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What Is Passive Income?
Passive income is revenue that’s received on a regular basis with little or no ongoing effort made to obtain it. It can continue indefinitely after the initial task is completed. For instance, Jane attracts royalties five years after publishing her book. Passive income is also known as residual, recurring, and unearned income. A passive income business doesn’t mean you can avoid work; you must work, but your effort isn’t directly tied to your income like that of most employees.
Earned income derives from active or ongoing participation in a task or series of tasks. The moment earned efforts end, earned income stops. For instance, an employee quits his job and immediately stops receiving paychecks from his former employer.
Can you generate income while you’re sleeping?
Yes = Passive income
No = Earned income
There are benefits and drawbacks to making passive income. Advantages include:
- Passive income is a very gratifying way to make money because revenue can be generated around the clock without direct involvement.
- Passive income can lead to financial freedom if the money generated exceeds financial needs and living expenses.
- Passive income can last for many years into the future and perhaps an entire lifetime.
- It can provide a safety net when earned income stops or isn’t available. For example, a full-time employee is terminated from his work, but he continues to receive passive income from his online course sales.
- There’s no limit to how much passive income a person can make (in most cases).
The disadvantages of making passive income include:
- Passive income “opportunities” and income reports receive a lot of hype, but it is difficult to create a hit product, service, or method to attract enough revenue.
- More and more people are attempting to make passive income, which dilutes the earnings pool. For example, the self-publishing book market sees hundreds of new books published every day.
- You can invest a lot of time, effort, and capital upfront only to experience a net loss.
- It can be months or years before a passive income product or idea takes off, if at all.
- Passive income products and services can become obsolete or experience a decline in demand, which will negatively impact future revenues.
- A small percentage of people generate enough passive income to become financially independent.
Passive income isn’t a new way to make money as many artists, authors, entertainers, and business people have been making residual income for decades. What’s new, however, are the ways to earn passive income on the internet and online.
How to Make Passive Income
Sell Physical Products
Online retail is a common way to earn passive income. Regarding products, you can create/develop, source, or drop ship merchandise. Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when the store sells a product, it purchases the item from a third-party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product and doesn’t have to carry inventory.
The conventional manufacturing model builds products for inventory storage. Alternatively, print-on-demand (POD) products and just-in-time (JIT) manufacturing are designed to meet demand, for example, a t-shirt with a specific image is printed to fill a customer’s order.
You can create an online store with applications like Shopify, 3dcart, and WooCommerce. You can also sell on marketplaces such as Amazon, eBay, and Etsy. Some sellers enter the market by purchasing existing stores.
Sell Photos and Digital Assets
Have you ever purchased an image or graphic for your website? I have and many. Creative stock includes photos, illustrations, graphics, video, and audio files. While many free creative stock sites exist, for example, Pixabay and Unsplash, just as many paid platforms appeal to buyers who want unique, high-quality original stock. Getty Images (iStock), Shutterstock (Bigstock and PremiumBeat), Fotolia by Adobe, and Creative Market sell royalty-free creative assets.
Shutterstock states that it has paid half a billion dollars to its worldwide community of contributors. Its competitors have paid millions too. You can apply to sell digital stock on marketplaces and sell from your website using software like Payhip, Sellfy, and SendOwl.
Sell Subscription and Membership Plans
Recurring passive income is a notch up from regular or one-time passive earnings. Products, services, and information can be packaged into subscriptions and memberships for recurring residual income. For instance,
- Bespoke Post members get a box of male-centric products monthly.
- Stitch Fix sends its members a box of clothes and accessories to pick from and return.
- Lyft offers a monthly subscription for up to 30 rides.
- Bloggers charge members to access exclusive content, training, webinars, and groups.
- The Wall Street Journal sells access to premium content.
Promote Products and Services
In a similar vein to selling goods is affiliate marketing. Affiliate marketing is a performance-based marketing activity. An affiliate promotes a product/service online and receives compensation for achieving a specific objective or action. A merchant or advertiser specifies the goal, which is usually a valid sale. For example, a merchant will pay the affiliate a 30 percent sales commission. Some merchants have pay per lead programs that pay for getting prospects and signups. Some merchants even pay recurring commissions for that little bit of extra passive income juice. Affiliate marketing is not only one of the best ways to make passive income but to make money online.
Affiliate marketing is about marketing goods and services, not selling them. Marketing is the act of creating awareness for products, services, and brands whereas selling is about converting awareness and prospects into customers. Affiliates spend most of their time building awareness and may do some soft selling. They’re not responsible for transacting sales or closing deals, that’s up to merchants. If selling is more to your liking, then e-commerce, drop shipping, or freelancing might be a better fit.
Affiliates/publishers deploy affiliate links on their websites, blogs, YouTube channels, and social media networks. Many marketers also include affiliate links in emails. There are many top affiliate networks to join and thousands of products/services to promote. Learn more about affiliate marketing.
Earn Advertising Revenue
Advertising revenue is another stream of income for many content creators including bloggers and YouTubers. Google AdSense is a well-established ad network/program run by Google. It allows publishers in the Google Network of content sites to serve automatic text, image, video, or interactive media advertisements. Advertisements are administered, sorted, and maintained by Google. Creators get paid for impressions and clicks, but you’ll need a lot of eyeballs and activity to generate enough income. Separately, if you get a lot of traffic, a minimum of 10,000 visitors a month, you could form private advertising partnerships/sponsorships.
Earning book royalties is a classic example of how to make passive income. The traditional publishing route, i.e., a big-name publisher publishes your manuscript, will net you fees of 5 to 15 percent per sale. Alternatively, self-publishing your book through Kindle Direct Publishing will net you royalties of 35 to 70 percent. Also, you can publish an audiobook on ACX. Learn how to write an e-book.
Narrate and Produce Published Books
If writing isn’t your thing, you can narrate books instead. Earning passive income as a narrator is possible once you record a book and list it for sale. There are several audiobook marketplaces, but Amazon is likely your best bet to earn decent royalties.
ACX outlines the steps to become a narrator. Narrators audition for audiobook projects, but the real opportunity is to contact bestselling authors who don’t offer audiobooks. If you email authors and discuss increasing their book revenues with audiobooks, you’re likely to get a few gigs. Regarding income, you can charge a production fee or agree to a 50/50 royalty split with the author. ACX has high production standards so you’ll want to ensure that you have excellent recording equipment and a quiet space to record.
Sell Online Courses
The online course industry is a booming one, and e-learning sites have sprung up everywhere. I did a stint as an online instructor and made mid-five-figures. You can self-publish courses on several e-learning platforms or sell online classes from your website with an online course app or plugin.
Earn Rental Income
Rental income is another tried and true way of making unearned income, and I’m surprised more people don’t jump on this revenue train. Is there a room or part of your home you could rent? What about buying a second property to rent? Websites like Airbnb, HomeAway, and VBRO make it easy to list, rent, and earn money. Long-term rental sites are available too. Separately, you can rent your parking space if you live in a high-demand area.
Collect Investment Distributions
Millions of investors generate passive income from dividend-paying stocks and managed equity funds. Conservative investors and retirees often invest in fixed-income securities and bond funds to collect interest payments. Financial markets and investment distributions will fluctuate, but investment income is one of the most straightforward and hassle-free ways to earn residual income. Common distribution-yielding investment options include:
- Mutual funds
- Exchange-traded funds (ETFs)
- Real estate investment trusts (REITs)
Collect Interest Payments
Peer-to-peer lending, or P2P lending, is the act of lending money to individuals and businesses through online services that match lenders with borrowers. It’s an alternative to investing in debt securities. Several websites verify, screen, match, and facilitate the lending process including Lending Club, Funding Circle, Upstart, and Peerform,
Sell Software as a Service (SaaS)
What do you get when you cross a subscription plan with software? You get “software as a service.” Software as a service is a software licensing and delivery model in which software is licensed on a subscription basis. Building a profitable SaaS company isn’t going to happen overnight, but you might find yourself printing millions in a few years. Also, billions in startup capital are floating around to support your venture.
What if you don’t have tech or programming skills? No problem. Many tech founders succeed despite not having strong tech skills, for example, Jack Ma, the founder of Alibaba. You can hire developers at varying prices on freelance marketplaces, including Fiverr and Upwork.
Create an Online Tool
Build an online tool and charge people to use it or build a free tool and include affiliate links. For example, Capitalize My Title allows you to automatically capitalize titles. The site owner is a Grammarly affiliate and promotes its product with a small green button that reads, “Check My Grammar.”
Sell Apps and Extensions
Many people know about selling apps and how lucrative it can be. However, most people only consider selling apps on the Apple App Store and Google Play Store. Hundreds of companies’ welcome developers to sell apps including Amazon, Hootsuite, Salesforce, Shopify, and more.
Browser extensions are a robust market onto themselves. The Chrome web store is full of free, freemium, and premium/paid extensions. TubeBuddy is an excellent freemium extension to grow your YouTube channel, for example. App and extension developers commonly make money through one-time purchases, subscriptions, and advertising revenues.
Sell Themes and Plugins
Millions of people use WordPress to create websites. WordPress is a free open-source application and content management system (CMS). It runs 31 percent of all websites and leads the way in content management systems with a market share of 60 percent.
There are thousands of excellent free themes and plugins in the WordPress universe. Where some of them fall short, paid themes/plugins are available to pick up the slack. For example, I use Bloom, a premium list building plugin, because free plugins don’t measure up.
I imagine themes are harder to sell than plugins, but either way, there’s money to be made. You can also sell themes on 3dcart, Shopify, and other e-commerce software sites.
Sell Services and Outsource Duties (Semi-Passive)
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets. Service arbitrage takes advantage of the difference between a selling price and outsourcing cost. Unlike traditional service people, for example, a plumber, service arbitragers hire others to complete tasks.
Service arbitragers wear two hats, that is, salesperson and project manager. For instance, you could sell SEO services and hire SEO freelancers to complete assignments. Regarding your team, it’s critical to employ excellent freelancers who will meet or exceed customer expectations. If you only focus on recruiting cheap labor and doing below-average work, your business will fail.
Passive income ideas and prospects are abundant. However, your best chance at success is to enter blue oceans (new markets) and avoid red oceans (saturated markets). Keep in mind the benefits/drawbacks of making passive income and remain open to earned income opportunities to reach your financial targets.