You may have heard analysts or financial advisors touting the advantages of “passive income,” a model that allows you to make money without a substantial deal of ongoing effort. It sounds too good to be true, but is passive income really something the average person can accomplish? And if so, how can you do it?
The Perks of Passive Income
Passive income is powerful because it allows you to continue increasing your income stream without actively spending more time. If you have a full-time job, or if you’re just trying to keep your life simpler, this is an incalculable advantage.
Additionally, picking up additional sources of passive income is a good way to diversify your income streams. Having more diversity in your income will shield you against volatility and catastrophic losses, like what might occur if you lose your job or if a certain class of assets tanks in value.
Passive Income Sources
Before we dig into the logistics of passive income, let’s look at some of the most commonly cited examples of the financial strategy.
If you invest in a rental property, you should be able to collect rent checks from your tenants that exceed the amount of money you pay per month in expenses. Assuming your tenants pay on time, you should be able to make a reasonable profit each month—all without needing to spend much time on keeping your property updated.
Many big U.S. companies offer dividends on a regular basis to shareholders, which serve as distributions of profit. For example, a company may pay a dividend of $0.50 per share, per quarter; if you own 1,000 shares of stock, this means you’ll earn $50 each quarter, just for being a shareholder.
Blogging (with affiliate marketing or advertising)
If you have a popular blog that attracts a fair amount of traffic, you can monetize that recurring traffic with the help of advertising or affiliate marketing. One big caveat here is that you’ll need to post new content regularly—but if you have other guest authors doing the work for you, you may be able to let it run on its own, like an idling engine.
If you drive a car regularly, you may also be able to capitalize on your visibility by selling advertising space on the vehicle. It may be challenging to find a buyer, but if you can, you’ll make money by going about your day normally.
The Weaknesses of Passive Income
As you can already see, even the most common and most appealing sources of passive income have some important caveats that prevent them from being truly hands-off.
First, you’ll notice that most of these passive income sources (and others) require a lot of upfront effort. Sure, you can make a significant sum of money with advertising if your blog gets thousands of monthly visitors, but growing a blog to get those thousands of consistent visitors can take months, if not years of effort. Similarly, it takes a lot of research to find a rental property worth your investment capital, and you’ll even need to do your due diligence before choosing dividend stocks.
Many passive income strategies require you to have the capital, to begin with. For example, if you want to buy a rental property, you may be able to get a loan, but you’ll still need to front a down payment. If you want to make a decent stream of income from dividends, you’ll need to own a lot of shares.
Even the most “passive” sources of income aren’t truly effort-free. If you’re managing a rental property, you’ll need to issue repairs, respond to tenant requests, and fill vacancies when you encounter them. If you’re running a blog, you’ll need to make periodic updates.
Most sources of passive income aren’t known for being lucrative on small scales. For example, most company dividends are in the range of 2 to 4 percent per year; even if you have $100,000 invested, that only amounts to $2,000 to $4,000 of annual income. A good rental property might only yield a few hundred dollars of profit per month. And more gimmicky strategies, like advertising on your car, might barely earn you enough money for an extra meal now and then.
The Bottom Line
So what’s the bottom line here? Passive income is a “real” concept, and a perfectly achievable one, even if you’re an average investor without much cash on hand. However, these aren’t get-rich-quick schemes, and passive income probably isn’t ever going to be completely passive.
That said, a collection of passive income sources can diversify your holdings, increase your total income volume, and ultimately set you up for a brighter financial future.