The First Steps Toward Passive Income

Before we even get started on this topic, let’s back up and look at what passive income is.

I’ve seen a lot of different definitions out there, but I define passive income as being any income derived from an initial investment of time, effort, money, or ideas without additional input of time, effort, money, or ideas.

So, for example, a published book (once you’ve finished the main promotional work) can be a source of passive income. A Youtube video can be a subtle source of passive income. Money put into a dividend-bearing stock can be a source of passive income. A retirement fund can be a source of passive income.

In each of those cases, a significant investment was put into the item up front. Time. Ideas. Energy. Thought. Money. Different initial investments require different things.

Passive income streams are a powerful personal finance tool. Simply put, a passive income stream earns income for you while you’re doing something else. That something else might be another lucrative path toward earning money, it might be retirement, or it might be engaging in a very speculative career path.

A few caveats, though.

First, if you’re not investing money, expect to invest a lot of time and energy. If you want a passive income stream that’s going to give you a long trailing tail of revenue, you’re going to have to invest a lot of time and energy up front without any immediate reward.

Often, the more time and energy you spend up front, the larger the reward and the longer it will last. However, that’s not always true – it’s merely a rough approximation. You can spend years honing a novel to see it only sell a handful of copies. (On the other hand, if you were to just put your first draft of that novel out there, it likely wouldn’t sell any copies.)

Second, many passive income streams are a trickle. If you upload a YouTube video, assuming it’s not a giant viral hit but also assuming that it’s not totally useless, your income from that video is going to be a trickle – on the order of a cent or so every few days. You might earn a dollar a year from that single video.

Not much, right? That’s why you need to bundle these kinds of income streams. If you make a video, make another one. That theoretically doubles your income stream, but it actually does even more than that, because people who find one video are at least slightly more likely to find another video you’ve made. This is true for any creative project you take on.

So, how can you get started? Here are a few things you can do to start launching a passive income stream. These can all be done in your home and without a publisher or other outside source accepting or helping you.

Make some content. Make a video and put it on Youtube. Write an ebook and submit it to the Kindle store and the Nook store. These options let you focus solely on the content you’re creating, as they handle all of the hosting for you.

Again, don’t expect to make a mint from each piece that you write or film, but you can create at your own pace this way. Make a video or do some writing in the evenings and before long you’ll have a small portfolio of things that are slowly earning income and synergizing with each other.

The key thing here is to make sure you’re creating something that others would want to watch or read. A good place to start is to look at the things you’re good at, as people always admire the skills of others.

Buy a share of stock in a dividend-paying company. Put away a dollar a day and in a month or two, you can purchase a single share in a dividend-paying company. Use a site like E*TRADE to make your purchase, then just direct the dividends to your checking account. In a few months, do the same thing again, perhaps with a different dividend-paying company to diversify things.

Don’t know what dividend-paying company to buy? Here’s a great list of very stable companies with a long history of paying dividends.

Buy a rental. The way to start this process is to buy a fixer-upper home, invest your own sweat equity into fixing it up, then rent that home out at a reasonable rate.

Since you want this to be truly passive income, the way to do it is to hire a property manager to take care of any issues for you in exchange for a piece of the rent. That way, you just collect the rent checks and don’t worry about it.

All of these ideas have a few things in common. They each provide a “hobby” of sorts where you can sock away your spare time without spending money, but eventually leading to earning money. They each eventually result in something that will earn you a small passive revenue stream. With additional effort, these smaller revenue streams can synergize, increasing your passive earnings.

The big ingredients you need to get started are time and effort.

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.