How to Build a Passive Income Strategy
If you want to retire early, you probably have looked into ways to build passive income. And that makes sense; generating passive income can be a great way to add income streams that can ultimately grow your long-term wealth.
But building a passive income strategy takes effort, planning, and often, capital. That’s right: to make money with passive income, you need money.
Let’s dive into what it takes to build a passive income strategy.
What is passive income?
You might be familiar with the concept of active income, which is the money you earn from working a job. On the contrary, passive income is money you earn from a source in which you aren’t actively involved. You can think of passive income as money you can generate even while you sleep!
Earning passive income offers more than just having more money in your wallet. It also diversifies how you make money, meaning you don’t have to rely on one source if your job falls through.
Even if you feel comfortable with your salary and confident that your job won't fall through, passive income can give you the financial flexibility to achieve FIRE (Financial Independence, Retire Early), invest in business opportunities, or give financial support to family and friends.
Ultimately, it can be an approach to reaching the financial freedom many aspire to attain, especially when we aren’t making millions in our day jobs.
Ask yourself these questions before creating your passive income strategy
The two resources you need to create passive income is time and money. Your decision likely will come down to a tradeoff between the two.
Start by asking yourself these questions:
How much money can you put to work?
One way to create passive income is to make your money work for you through investing. But first, you’ll need to make sure you’ve got enough cash for your immediate needs and emergency fund. Make sure you have at least three to six months’ worth of savings before committing any capital to your passive income strategy.
Then, assuming your safety net and finances are in order, determine how much money you have to put towards generating even more money. You shouldn’t touch the money you put down here, because it will get tied up in investments, such as property or financial markets, that require staying power to generate any meaningful returns.
Understanding how much you can put down can help to manage your own expectations about how much you can actually earn with your passive income strategy (spoiler alert: you’re not going to earn millions from a RM10,000 investment). It can also guide you in what you can realistically invest in.
Renting out a property or investing to earn dividends are two common passive income strategies, but these require significant upfront financial investments. A standard income portfolio pays a dividend of 4%: if you want to generate $40,000 USD in dividends you will need to start with a portfolio of $1,000,000 USD. Most of us probably can’t put up $1,000,000 USD, so maybe instead we invest $100,000 USD, understanding that that will generate $4,000 USD a year instead. This part is about managing your own expectations.
Income portfolio with a dividend of 4% | Amount to invest |
|---|---|
To generate $40,000 USD | $1,000,000 USD |
To generate $100,000 USD | $4,000 USD |
Don’t worry if you don’t have much capital to put forth. We’ll get into other examples to generate passive income with less upfront costs below.
How much time can you put towards setting up the passive income stream?
Passive income streams range in how much capital is required to start earning income, as well as in how much time they require to set up and maintain. You can spend months or even years writing a book to generate royalties later, or you can invest money one time (or more, if you’d like) into an income portfolio that generates yields and dividends. It’s important to know if you are willing to put forth a lot of effort now and very little later, or if you’re comfortable being responsible for that rental property.
How to generate passive income
Passive income can take on many different forms, such as generating dividends from investments or rental income, or even running a successful blog. These two examples all require different levels of financial and time inputs: the first requires a lot of upfront capital, and the second requires a lot of time before you can start generating money.
Passive income strategies that require capital upfront
Opportunities that need some financial capital, for example, include:
Diversified investment portfolios optimised to earn long term returns through dividends and market gains
Cash management accounts that earn a projected rate
Property investments that pay monthly rent and appreciate in value over time
Money doesn’t come out of thin air. Implementing a passive income strategy takes planning and sufficient resources to execute the plan. The two resources you need to assess when deciding what type of passive income stream you should go for are money and time. Your decision likely will come down to tradeoffs: do you want to put in the money or the time?
Passive income strategies that require time to build
If you can’t put down a lot of money, you’ll have to give something to start making money, and that’s your time. Passive income ideas that require little to no moneybut a lot of hard work and perseverance include:
Starting a blog
Selling ebooks
Creating a YouTube channel. Don’t expect overnight success with any of them, but know that it’s certainly possible to earn revenue eventually.
Takeaways
No single passive income option is categorically better than another. On top of deciding between passive income strategies, you should also consider how you like to spend your time, because it’s just as important as how you earn your money.
Generating income is about generating financial and emotional value throughout your life. There are a bunch of get-rich-quick schemes out there that make false promises of little effort to make money. Avoid those. Making money takes effort. If it were easy, everyone would be doing it.
So, put aside some time to plan how you can give yourself and your loved ones multiple income sources through passive income. Passive income ultimately gives you more options and flexibility. And it’s a faster way to achieving your financial goals.
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