Passive income sounds like the perfect financial dream. You get to make money by doing nothing – and if you spend enough time working on your passive income strategy, you might make enough in passive revenue that you can live off it without working. Whether you’re interested in retiring early or just want a supplementary source of income to complement your full-time earnings, passive income can help you achieve your goals.
That said, establishing passive income streams isn’t a guarantee of success – and there are some important tips you’ll need to follow to make it work for you.
Examples of Passive Income
In case you aren’t familiar, passive income refers to any income you generate without the need for ongoing work. In your current job, you likely make money based on the number of hours you work, or from a salary provided to you in bimonthly installments; because these are contingent on your ongoing provision of services, they’re not passive.
It’s easiest to understand passive income with the help of examples:
- Dividend stocks. Some stocks issue cash “dividends” to investors as a form of profit distribution. If you hold $100,000 of stock, you might earn $2-4,000 annually from your investment.
- Rental properties. If you own property and rent it to tenants, you might be able to collect monthly rent from them in excess of your ongoing expenses, resulting in a profit of hundreds of dollars per month.
- An active blog. If you have a website or blog that’s actively attracting traffic, you can passively monetize the site with advertising and/or affiliate links.
Important Passive Income Tips
If you want to master the art of passive income generation, you’ll need to learn and follow these important tips:
- Understand that passive is rarely truly “passive.” First, understand that most sources of passive income aren’t “passive” in the strictest sense. To make money from stocks or rental property, you’ll first need to generate enough capital to make those investments. To profit from a blog or website, you may need to periodically make updates and manage your assets (such as creating new content every week). Either way, you’ll need an upfront investment of time and money and a marginal investment of time on an ongoing basis.
- Enlist the help of experts. Work with experts to get more value from your passive income sources and reduce the need for time investments of your own. For example, you can hire a property management company to actively manage your rental properties, making this income source truly passive and potentially increasing your return.
- Diversify your portfolio. One of the most commonly touted pieces of advice in the investing world is “diversify your portfolio.” But what does it mean? It generally means investing in many different types of assets simultaneously; this way, if one asset fails, you won’t suffer catastrophic losses. Try to expose yourself to many different types of passive income investments to hedge your bets and minimize potential losses.
- Estimate conservatively. Most streams of passive income ebb and flow. A sudden vacancy, an economic downturn, or the loss of an advertiser can result in a sudden dip in your income. Accordingly, it’s important to estimate your income conservatively and plan around it.
- Keep adding to your principal. Even if you’re living off your passive income in lieu of a salary from a full-time job, it’s important to keep adding to your principal. Set at least some of your income aside to add to your overall holdings; this way, your passive income amount will keep increasing, and you’ll be guarded against potential losses in the future.
- Have a plan for emergencies. It’s important to plan for worst-case scenarios, even if your portfolio is diversified and properly planned. If some or most of your passive income sources temporarily dry up and you need cash, do you have a convenient way to get it? Make sure you have an ample emergency fund in place.
- Find active ways to make money as well. Even if you can thrive on your passive income, it’s a good idea to find active ways to make money as well, even if you’re only working a few hours a week. It keeps you sharp and active, while adding more income to your ledger.
- Rebalance regularly. Take the time to rebalance your portfolio on a regular basis. Your needs, your interests, and your risk tolerance are going to evolve over time. Your portfolio should evolve with them.
Passive income isn’t an easy strategy to follow, despite the suggestion of its name. It’s also not the right investment or financial strategy for everyone – especially those early in their career development.
However, with the right approach and an open mindset, you can likely tap into its power and make it work for you.