What Is Passive Income?

Income is categorized into three main types: active, passive, and portfolio income (source).

Active income is earned where services are offered or products sold products physically (like salaries, commissions, wages etc.).

Passive income is income you earn without much effort or physical involvement. You earn passive income by outsourcing or automating aspects that require you to be physically involved (source).

Portfolio income, on the other hand, is earned from investments in the form of dividends, loyalties, capital gains, interests etc. Portfolio income is also a form of passive income (source) because you earn money from investments that are already generating income.

How is passive income earned? Passive income is the money you make with little effort and minimal physical participation. There are many passive income streams, ideas, side-hustles, and investments you can undertake and make money. You can also turn an active idea into a passive income idea when you outsource or automate services.

In this article, we will look at passive income and everything you need to know about it as a beginner. For more details, feel free to view our YouTube post on passive income.

Although earning income passively is easy and lucrative, turning an idea into a passive income source requires a lot of patience and dedication at the beginning.

Let’s dive right in.

What is Passive Income?

Passive income is the money or benefits earned with minimal physical involvement (source). All the aspects of the business or income generating idea that requires you to be actively involved in the process are minimal or nonexistent.

It can also be defined as regular income earned regularly with little or no effort on the part of the person receiving it (source).

Other types of income like portfolio income (e.g. capital gains, dividends, interest, royalties, profits, rental income etc.) are also categorized as passive income.

This is because portfolio income is generated from streams or investments that already generate income.

Difference between Passive and Active Income

Involvement

Active and passive income differs in many ways. However, the main difference is how the income is earned.

Whereas passive income is generated with little to no effort, active income requires you to be actively involved in the process.

Many 9-5 jobs are active income sources where employees work in return for a salary or wage. The business owner, however, earns a passive income because most activities are performed by employees on his behalf (source).

Taxation

Other notable differences occur during taxation. Passive income has favourable taxation rates and requirements compared to active income (source).

It is for this reason that many investors prefer to own passive income streams to active ones.

Time and Financial Investment

Any income generating idea requires patience, dedication, and some form of monetary and time investment. Active income streams require you to invest a lot in terms of time and money.

The success of an active income generating idea depends greatly on the time dedicated towards it. So, an active income source leaves you with little time to yourself to do other things.

Turning an idea into a passive income source requires a lot of dedication and financial investment. However, once you establish it and make it passive, you can have a lot of free time in your hands.

Ultimately, your involvement and investment (time and money) is reduced significantly.

How is Passive Income Earned?

You can earn passive income through two main ways: creating or buying a passive income stream or turning an active business into a passive income stream.

Whichever way you choose, remember that patience and dedication are key in the beginning before you can start earning passive income.

Creating or Buying Passive Income Streams

You can create a passive income stream from scratch and wait to earn passive income once everything is set and running. Building a passive income source is easy but getting it to the point where it generates income passively is difficult and requires dedication and patience.

For example, creating a blog is easy, but monetizing it is not. You need to dedicate long hours to build it, post content, generate traffic, and establish a sound audience. From then on, you can monetize it (through ads, affiliate marketing, selling physical and digital products etc.) and start earning a passive income from it.

Alternatively, you can buy a passive income stream (a stream that already earns money passively), run it, and continue earning passive income from it.

Although it sounds more conducive, buying a passive income stream is not easy. You need to invest money to buy the stream and dedicate your time to update and run it.

Turning an Active Business/Idea into a Passive Income Stream

You can turn an active income-generating idea into a passive income source through automation or outsourcing.

It is also not easy to do so, but with the right strategies, it can enable you to earn income with minimal effort.

Automation

Business Process Automation (BPA) involves streamlining complex business processes for simplicity, to increase service quality & delivery, and contain costs (source).

By automating your business, you put up infrastructure and tools that allow the business to run efficiently with minimal supervision. This includes using software applications, integrating applications, and restructuring of labor resources.

For example, let’s say you own a car wash business. You can automate it by putting up infrastructure to make it a self-service car wash.

That way, you earn a passive income since software and robotic machines do most processes on your behalf.

Outsourcing

Outsourcing services is another way of turning an active income idea into a passive income source. It entails hiring the services of a professional to perform tasks that are otherwise performed in-house (source).

Outsourcing is a cost-cutting measure that helps you minimize labour and other overhead costs.

For example, instead of running a print-on-demand service, you can outsource all the activities e.g. designing, printing, and shipping of your products and wait to earn income once the product is sold and delivered.

Let’s say you own a Laundromat business. You can automate it and outsource the services of one attendant to oversee the smooth running of business operations.

That way, you earn a passive income because most processes are done on your behalf.

Types of Passive Income Streams

There are many passive income streams available today including passive income ideas, side-hustles, investments, and businesses. It all depends with what you are willing and capable of doing.

Passive income ideas include online ideas like blogging, copywriting, podcasting, creating niche sites, Chatbots, affiliate marketing, niche membership sites etc.

Passive income side hustles include food delivery apps, peer-to-peer rentals, pet & house sitting, charging scooters, flipping items etc.

Passive income investments include peer-to-peer lending sites, discount & reward programs, cashback credit cards etc.

Passive income businesses include self-service stores & storages, automated car wash, Laundromats, Food trucks etc.

NB – Passive income ideas are unique in their own ways. Some (like passive income businesses) require a lot of investment in terms of time and money. Others (like passive income investments) require little or no time and monetary investment.

The amount of money you earn passively also differs. Some ideas earn more than others depending on the products sold or services offered.

Moreover, some ideas are easier to undertake than others are. For example, online ideas (like blogging, podcasting, YouTube etc.) are easier compared to passive income businesses like Laundromats.

However, nothing can be too difficult as long as you are passionate and willing to learn about it.

Conclusion

Making money passively is not difficult. As long as you choose an idea that you are passionate about, you can easily earn passive income from it with time. Initially, all ideas require your constant attention and involvement before you can start earning passive income from them.

Earning money passively is easy but getting to that point requires a lot of patience and dedication. With the right strategies, you can make money passively in due time. The best part? You can combine passive income streams and earn more passive income from them.

Related Questions

Can anyone earn a passive income? Yes. It doesn’t matter who you are, there is an idea that you can undertake and turn it into a passive income source. Some ideas require skills and expertise, but most of them can be done easily once you learn about them. The idea is to choose an idea that you love and are willing to dedicate your time and money towards. Once it is successful, you can venture into another one and boost your passive income.

How long does it take to earn passive income? It depends with the idea you choose to undertake. All ideas require time to turn into passive income streams. However, some may take longer than others. For example, it takes time to monetize a blog, YouTube channel, or niche site. On the other hand, automating a business (e.g. Laundromat) takes little time. Once the systems are up, and running, the income you make automatically becomes passive.

Can I combine passive income streams? Yes. So long as you are able and willing, you can undertake two or more ideas simultaneously. For example, you can run a monetized blog, YouTube channel, and niche site and rake in more money passively.