What is Passive Income?

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This post delves a bit into the realm of Business and Personal Finance as we take a break from Blockchain and cryptocurrency investments. I’ve found that the growing interest into passive income lifestyles, has been accelerated with the evolution of social media. But first I’ll explain a bit about what passive income is and how this all ties to the Blog theme of investing. In this post I aim to just provide a brief overview on passive income and will go more in-depth into each example listed below. in subsequent posts.

The passive income concept has been widely popularized by Tim Ferris’s book The 4-Hour Work Weekas well as Robert Kiyosaki’s book Rich Dad Poor Dad (links to which are embedded). Both books explore many concepts in personal finance but primarily, they introduce the concept of financial freedom through passive income and “allowing your money to work for you.” But what really is passive income and why does this topic deserve its own post?

Passive income is a technique utilized both consciously and subconsciously by a large chunk of the population, whereby a stream of income is created, without having much input by the beneficiary. However, it should be stressed upon, that passive income ventures typically require a high upfront time dedication and continuous monitoring (though minimal in some instances). But how does this work?

Perhaps the most classic example of passive income is through real estate; whereby a person leverages a property to provide a stream of income through long term-renting, flip and resale and subletting, just to name a few. There are many different methods of doing this, but you get the gist. The biggest barrier to entry, however, is that for most individuals, real estate investments require a high upfront cost, which leads to persons exploring this concept at an advanced stage in their career. What if I told you, there exists ways in which achieve the same goals without the hurdle of a high initial financial commitment!

Nowadays, passive income practises have encouraged young professionals to focus less on continuously overloading themselves with stressful work solely to meet financial obligations, but rather dedicate time to doing tasks which they actually enjoy and are passionate about. Now don’t get me wrong, there’s definitely the possibility that the stressful work mentioned above is something that you would like, but in the event that it isn’t, passive income techniques offer an excellent way of diversifying your stream of income as to not heavily rely on one (i.e. it is the principle of working SMART).

Now it’s important to bear in mind, that many passive income ideas (as will be described below) have become the primary source of income for many individuals allowing them to establish businesses around these methods and sometimes even retire at an early age. Now let’s get into the juicy part of this discussion. What are some passive income techniques?

The use of social media has become one of the easiest ways to generate a stream of income in both a full-time and passive manner regardless of wealth or education level. Some examples of this are:

  • Affiliate Marketing – This is a process whereby an ‘affiliate,’ advertises the product or service of a business, and earns a commission every time a customer is brought in from the affiliate’s referral. (e.g. via Instagram or Pinterest)
  • Facebook/Google Marketing – This technique is very similar to affiliate marketing however, instead of earning a commission, in this process the individual targets small-medium businesses who do not have an online presence and offers to manage their marketing and advertising via Facebook or Google for a monthly fee.

Throughout the 21st century, e-commerce (the practise of selling online) has grown in popularity, and in recent times with the Covid-19 pandemic ongoing, e-commerce has proved its dominance over traditional ‘brick and mortar stores.’ Some examples of passive income techniques taking advantage of e-commerce include:

  • Dropshipping – This process involves an individual acting as a ‘middle-man’ between wholesalers/manufactures/retailers and customers using an online platform. Effectively the individual lists a product on an online platform (e.g. Shopify or E-bay) and when a customer purchases the product, the individual transfers the order details to a wholesaler/manufacturer (e.g. via AliExpress) who fulfills it.
  • Amazon FBA (Private Labelling) – FBA (Fulfillment by Amazon) is a process whereby individuals take advantage of both the millions of customers on the Amazon platform and the Amazon Prime service. Individuals source high-demand, niche products directly from manufacturers (e.g. in China or India) and brand it as their own, in order to tap into the market for the chosen products.
  • Retail Arbitrage – As the name suggests, ‘arbitrage’ takes advantage of price differences. In this case, price differences between retail stores (e.g. Walmart or Target) and e-commerce platforms (e.g. Amazon or eBay). In this process, individuals look for high-demand, discounted products at retail stores and resell them at a higher price online, for a small profit.
  • Creating your own product – Perhaps the most effective way of leveraging e-commerce platforms is to create your own unique product (a ‘passion product’) and sell it online.

One of the most popular ways to generate a passive income is through investing in financial markets. Some of these investments include:

  • Bonds and Fixed Income – This involves buying corporate or government debt in order to generate a low-risk, constant cash-flow/income.
  • Annuities – This process requires an initial lump-sum deposit/s into a financial product with the intention of fixed, constant payouts immediately or sometime in the future.
  • Dividend Paying Stocks and ETFs – Stocks or ETFs (Exchange Traded Funds) are representative of a share in a company or group of companies. In some instances, these companies pay a monthly, quarterly or annual dividend (portion of their profits) thereby generating a stream of income. The process of ‘stock-picking’ may be difficult and though it can offer added benefits of capital gains (i.e. buy low and sell high to make profit), there’s also some inherent risks involved, and as will be discussed in future posts, individuals should seek to manage those risks before investing.
  • Cryptocurrency Mining – Cryptocurrency is seen as a highly speculative asset class, however some cryptocurrencies (e.g. Bitcoin, Z-Cash, Ethereum) offer the option for individuals to act as nodes in their respective Blockchains therefore enabling them to earn rewards (a stream of income) for mining cryptocurrency. More information on this can be found in my earlier post on Blockchain.
  • FX trading – Though this may be a highly debatable and risky venture, FX trading involves actively trading major foreign currency pairs (e.g. USD/GBP, CNY/CAD, EUR/CHF) to make quick profits (pips) over small moves (+/- 2%) in currency exchange rates.

Though this may sound nonsensical, perhaps one of the best ways to secure a stream of passive income is to use your skills. Have no skills (you may think)? Nonsense, everyone definitely has at least one skill that can be used to generate an income. It may be an art form, writing skills, oratory skills, graphic design skills, etc. These skills can be used in the following ways:

  • Becoming a Freelancer – Many persons often offer their services in areas such as: graphic design, photography and videography, writing, programming, animation, consulting, tutoring, etc. for short projects or contractual jobs to earn an additional stream of income, though it may not be considered completely passive. This can be done via sites such as Fiverr (follow the link if you’re interested!).
  • Writing a book (or e-book) – For those individuals who have a knack for story writing or have experiences worth sharing in any particular field (e.g. powerlifting, digital marketing, electronics repairs and installations), sometimes author a book or an e-book for sale in order to generate a stream of passive income.
  • Constructing an online course (e-learning) – In recent times, e-learning has rapidly grown and sites such as Udemy have increased in popularity for young professionals looking to share their knowledge by means of an online course. From the simplest of courses like ‘learning to bake a cake’, to the most technical such as ‘derivatives trading’, have been created and sold on Udemy in order to generate a stream of income.
  • Starting a Blog – Blogs have become a quite popular way of generating a passive income, but more as a full-time income to many individuals. Through the use of advertising and also affiliate marketing (as mentioned above), bloggers are able to generate revenue when there is a large traffic on their website. This process often involves a constant time commitment in writing high-value articles and performing SEO (search engine optimization) research to generate traffic but these tasks can be outsourced later on, once some income is being generated.

If you have a good amount of money stored away in savings and you’re probably getting an undesirable interest rate leaving it in a bank account, there are some ways to use those savings to generate a stream passive income:

  • Peer to Peer Lending – This process involves an individual acting as a short-term lender to friends or colleagues who may not be able or willing to go directly to a bank. This process allows individuals to earn consistent income in the form of loan repayments, and also earn a premium on their money, based on the interest rate charged.
  • Real Estate – As mention at the onset of this article, probably one of the most common means of earning a passive income is through real estate. Individuals can purchase a property (either with their own cash or using debt as talked about in Rich Dad Poor Dad) and rent it to earn a stream of passive income. Another method involves, individuals subletting rooms in their current apartments or houses to earn additional income. There can be many ways to exploit real estate investing, not only to earn a passive income, but also for asset value appreciation (i.e. the value of your property increasing over time); however, I will cover more on this topic in a future post.
  • Buying some vending machines – Though this technique may sound trivial, vending machines do offer a stream of passive income if utilized correctly. In this process, individuals can purchase one or more vending machines and place them in highly populated areas to make a profit on each item sold (effectively like a digital snack or drink shop).

In this post, I tried to briefly touch upon some ways to generate a stream of passive income and I’m sure that there may be some that I have missed. However, the key point to take away from this article is that there is a growing list of techniques that can be utilized to earn you a stream of passive income, both as a supplement to traditional occupational income and also as a full-time income source.

As you may notice, some of the aforementioned processes have larger time and/or money commitments than others; nevertheless, due to the wide variety of methods, absolutely anyone can start earning passive income right NOW!

In the next post within the business and personal finance category of my blog, I will dig a bit deeper into some of these methods and give some recommendations on how to get started generating passive income (whilst also sharing some of my own current practices). Feel free to read up on any of the aforementioned in your own time also and should you have any questions don’t hesitate to reach out to me on Instagram (@investingvirtuoso) or Facebook (@investingvirtuoso), I’d be happy to help. If you liked this post, please remember like, share and comment!

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