What is passive income?

Most people rely on one stream of income — their salaried job. But if the past couple of years has taught us something, it’s that external factors can take away your job in an instant. Hundreds of thousands of workers were displaced during the pandemic. But in addition to job insecurity, data shows that incomes have stilled, and the costs of housing and education have soared. 

This information is not meant to scare you. It is given to point out the fact that there are many good reasons to consider drawing earnings from two or more sources. It might not be for everyone, but it’s worth investigating how to build a passive income online first.

If you think it’s too late to act, remind yourself of this ancient Chinese proverb: “The best time to plant a tree was 20 years ago. The second-best time is today.”

Background info: definition and examples

Passive income describes earnings that are derived without one’s active involvement. If you receive regular earnings from a source other than an employer or contractor, it counts as passive income. 

There are three models for creating a passive income stream:

  • Buying investments (financial assets, properties, businesses)
  • Creating (products that generate cash, often digital)
  • Contributing (limited partnerships, subletting) 

A few couple examples are:

  • Dividend stocks
  • High-yield savings account
  • Real estate investment trust
  • Rental income
  • AdSense (website, blog, or YouTube videos)

Passive income isn’t only for people who don’t love their jobs or who don’t make enough money. But chances are, you wouldn’t mind making more income with less effort than an extra job. In an ideal scenario, you can increase your wealth, build an emergency fund, and perhaps retire early. 

How much money do you need?

Let’s say you want to make $4,000 a month ($48,000 a year) from investments:

  • Rental properties (expected yearly return in rent of 8%): You’ll need to invest $600,000 upfront;
  • S&P500 index (average return of about 10%): You’ll need to put up $480,000 in the index.

These figures may sound daunting, so let’s set the bar lower at $100 a month ($1,200 a year): 

  • Rental properties (expected yearly return in rent of 8%): $15,000
  • S&P500 index: $12,000

As you can see, even generating $100 a month requires a hefty upfront investment. Here is a compromise: pick an income stream that is not entirely passive or turn the things you already own into income-producing assets.

How long does It take to build wealth passively?

When it comes to setting timeframes, remember two things: 

  1. Passive income takes time to develop.
  2. Don’t expect instant results from passive income investments online.

The goal of the first few steps is about setting up properly — educating yourself about business, finance, and investments, experimenting, and starting small. Many people expect to succeed on their first try, but it’s rarely the case. 

You can’t build a successful income stream in a day, a week, or sometimes, even a month. In the beginning, you’ll be navigating an unknown territory with a higher risk of failure. So, set aside a few months and extra capital to figure everything out at your own speed.

Just how “passive” is passive income?

“A lot of people are surprised by how much work it takes… a lot of people who are earning a passive income don’t necessarily tell you the whole truth”.

entrepreneur and creator of the Smart Passive Income podcast

Passive income is not actually created passively – it’s not a lottery. Whether you buy stocks, rent out properties, sell digital properties, or earn royalties/ad revenue, you will need to do some work upfront. Before anything starts generating money, you’ll need to arrange it, streamline it, and maintain it. 

Besides, there is no clear-cut point where income turns passive. You may be required to do “minimal work” to keep the funds flowing.

Can you make a living from passive income?

It depends on various factors. As for investing, the biggest determining factor is the size of your investment. Also, the longer your positions stay open in the market, the more opportunity there is for your investments to go up. Successful companies increase their profits over time and raise their dividend along with them.

If you have a thought-out plan, you can scale up to the point where your passive income matches and even surpasses your active income. But prepare yourself for a long journey before you get to this point. It’s important to be reasonable and make calculated decisions — ones that do not involve you leaving a well-paying job for a risky investment.

Takeaway: what you need to know about building passive income

How to spot passive income scams? Watch out for:

  • Promises of easy and fast earnings: Get-rich-quick dreams are often taken advantage of. There have been too many Ponzi schemes preying on people desperate for money. 
  • Aggressive sales techniques: Whoever urges you to act quickly before the opportunity ends should not be trusted. Yes, you can miss out on valid time-sensitive options, but always give yourself some time to think and reassess. 
  • Companies that don’t sell real products or offer services: Avoid companies that don’t offer anything of value.

Passive income comes down to making long-term commitments and short-term trade-offs. You have to be willing to give your time, skills, and money to reach your goal.  

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