Updated on 04.03.07

The Simple Dollar on Passive Income

Trent Hamm

With the ongoing review of Rich Dad, Poor Dad and its focus on assets that generate cash flow, it seems like an appropriate time to look at passive income and ways to generate it.

What is passive income? Passive income is income from a source that doesn’t require any active work to generate income, though it may require a lot of work to get it started. For example, if you own a self-managed property that returns rental income to you, that’s passive income. If you write a book, then the royalties from that book are passive income. If you create a website, income from ads on that site are passive income. I view the archives of The Simple Dollar as passive income, for example, as I don’t actively edit or modify those pages.

What about income off of stock investments / mutual funds? These are referred to generally as portfolio income and, depending on who you ask, are either considered separate from or a subset of passive income. I view them as a subset, so I also include investments in equities as passive income, though I generally roll my income from these into more assets.

What’s the point? The point is that if you can accumulate enough passive income to match your primary income, it becomes your primary income. This is a way to gain freedom from being under the thumb of an employer.

Great! So how do I get started? The biggest thing you need to do to start building up your passive income is to start spending less than you’re bringing in. If you’re spending everything you make each month, there’s nothing left over to invest into earning passive income. This means you have to live somewhat frugally and also that you have to pay off your high-interest debts, as these merely drain money away from you at a frightening rate.

Once your finances are in better shape, start saving for and investing in assets that see some rate of return, such as rental properties or websites. This is often a mix of financial and time investment, though some are more weighted in one direction or another (property often requires more of a financial investment, while a successful website is more of a time investment).

When you’ve got an asset that can run on its own, then start saving for another, and another, and another, until you have enough passive so that you can cover your monthly expenses. At this point, you’re very close to leaving work, but keep at it until you can cover your monthly expenses and also invest a healthy amount of the income into more assets.

That’s expensive. How do I balance this with retirement? Remember, most retirement packages are passive income – they become an annuity that provides income without your effort when you retire.

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  1. Very interesting subject we have today.

    Now I would be interested to see what passive income sources people have, and how much time did they earn before get them.

    I have some websites, and I’ve worked about 1 year, but is not to much money.

  2. rhbee says:

    As I’ve said in an earlier comment, I am interested in this topic because I came to learn about it through my interactions with the RichDad philosophy and by playing the Cashflow games. But I have a question, Trent, which you can answer here or via email. Yesterday, my real estate lender sent me a plan for using an equity line of credit to deal directly with the idea of reducing a person’s spending and I’d really like to run it by you and get your insight. So can I forward it to you?

    And in reply, to Micheal’s question, I have just recently started a website that I plan to have make money. And I was amazed at the myriad affiliate programs and adsense options there are. However, I believe less is more in this regard so I am being very cautious in adding them to my site or blog.

  3. db says:

    Right now my big passive income project is that I’m selling approximately 75% of my personal library on amazon.com, etc. I have around 100 items listed right now and some more to list — I’ve sold over 55 items already. Eventually though I’ll dwindle my stock.

    Other than that I’m looking to build a monetized blog (not necessarily my current one), work on a cafepress store, and work on making jewelry out of a huge amount of beads I inherited. Also I’m looking at copywriting and forex trading as side businesses if not really passive — forex is definately not an immediate thing whereas I could start the copywriting up this year.

    I think I need that personal productivity blog! Because there are lots of ideas there and I need to really deliver on some of them.


  4. db says:

    P.S. – I know some of my things aren’t really passive income — I’m working on that too!

  5. moom says:

    Yup, trading forex and selling books aren’t passive income. I’m counting dividends, interest, and mutual fund distributions that I receive in my non-retirement accounts without having to do any active trading of any sort to say realize a capital gain. Last year I was at $13k in such passive income.

  6. Dboy says:

    You CAN, REALLY, do this…

    I read the Rich Dad books (all of them) in the summer of 2001. Now, summer 2007 at at 39 I am “out of the rat race”, no longer employed, and have been spending most of my time travelling the world (mostly Europe and Asia). It really can be done.

    Now for the reality check. Throughout that last 5 years of work I was saving over 50% of my after-tax income, lived WAY (no really, WAY) below my means, single, no kids. I still have a small mortgage left to pay (less than $60K at 5.0% fixed) monthly payment $425? or so), that and all other expenses are easily covered by passive income. So I did it, but it was through radical savings and single-minded dedication to getting it done. It felt VERY good being able to give my old corporate job the ol’ middle finger.

    My current goal is to get my life internationalized so that I am not required to remain in the US. I’m doing this for political reasons. My passive income is not from internet sites, network marketing, flipping real estate, or anything like that.

    About the “forex trading” thing. I used to work on the floor of the Chicago Mercantile Exchange in Chicago, mostly in the currency pits. I *assure* you, forex is alluring because it seems so easy. *You will lose all your money*. No amount of expensive courses, software, or holy grails will allow you to beat professional traders unless you are willing to accept a minimum of 5 years, but maybe up to 15 years, watching the screens and losing money. If you make $5000 on your first forex trade, immediately close your account and enjoy your profits. Sorry, thats real world, I’ve just saved you alot of grief.


  7. Raymond says:

    I must say that comment#6 really really frustated me because Dboy talked as if he had a passive income, but never said what it was.

    If a person cannot prove it or say what they are doing, it does not help anyone. Anyone can talk or say that they have done something but how did they do it, (that’s what really matters).

    Talk is cheap!!!

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