yearly interest on their savings or that stock trader who has been bragging about his Tesla shares for more than a decade.

With some imagination, you could even see grants or governmental support as passive income. Think of a lazy, unemployed guy receiving financial aid, while he’s perfectly capable to do work. Zero effort, free money.

Well, he shouldn’t be your example. But you get the point.

Making a Passive Income online

The internet also created many more opportunities for passive income. It has made it easier for individuals to create their own revenue stream, without the need to be part of a bigger company. Think of someone who creates online courses, a songwriter who earns royalties whenever his song is played on Spotify or the YouTuber who earns money from advertising Skillskare in every f*cking video.

The difference between Active and Passive Income

Now let us take a step back. Why do we work?

We work because we want to earn a living. You can enjoy your job, but in the end, you work for money.

Work smarter

When it comes to work, you can work harder or you can work smarter. Generally, it’s best to work smarter and not just harder. I think you would agree. Of course, we want to do both, but if there is an easier way to get the same result, then you should do it. Most people would want to work less and earn more. Working in a smarter way allows us to save time and potentially get greater results.

Now I know your initial thought is: “Sure, everyone wants to work less and earn more, but it is easier said than done.”

But it is actually possible with passive income.

Sky is the limit without a ladder

In school we get taught that if we want to get a good job later, we need to study hard and climb our way up the ladder. If you want to earn more, you need to make promotions or find a job that pays better. And yes, good education and working hard will make your pay higher. But with any job, or active income, there’s an upper limit. There’s only so many hours in a day. Sure, you can decide to work more or less, but no human should work more than 40 hours a week. And sure, some people are earning crazy salaries. But no matter if you earn 10 or 1000 dollars an hour, there’s still an upper limit.

There is no upper limit in most forms of passive income.

You can build a system that generates money without needing to put in daily work. Your earnings will accumulate.

Compound effect

This approach to earnings is not commonly taught in schools, but even traditional schools already gave you some hints. In your Economics class, you learned about calculating interest:

“If I would have 10k on my bank account and the bank gives me 5 percent every year, I would have 10,5k in year 2, and so on.”

Now, these schoolbook examples were from a time where it was actually profitable to put your money in bank. Putting your money in the bank would give you some passive income. Nowadays banks give us anywhere from zero to two percent of interest. That’s a meager income. And if you paid attention in class, you should be able to calculate that it will only take you 231 years to get to a million.

I think that’s too long.

Passive Income doesn’t mean Laziness

Passive income doesn’t mean that there’s no work involved. Instead, it means that the work is not long-term and does not require a continuous effort. Even if you decide to take one month off, you should be able to get some income.

When creating a passive income, the bulk of work is usually done upfront. Besides spending a few hours here and there to ensure that the revenue stream will continue running, there is no more work involved.