The opportunity to make money while we sleep is one few of us would turn down. And passive income, at face value, suggests we can do just that.
Social media is chock-full of influencers telling us how to make passive income. And while many of those content creators do actually earn money even when they're not on the clock, fewer of them are forthcoming about the work required to get there.
“A lot of people are surprised by how much work it takes because I think a lot of people who are earning a passive income are talking about how great it is having earned that,” said Pat Flynn, a US-based entrepreneur and creator of the ‘Smart Passive Income’ podcast. “But they don't necessarily tell you the whole truth. You're seeing the tip of the iceberg.”
‘Passive’ income, in most cases, won't be created passively. Whatever the pursuit - investing in stocks to receive dividends, buying rental properties, earning ad revenue on video channels - you'll have to put in work upfront before you can start making money while doing little, or no, work. And in many cases, you'll have to keep doing work to maintain that income, too.
Different ways to earn passive income
The goal of a passive income strategy is to earn money while you sleep. But despite having ‘passive’ in its name, earning this kind of income requires an upfront investment of money and time to generate long-term cash flow.
Dividend stocks: One way to build an income stream is to invest in dividend stocks, which distribute part of the company’s earnings to investors on a regular basis, such as quarterly. Dividend stocks typically are less volatile than growth stocks and help diversify your portfolio.
Index funds: You can also invest in index funds or exchange-traded funds that hold dividend stocks rather than picking and choosing individual stocks to buy. This is a form of passive investing for those who prefer a more hands-off approach.
Bonds: Experts also suggest investing a portion of your portfolio in bonds because of their lower volatility and relative safety compared to stocks, then having a higher ratio of bonds in your portfolio the closer you are to retirement.
Real estate: Purchasing properties to earn rental income is another way to build passive income. Long-term rentals can provide a reliable source of cash if they are located in a healthy market for renters. Real estate investments are long-term bets to build passive income.
Peer-to-peer lending: If you want to potentially earn income and cash out your investment in under five years, one tactic to consider is peer-to-peer lending. An alternative to traditional bank loans, they match investors who are willing to lend money with borrowers who are vetted for creditworthiness.
Passive income has no set definition
When does a job or side hustle turn into passive income? That depends on how you define it.
There is no clear-cut point where income turns passive. For some, it could be when no work or upkeep is required, or for others, it could be when a minimal amount of work each week is required. And ‘minimal work’ is also subjective.
“Passive income, for me, is really something that you have to work to set up, but after that, it takes very minimal work to maintain and to keep that income stream coming,” said Joseph Hogue, a US-based chartered financial analyst and creator of the YouTube channel ‘Let's Talk Money’.
Other sources of passive income include investing in bonds or peer-to-peer lending, generating ad revenue from a blog, or putting your money in a high-yield savings account. Even the money an artist makes through plays of their songs on a streaming platform can qualify as passive income.
If you want passive income, be ready to work
Contrary to what the phrase passive income suggests, you need to put in work in order to attain it.
Investing money you inherited or won in a lottery may be the only path to truly passive income, start to finish. But for most of us, creating this new revenue stream will involve investing money made from more traditional means like a job, or investing our time building a source of income from the ground up.
Without a large initial financial investment, people often underestimate the ‘sweat equity’ or time and energy required at the beginning, said Jannese Torres-Rodriguez, a US-based entrepreneur and creator of the ‘Yo Quiero Dinero’ podcast.
“That initial workload, that time it's going to take to get to a place where it's passive, is what freaks a lot of people out and makes them think that, ‘Oh, well, this is obviously a scam because I just want to make money quickly,” said Torres-Rodriguez.
For both Torres-Rodriguez and Flynn, it took at least a year before they saw earnings from some of their current sources of passive income. Both said that it took consistent work during that period before they started seeing money come from their blogs, including from affiliate marketing, ad revenue and selling courses, among other sources.
The amount of work upfront can depend on the income stream and what you want to get out of it. For instance, if you're making income from rental properties, you can hire a person or a company to take care of all the property management. That'll take away from your earnings, but putting in your own time will make the income more active than passive.
If you're looking to make passive income, keep in mind it's not guaranteed down the road – even if you do put in the work. There's no promise your investment, whether that's time or money, will pay off. Inevitably, there is risk involved.
Seeing other peoples' successes, or hearing about them, can trigger that fear of missing out on a good thing. But before you try to emulate them, consider the journey. It's not unattainable, but it won't happen overnight.