Definition of and Ways of Generating Passive Income

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You’ve probably started hearing the term Passive Income more and more, but what is it exactly and how do you generate passive income?

The Covid-19 pandemic has caused a global disruption in business and economic activity. Almost every industry and sector is affected. Unemployment is on the rise and economic experts are predicting a prolonged recession heading our way.

According to the IMF, the current recession can be worse than the Great Depression. Banks all around the world are being asked by their governments to cut down their dividends and suspend them if possible, to fortify their cash reserves for the unpredictable environment.

In such an environment, uncertainty has gone off the charts and people are no longer certain about their jobs. Millions in the USA are filing for unemployment each week. Global unemployment is set to see a record spike as businesses continue cutting down their staff to reduce costs. Those who haven’t lost their jobs are either hanging in the balance or have had their work hours and salaries slashed.

It therefore is becoming necessary for people to look for more streams of income. If we look at the concept of income then we can see that it is broadly divided into two main categories:

  • Active Income
  • Passive Income

Active Income

Any income that is generated through active participation is called active income.

If you have a day job, then that is your active income stream. The 9am to 5pm routine we go through everyday is an active income stream. Similarly, if you are a freelancer and you work full time to earn your living, then this too is your active income stream.

Active income represents income that you are continually investing your time and resources into. Your income increases as you invest more time and resources into it.

If you are an entrepreneur, then your business is your active income stream as you are actively and continually investing your time and resources into it to generate value.

Many people only rely on a single active income stream, and while this may be enough for those, it isn’t necessarily true for a lot of other people. For those where a single income stream is not enough, they need to think about setting up multiple income streams to create a financial cushion. However, it’s not easy to set up multiple active income streams, because active income requires active participation in time and resources.

This is where passive income comes into play.

Defining Passive Income

Passive income is any income that is generated with little or no participation.

As the name suggests, Passive income is generated in a passive manner. It does not require you to actively participate with time and resources, other than the initial setup and occasional maintenance. Most forms of passive income require your time and resources to get up and running, but as compared to active income, the amount of participation involved is significantly less. After the initial setup, the plan is that most things are automated and you don’t need to be very active.

Our How to Start an Online Business series focuses on creating an affiliate marketing blog to generate passive income. So be sure to check out the series and follow along.

Why Passive Income?

The idea behind passive income is not only to create a financial cushion to have some breathing space but also to be able to free oneself from the 9 to 5 rat race that has seemingly turned everyone into zombies or mechanical workers. Where our day starts at 9am, we go through the dull drudgery every day while keeping ourselves powered up with copious amounts of coffee and then get back home at 5.

All this and we still have to struggle to make ends meet by the end of the month. How many of you feel that you’re giving the best years of your lives working for these companies? Giving to employers who do not value the effort and sacrifice you put in? The sacrifice of being away from family, the sacrifice of not actively taking part in your children’s lives.

The concept of passive income is becoming more and more common. It allows you to be your own boss and most importantly, the amount that you can earn through passive income is only limited by your ability and imagination.

Passive Income Stream Opportunities

There are many different ways to create passive income streams:

  • Blog affiliate marketing
    • The How to Start an Online Business series that newsletter subscribers wanted
  • Ads on blogs and websites
  • Rental income
  • YouTube videos
  • Teach online courses
  • Photography
  • Write books and eBooks
  • Peer-to-peer lending
  • Airbnb hosting
  • Investment dividends

These are just a few examples of passive income ideas. There are many ways to generate passive income. The ones listed above are the most common and popular among amateur passive income enthusiasts.

What’s best for you?

It’s different for each person, because everyone’s situation is different. Some require you to put in more time. Some require more money upfront. Others require certain equipment.

Different forms of passive income require a different set of skills and/or resources. Start looking into each passive income idea and see what’s best for your personal situation.

Ways of Generating Passive Income

Blog Affiliate Marketing

Most people, when they want to set up passive income streams, think of affiliate marketing. It is a way to promote products and brands that you like, in return for a commission for every sale that is made through your referrals.

It’s also what you, the audience, voted for the first series on how to make money online.

You simply need to set up a website or a blog to review products or write content that can persuade your readers to try or purchase the products / services that you are promoting. If the readers use your links to go to a merchant’s website to try or purchase, then you will get a commission from the sign up or sale.

Affiliate marketing, if done right can be used to earn hundreds and thousands of dollars each month. Income depends on how engaging your content is and how much traffic you get to your blog.

Some affiliate marketers work directly with merchants whereas most affiliates connect with affiliate networks to get access to a broad range of products that they can pick and choose from. Affiliate networks consolidate multiple merchant payments and don’t have to worry about securing payments from multiple merchants individually.

I have a post on the definition of affiliate marketing too, so do read that one for more in-depth info on affiliate marketing.

But in a nutshell, affiliate marketing is promoting merchants’ / brands’ products and services to your audience. When your audience purchases or performs a certain action, like sign up for a free trial, then brands will pay the affiliate a commission.

Rental Income

This may not apply to everyone but it is a very simple way to generate passive income.

If you have got property or a room where you live that is not being used, then you can rent it out and thus earn monthly rental income. It can be an apartment, a house, a farm, or even a garage. You can use your savings to purchase real estate and rent it out. You’ll have to be mindful of annual maintenance costs, taxes and other property costs. If you’re in a hot real estate market for rentals, those other costs are minor compared to what you’ll be able to receive in rent.

If you do not have enough savings because real estate isn’t exactly cheap, an option is investing into shares of real estate investment trusts (REITs).

A REIT is a trust which holds ownership of properties and its main source of income is rental income, which is distributed in the form of dividends. By law, REITs are required to pay out 90% of their income as dividends. Investment in a REIT is ideal for those who want to invest in real estate, but cannot afford their own properties yet.

YouTube Videos

YouTubing is one of the most popular ways to generate passive income mainly, because it doesn’t require any monetary investment and anyone can do it – even kids (with adult supervision of course).

In order to generate passive income from a YouTube channel, you only need an idea. Yes, it is as simple as having an idea. You can be a professor, an author, an avid reader, a car mechanic or simply a teenager. All you need to succeed on YouTube is an idea and the ability to create engaging content.

If you think that you are a good gamer and you can create engaging content, then you can create your own channel to earn passive income through YouTube. You may be a voracious book reader, so you can set up your own literary channel reviewing books.

YouTube, is also a stepping stone when it comes to content creation. If your channel takes off then you can also switch to other platforms such as Patreon for a richer community experience with monthly subscriptions.

A caveat here, like affiliate marketing, is you’ll need enough traffic before you can start making enough passive income. You’ll want to make sure you enjoy being on camera, shooting and editing video.

Offer an Online course

If you have got skills that can be taught to others then you can consider creating an online course on any online educational platform like Teachable. Check out their platform at their site.

Basically, you will need to create an online course either on video or through a presentation. This course will then be uploaded onto Teachable or another online course platform for people who wish to learn the subject.

The online learning platform will give you a share of your proceeds. The better your course, the more students you will get and the more you will earn.

The initial creation of the online course will take up the most time, but once it’s up, there’s not much else you need to do – except to market it and get students. The course is pretty much done, unless you want to update videos and materials.

With Covid-19 closing schools, colleges and universities, the demand for online learning has increased dramatically. This is a great channel for potential passive income.

Write an eBook or Physical Book

If you think you can string your thoughts and ideas into words, then you can try writing a book. It can be on any topic you want and it doesn’t have to be a full 500-page novel either.

You can write about 10 best ways to invest your savings or a fictional story that you have had in your mind for a long time.

You can find a publisher or you can publish it on Amazon Kindle as an eBook. Another option is to self publish your book physically and digitally. This can be your stepping stone to becoming an acclaimed author because remember, your content will only be as good as you make it and you only have to make it once. After publishing, it will generate sales and bring a revenue stream for you as long as it is up for sale.

Peer to Peer Lending

P2P lending is also a very popular method of generating passive income. P2P lending is basically a way to lend money to borrowers through online lending platforms without the involvement of banks.

The borrowers who use P2P lending mostly include individuals who either have bad credit scores or people and start ups who cannot secure funding through banks due to ineligibility.

If you are looking to generate passive income through P2P lending then you will have to register to an online lending platform that you find trustworthy and transfer your funds. Your funds will then be lent out by the platforms according to the criteria chosen by you, in a series of micro transactions. This means that in most cases your funds will not go to one party instead they will be broken down into smaller sets and go out to different borrowers. This is a way P2P platforms reduce the risk of losses, by spreading the risk.

A typical P2P lending platform can give you a rate of return anywhere between 2% to 6%, depending on your investing strategy.

Conclusion

So, these are just some ways to generate passive income. Remember, there are many ways to generate passive income and we only discussed a handful of the most common ones.

Whichever method you end up pursuing, keep at it and make that passive income. Once you are comfortable with that passive income stream, you can keep adding more income streams to increase your total passive income!

One of the best books ever written about active income vs. passive income is by Robert T. Kiyosaki – Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! Get the Audible audiobook version of it and start listening right away. Or if you prefer reading an eBook or physical book, you can get it on Amazon too:

Here’s a recap of 10 ways to generate passive income streams:

10 Different Ways to Generate Passive Income Streams

There are many passive income streams, here are just 10 examples:

1. Blog affiliate marketing
2. Ads on blogs and websites
3. Rental income
4. YouTube videos
5. Teach online courses
6. Photography
7. Write books and eBooks
8. Peer-to-peer lending
9. Airbnb hosting
10. Investment dividends

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