How to Create and Build Passive Income

Passive income seems like a wonderful dream. A source of income that requires little or no time and effort to generate money? It’s something that pretty much all of us would find incredibly useful.

Of course, passive income isn’t an easy thing to build — if it were easy, all of us would have big streams of passive income and we wouldn’t have to work! Still, it is possible to build sources of passive income for yourself. It just takes a few ingredients and some reasonable expectations.

Let’s dig in to see how you can get started with passive income.

In this article

    The ins and outs of passive income

    Passive income usually operates on the “long tail” idea.

    Most sources of passive income operate on the idea of the “long tail.” You start off with a large investment of time and/or energy and/or money that may not generate a whole lot of initial return, but over the long run, it slowly and continually brings in revenue.

    For example, I wrote a book several years ago called 365 Ways to Live Cheap. At the time, the book required a whole lot of work with very little return for that work (I received a small advance). However, when it was finally finished and went to press, my effort was basically finished. Even today, it still sells a pretty hefty handful of copies each month, and because of that initial effort, I get a royalty check in the mail like clockwork. It’s not a big check by any means, but it’s pure passive income — I really don’t have to put in any more work. (I’ll get back to this project later.)

    It’s that “long tail” of income that really made writing that book worthwhile. It wasn’t worth the immediate return that I made from writing that book, but if I add up all of the checks I’ve received over the last decade, it’s a much more appealing proposition, and the fact that those checks keep coming in without any additional effort from me is incredibly appealing. Each one of those checks is small, but they come in regularly, like clockwork, for many years.

    This is the reality of passive income. You put in a lot of effort and time and energy and (perhaps) money upfront and, initially, the return doesn’t seem so great. However, after that, you put in minimal effort and time and energy to keep things going and it steadily pays out, gradually making all of that initial effort worth it and more.

    Passive income isn’t 100% passive.

    Another important truth to learn is that passive income isn’t 100% passive. You can go for periods without putting additional effort or resources into that passive income stream, but if you do that, the income will dwindle and eventually go away.

    Rather, the best way to look at passive income is that once you’ve put in that large initial effort, the value of later effort is greatly multiplied.

    I’ll give you an example. I am friends with a person that runs a fairly popular YouTube channel. Over the course of the first year or two of that channel, he published a video almost every day, with most of them barely garnering 100 views. Over time, he got a little better at making the videos and now he has over 100,000 subscribers to his channel.

    When I talk to him about this success, he makes it clear that the revenue he makes from this channel now is mostly from his older videos, the ones that are finished. He still makes videos, but he looks at them mostly as a way to promote all of the older videos he’s done by attracting viewers. A new video might get 10,000 views in the first day, but it also attracts 100 views each for the 1,000 videos already on his channel — in other words, 100,000 more views.

    Furthermore, he can now go for periods where he doesn’t produce new content and the channel still earns good revenue. There’s a boost for a few days whenever he produces something new, but much of his income is actually a passive stream. His YouTube channel is a passive income stream that he tends regularly to keep it going but doesn’t require overwhelming work to do so. In fact, he says he has far more fun these days making videos because he has the process down cold, he doesn’t feel the need for daily output, and he can thus stick with topics that are more fun for him. The ongoing effort is low, and that ongoing effort is rewarded with a wonderful steady passive income.

    Financial investments are definitely a form of passive income.

    If you take $10,000 and invest it in stocks that return a 2% annual dividend, you can sit around and enjoy those $200 in annual dividend checks and barely have to lift a finger. That’s passive income.

    If you own an apartment building and pay a property manager to take care of it for you, you receive regular checks for a significant portion of the rental income and barely have to lift a finger. That’s passive income.

    The difference here is that the up-front investment is in the form of money, not time. It’s still passive income, as it requires little or no additional effort or money or time to earn a return.

    Of course, many people will work at a lucrative job they hate and live far below their means so that they can turn their time and energy into extra money which they use to buy passive investments. That’s essentially what people do when they contribute to their retirement accounts, after all.

    If you don’t have a lot of money, however, you can build passive income using your time, energy and skills.

    If you don’t have the money to invest right now but you still want to create passive income, the question you need to ask yourself is this: what can I create with my own time, energy and skills that other people will still value and enjoy years from now? Think about things that people have made in the past that you still enjoy now — older videos on your favorite YouTube channels, websites that still bring you enjoyment with their older content, books that are older, smartphone apps that have been around for a while and so on.

    The important thing to remember is that you can always learn the skills you need to create things like this; the real ingredients are the time and effort you put into making things, promoting them, and learning the skills needed to make those things happen.

    It is going to be painfully slow at first, with very little return for lots and lots of time and energy invested.

    The first of many things you make will not be particularly good. It won’t attract much of an audience. You might decide not to even share those things publicly, perhaps just soliciting feedback from some friends you trust who you will accept criticism from.

    Even when you start putting things out there, they won’t be a big hit immediately. You’ll make a lot of things that just won’t hit at all.

    The first several hundred articles I wrote for The Simple Dollar got very few views, and many of those views were from friends of mine. I didn’t make more than a few pennies during the first several months to a year of the site’s existence.

    Eventually, however, you’ll find that you’re making better stuff and your process for making it gets more refined. You’ll also learn how to promote it better. Gradually, the new stuff you produce will start having an audience, and some portion of that audience will dive back into your older stuff. A few of them will start recommending your stuff to their friends, and then it will start snowballing.

    At a certain point, that snowball starts rolling out of its own accord, with most recommendations and new fans and customers appearing out of nowhere without your direct effort. That’s when it all starts turning into passive income.

    I like to think of it as a merry-go-round. At first, you have to push really hard to get it to even start turning, and you have to keep pushing hard with a lot of effort to get it to build up much speed. After a while, however, you give it a final shove and it’s basically spinning without your input. It will gradually slow down, but if you keep giving it regular additional lighter shoves, it will keep going and going for a very long time, eventually producing far more value than the effort you put into it.

    A big hidden benefit of building passive income streams is the skills you build.

    Building a passive income stream through the investment of time, energy and skill is a lot of work and involves at least some application of various skills that might also be useful to you in your professional life. You’re going to have to learn new things as you go, and through the repetition of those skills, you’re going to get quite adept at doing different things. You’ll probably spend some time doing topic research as well, gathering together bits of information and other materials for what you’re creating.

    All of that is vital for building your passive income stream, but it’s also invaluable for your own professional path. The skills you learn and sharpen and the knowledge you acquire while creating passive income streams will often transfer over to other areas of your life, particularly your professional life, and those very skills can help improve your income or open other doors for you. Don’t just see the effort in building a passive income stream as only providing as much value as you earn in passive income, because those new skills and that new knowledge will pay benefits in other ways, too.

    6 plans for producing passive income streams.

    Thinking of giving this a try? Here are six options for getting your own passive income stream started. Remember that you will be putting in a bunch of up-front work with little immediate return; the goal here is to build a “long tail” that produces revenue with little ongoing effort later.

    1. Start a YouTube channel on a topic you’re passionate and knowledgable about.

    All you really need for this is a good camera (modern smartphone cameras are actually good enough if you have a tripod), good lighting, some good video editing software (Lightworks is excellent and has a great free version) and a decent internet connection.

    The key is to find a topic that you’re interested in that provides enough material that you can create a lot of videos in that niche. You might choose to review items related to one of your favorite hobbies. You might choose to make some how-to videos related to a hobby or even your career path. Just find something for which you can easily list lots and lots of distinct videos.

    I’d suggest making a few, figuring out how to upload them to YouTube, then share them privately with some friends that you trust to give you honest feedback, particularly criticism. You want to know what parts are good and what parts are bad, so that you can retain the good parts and work on the bad ones.

    Once you start making videos that feel pretty good, start producing them as regularly as you can. Learn a bit about how to market your videos well on YouTube with catchy names, titles and descriptions. Remember that you will not get a lot of subscribers and views for a while and you won’t be able to enable any ads for quite a while; rather, you’re trying to build up a big merry-go-round and get it going on its own with a lot of momentum, so the progress is really slow at first.

    The key is to choose a topic, even if it’s pretty niche, that you’re excited and knowledgable enough about that you can continually produce videos in that niche without burning yourself out.

    2. Create a smartphone app that solves a specific problem you have.

    This is a great option for someone with computer programming skills, as it not only helps build up some of those skills but produces an end result that you can stick up in the App Store and sell for $0.99 to produce a small passive income stream. The key is starting with a tool that solves a specific problem you have, preferably something little that you wish your phone could do for you.

    For example, one of my favorite podcasters, Casey Liss, did exactly this with Vignette, which was his attempt at solving a simple problem he had on his iPhone. He wanted to have automatically updated pictures of all of his contacts, pulling their pictures from social media automatically. That’s exactly what his app Vignette does. I’ve used it and it does exactly as advertised, though it does take some work to make sure you have social media information in place for all of your contacts.

    Start by thinking about a little itch you wish your phone could scratch, and once you find one, figure out how to create an app that does just that. Once you’ve written and tested the app — and learned what skills you need to make it click along the way — upload it to the app store and do a bit of promotion for it, perhaps by posting about it on relevant internet forums.

    3. Write and self-publish a short book on a topic you’re passionate and knowledgable about.

    If you prefer the written word and you’re knowledgable about a topic, you can simply turn that warehouse of information into a short book, then self-publish that book both on the Kindle and in print via Amazon. Here’s a basic guide for doing it!

    You’ll want to aim for somewhere between 30,000 and 50,000 words of text for a shorter book, and the best way to delve into a project like that is to organize the entire thing like a giant outline. Consider what five to 10 main points you really want to hit home, put an introduction and a conclusion at the beginning and end, then start breaking down each of those sections.

    As you wrap it up, you’ll want to go through and do a self-edit of your work, then hand it off to a willing friend (or two) to edit and proofread it further. After that, you’ll go through the process of formatting it to be sold as both a physical book and an e-book on Amazon.

    Once it’s actually listed there, you’ll want to promote your book a little by posting about it in a few relevant places, such as online message boards related to the topic of the book.

    4. Create a website covering a topic you’re passionate and knowledgable about.

    This is similar in concept to creating a book about a topic you’re passionate about, except that you’re hosting this site online. Most web hosting services have a small hosting fee, and you’ll also need to pay a small fee for your website’s URL, but the annual fee is usually under $100 a year and additional sites won’t add up to much more than that.

    Essentially, you’ll just choose a particular topic you’re passionate about — say, fantasy book series or strategies for saving money at the grocery store — and you break that topic down into a bunch of sub-topics. For example, you can create list of the top 25 fantasy series along with a page discussing each one in detail and listing the books, or an overall guide for shopping for groceries inexpensively along with pages for each step in the process.

    You’ll need to know some HTML to put the site together, or you can rely on a service like Squarespace to handle a lot of the details for you. In either case, once you have a good website in place (and have a few friends read it over and suggest proofreading fixes and other changes), publish it and then promote it a little bit on some relevant message boards related to your topic.

    5. Take great photographs and sell them for stock photography.

    If you’re passionate about photography, consider taking some of your better shots and selling them for stock photography purposes. It’s mostly just a matter of uploading some of your good shots that you don’t have a particular use for to sites that will sell those images as stock photography, like Shutterstock and iStock.

    It’s really as simple as it sounds. You just take some high-quality photographs, touch them up a little so that they look great, and then upload them to a stock photography website. They’ll handle the sales from there and your images will become a small passive income stream.

    Just keep taking photographs and choose ones that you think will work well as stock photos, uploading them as you go along. The more images you have, the more you’ll sell and the more money you’ll make.

    6. Build a large social media following to promote these things (and others via affiliate links).

    This strategy will make money on its own, but it also works well as a supplemental strategy for all of the above passive income strategies.

    Basically, just start fresh with new social media accounts, particularly on Twitter and Instagram along with perhaps a Facebook fan page, and have those accounts oriented toward conversation and promotion of a particular niche area. This takes a ton of work at first to get it going and build up a following, but it’s also like a merry-go-round in that once it really starts rolling, you’ll build up followers automatically and you can dial back the frequency and intensity of your posting.

    Once you have followers, when you post things that include affiliate links to products (such as Amazon Associate links to Amazon products), you’ll get a percentage of any of those products that sell. You can also use those avenues to promote your own products so that you not only gain affiliate bonuses, but you also make money from the sale of your own item. If you link to your own book on Amazon using an affiliate link, for example, you make money from the affiliate link and from the book sale.

    Remember, you’re better off having 1,000 followers that are really into your niche than hundreds of thousands of general followers.

    Build passive income during downtime.

    If you find yourself with extra free time, perhaps during a period of social distancing, building passive income can be a great side project. You can use it to build your own professional and transferable skills, dig into sharing information about a topic you’re interested in, and end up building something that can earn money for you over the long run with little additional input. In my eyes, that’s a pretty great use of spare time!

    Good luck!

    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.