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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 building plan.
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.
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 generate while you work at a job, or spend time doing the things you love.
Additional income sounds great; after all, who doesn’t want more money? And, better yet, earning passive income offers more than just getting more money to your wallet. Passive income can also diversify how you earn money, meaning you don’t have to rely on one source in the case that 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 more flexibility to quit when you want to, retire earlier, invest in that business opportunity someone pitched you, or comfortably help family or friends if they ever need financial help.
Ultimately, it can be a means to the financial freedom so many of us aspire to attain, especially when we aren’t making a multi-million dollar a year salary from a single job.
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?
Start by asking yourself these questions:
Only once you have substantial liquidity for a safety net (at least 3 to 6 months of expenses) should you consider investing additional funds anywhere, especially towards your passive income strategy.
Assuming your safety net and finances are in order, determine how much money you have to put towards generating even more money. You can’t touch the money you put down here, because it will get tied up in property or investments 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 $10,000 USD investment). It can also guide 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.
Don’t worry if you don’t have much capital to put forth. We’ll get into other ways to generate passive income with less upfront costs below.
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.
Passive income can take on many different forms, such as generating dividends from investments, rental income, or even running a successful blog. These three examples all require different levels of financial and time inputs: the first two require a lot of upfront capital, and the third requires a lot of time before money can start being generated.
Other investment opportunities that need some financial capital, for example, include portfolios optimised to earn dividends, savings bonds, and fixed deposit accounts.
If you can’t put forth a lot of money, you’re going to have to give something to start making money, and that’s your time. Passive income ideas that require little to no capital but a lot of hard work and perseverance include starting a blog, selling ebooks, or creating a YouTube channel. Don’t expect to see overnight success with any of them, but know that it’s certainly possible to earn revenue eventually.
No single passive income option is categorically better than another: you should also consider how you like to spend your time (i.e. your values), because how you spend your time is just as important as how you earn your money.
Generating income is about generating value - financial and emotional - throughout your life. There are a bunch of get-rich-quick schemes out there that make false promises of little work and lots of money. Avoid those. Making money takes effort. If it was easy, everyone would be doing it.
So, put forth the time to plan how you can give yourself and your loved ones the peace of mind that multiple income sources give you more options and flexibility. It’s a faster way to financial freedom—the life you know you’ve been imagining.