Passive income streams: Why and How?

In this post, we explore why building passive income streams should be on everyone’s mind.

Earning money while you sleep or sip a cocktail on the beach is a dream for many (including me!). So how do people reach this goal? (and how you can too!)

The answer is passive income!

What is Passive Income

Passive income is money which flows in your bank account at regular intervals with putting only a very minimal amount of effort. While this is great on paper, don’t forget that passive income streams require an upfront investment. 

What Passive Income is not

Passive income is not your job. The wages you earn from your job where you have to physically (or virtually) work in exchange for your time is not a passive income.

A side hustle is also not considered as passive income for the same reason mentioned above. There is one exception though. If your side hustle grows into a large business where you are able to remove your involvement, then that would fall under the passive income category.

Investing Money vs Investing Time

There are 2 things you can do to earn passive income. You can either invest time in building an asset or you can invest your money.

Investing time comes in the form of spending time upfront to build a business that will start generating income. Once it grows, you can automate and outsource your tasks untils it becomes a passive income stream.

The second way is to invest your money. You acquire a financial product that produces income and that appreciates in value over time. I personally focus on the income they produce and treat the appreciation as the icing on the cake.

Why build passive income streams

There are only 24 hours in a day. To increase your active income, you need to either work more time during the week or increase your hourly rate. Trading time for money can only get you so far. That is why you should consider creating passive income streams. It allows you to increase your earnings without “working more” yourself. 

Financial Security

Having passive income streams  will relieve some of the stress of losing your job, becoming sick or getting injured. Having passive income sources means that you still have money coming in even if you “can’t” work. While you should always have an emergency fund available for this type of scenario, having passive income sources will cover your  monthly expenses. It will provide you with additional financial security.

More free time

For some people the ultimate goal is to reach financial freedom and have total freedom over their schedule, meaning living completely off passive income. While it can be the end goal, there are steps in between. For instance, let’s say you build a passive income stream generating $100 per week. If you want to generate more free time, maybe you outsource some of the chores around the house. Instead of spending 2 hours cleaning your house every week, you pay someone else to do it and you reclaim those 2 hours for doing whatever you want.

This is just an example but you can easily see how having passive income  can help you get more free time.

Live anywhere

In the same vein, if you earn enough passive income not to go to an office everyday, you would be free to live anywhere in the world. Most of the passive income streams can be managed remotely from a laptop.

First steps to reach financial independence

Having passive income sets you up for financial independence. Financial independence is having enough passive income streams to cover your expenses without having to actively work.

Passive Income Streams Ideas

This below is a non-exhaustive list of passive income streams ideas.

Ideas requiring an upfront time investment

Write and sell an ebook

With no surprise, the upfront investment here is to write the ebook. 

Self Publishing has become an easy thing to do. Simply grab your computer and write your ebook. You can then use platforms like Amazon or Barnes and Noble to put the ebook for sale and earn passive income from the sales.

Create a blog

The upfront investment in time focuses on designing the website and generating enough content to build an audience for the blog. Once the audience is built, you can outsource the content creation and maintenance, to keep your involvement minimal. Now, how does a blog generate passive income you might ask? A few examples are

  • Enable ads on the blog
  • Affiliate marketing
  • Have a paid membership to offer premium content
Create a course

It is not as difficult and expensive as one might think to start selling online courses. All you need is yourself, a simple website, and a topic that you can teach. This one could complement the previous one as you could sell the course on your blog. You can also use online platforms like Udemy to market your course. This will reduce your task to simply create the content of the course.

Sell Stock Photos / License Music

If you are passionate about photography or a musician, this is the one for you. As a photographer, you can sell your photos to websites that provide stock photos. As a musician, you can license your music and earn a royalty from its usage.

Ideas requiring an upfront monetary investment

High Yield Savings Accounts

Parking your money in a high-yield savings account rather than a traditional savings account is one of the easiest way to get started with passive income. Simply go to your bank, open the account and deposit money.

Invest in Dividend paying stocks

A dividend is a periodic payout of earnings that some companies and funds share with investors just for being a shareholder. First you need a stock brokerage account. You can open one at your bank or you can use a dedicated broker that typically provides more services and lower fees. My favourite one is Interactive Brokers. Then you fund the account and buy the dividend stocks in your portfolio. Dividends are paid periodically (Quarterly, Monthly…) directly onto your account.

Under the same umbrella, certain Index Funds and REITs (Real Estate Investment Trusts) work the same way as Dividend stocks.

Peer-to-peer Lending

A peer-to-peer lending company is a third-party organization that operates a platform which facilitates loans between individuals.

A Peer-to-Peer lender (P2P) is a lending company that facilitates a marketplace for lenders and borrowers to come together and conduct business. The P2P lender does not directly act as an intermediary but instead helps match borrowers with lenders through an online platform.

P2P platforms offer the following benefits to investors. 

The opportunity to generate lucrative returns, usually between 5% and 9%

The ability to diversify a loan portfolio across multiple borrowers of varied risk

The ability to generate a steady income stream regardless of what occurs in the broader economy.

Invest in Rental Properties

This one is probably the oldest way of generating passive income. Simply buy a property and rent it out. Note that to be passive, you’d better outsource the property management.

Two less common ideas

Earn interest on Cryptocurrency stablecoins

Stablecoins are cryptocurrency pegged to a fiat currency. For instance 1 USDT = 1 US Dollar. There is no fluctuation on the value of stablecoins, this is quite different from the volatility of other cryptocurrencies as you have probably heard. You can put your stablecoins in a sort of “savings account” that will earn you a quite high return (usually in the range of 4 to 8%).

Invest in Trading Bots

Trading bots are robots that will trade automatically for you. You put the money on a brokerage account and the bot will use this account to trade for you. The most popular bots trade on the Forex and on the crypto market. For instance, “scalping bots” open trades on the market with a low target for profit (e.g. 1%). They will do only one trade per day and have a maximum loss that they allow on the trade. This has obviously a higher risk compared to the others as your capital is at risk.

Conclusion

The goal of passive income is to earn money while you sleep. That is why it is highly sought after. I believe that it should be on everyone’s mind as this is the best way to gain financial security. This is also putting you on the road to financial independence and once you get started, you’ll get hooked to the process.

If you want to know more about financial freedom, check out our article on climbing your way to financial freedom.

Let us know in the comment below what is your favourite passive income stream and what is the one you are looking at creating next.

Passive income streams: Why and How?

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