Lately, I’ve been looking at sources of passive income in order to bolster (and hopefully eventually replace) my current income. It is a fond dream that at some point in the future, I could largely step back from doing active day-to-day work and instead use these sources as my primary income stream. In that eventuality, I could devote my time to volunteer causes and charities I’m passionate about (and maybe have time to sit back and read a book for pleasure on a lazy afternoon every once in a while).
First of all, what is passive income? You’ll find a lot of definitions of it online, but mine’s pretty simple: passive income is any source of sustained income that you earn without any additional work. You might have to put up a lot of work up front, but once the money is rolling in, it doesn’t require any additional effort to earn money (additional effort might help to increase earnings, but it’s not required for some level of income). Thus, I don’t identify things like being the landlord of a rental property or blogging to be passive income – both require significant and regular work to earn money.
Passive income isn’t a way to get rich. That’s not the point, and anyone claiming you can get rich from it is selling snake oil. For me, it’s an investment of money and time now to buy time later. Notice how the output has nothing to do with money – it’s about putting resources away now so that I don’t have to invest time working in the future to maintain my standard of living.
Here are four sources of passive income that I’m looking at for my own future, along with some suggestions on how you can get started.
Investments that pay dividends or distributions
The mere act of owning many investments can be considered a source of passive income. You merely hold the investment and regular dividends are paid out to you. Many people tend to focus on investments in terms of the increase in resale value, but many others quietly hold stocks and bonds that pay large dividends, lining their pockets with capital gains. Look for individual stocks and bonds or index funds that pay good dividends, then sit back and watch the money roll in.
How can I get started? Just start an account at an investing house (Sharebuilder‘s my pick for beginners who want to buy individual stocks; Vanguard‘s the place to go in my opinion for index funds) and set up an automatic deposit into the account. Let the dividends roll over until you need them for income, then just collect the dividends as cash. Passive income at its easiest, and I plan on digging into these options more in the future, both as investments for future things and as potential passive income if it’s necessary.
My plan Once our non-mortgage debt is gone (hopefully by the end of the year), I intend to start investing in Vanguard index funds in a taxable account (and perhaps a few individual stocks of companies I believe in) and holding that investment with a fairly long time. While our goal is to eventually use that money to buy a plot of country land and build a home, it’s also quite possible that I’ll just turn it into a passive income source by collecting dividends or bond distributions.
Writing a book
The normal procedure for writing a book involves getting a book deal and an advance check, writing the book and submitting the manuscript, then getting (possibly) another advance check, then sitting around while the royalty checks come in. It’s a nice way to get a passive income stream, but it requires a ton of upfront work and a significant time investment. However, once it is done, it not only earns money slowly over the long tail, but it also opens the doors to other active opportunities – an active-passive double header.
How can I get started? You can start by getting your toes into writing. Find venues where you can sell written pieces and make a bit of cash while also building up your resume. Then, when you have several pieces in print and a good idea, pitch a book to a small-to-medium sized publishing house or get an agent to shop one around for you. Get the deal, write the book, then the royalty checks come.
My plan I’m currently in the process of doing this. Once the work is done, I receive my final advance check, the book goes into print, and I receive royalties, no extra work really required. Granted, it won’t be large checks, but it’s a start. The real key (for me at least) is to write several books, enough so that the royalty checks are significant.
Developing a static website of some interest
If you don’t want to invest all the effort of writing a book, you can instead just develop a static website with whatever amount of written material you want. An individual site won’t earn you much, but considering you can set the whole thing up with just a few hours’ worth of work and walk away, even a few pennies a day can make the endeavor worthwhile over the long haul.
How can I get started? Think of a topic you know something about. Write down the useful information you know about the topic, and take pictures, too, if need be. Find a free hosting site online, like Google Pages, then put your materials there. Sign up for an ad service like Google Adsense and put a few ad blocks on the site. Submit the URL to a search engine or two, then sit back and wait. This is something you can do in an afternoon. Be aware that one single site won’t earn you much unless you have something seriously compelling – many people that do this make new sites and pages all the time to add to their repertoire. It’s passive in that they’ll earn income whether they add new sites or not – adding new sites merely increases the income potential.
My plan These are great ways to develop specific written ideas you might have and to share them with the world while earning some passive income. I have a few things I plan on documenting in just this fashion. In fact, if I ever get tired of actively writing The Simple Dollar, this is what it will functionally become – a static site on a server somewhere, slowly earning some income over the long tail for many years to come. I don’t think I’ll stop actively writing The Simple Dollar for a long time, though – I truly enjoy it.
Creating and selling creative products online
There are many sites where you can create or upload creative products and have them earn an income for you over time. Zazzle and Cafepress let you design t-shirts, coffee mugs, keychains and such to sell (they manufacture it and you get a cut as a designer), while Metacafe and Revver let you upload videos of your own creation and pay you if they’re viewed by others. The best part is once you’ve uploaded your design or your video, you can just walk away and the passive income will trickle in.
How can I get started? If making a video or designing a t-shirt sound compelling to you, give these sites a shot. They’re all pretty simple to use and can be lucrative if you create something that catches on. Just try uploading some things – even if you don’t make any money, you can still leave them up there and it might catch on later.
My plan I’ve been thinking of making a series of videos to run on Metacafe or Revver focusing on a number of topics (personal finance and cooking). My wife and I have already plotted out several ideas and have thought about creating them in our spare time, then posting them also to The Simple Dollar. We’ve also talked about designing t-shirts to put on Cafepress and/or Zazzle, but that’s a more nebulous idea. Both of these are in my “projects” folder – they’re things that would add to the portfolio of potential passive income streams if we invest the time to create them up front.
These are the four methods of passive income I’m strongly looking at. Do you have any interesting ideas for ways that people can create passive income?