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How to Start Using Passive Income

Updated on February 9, 2017

What is Passive Income, and Who Cares What I Have to Say on the Subject?

I'm not a banker or a Wall Street investor, and I'm not rich. I'm not a bigshot with billion dollar earnings, and I wasn't a finance or accounting major in school. In short, I'm just like you, except maybe 2 or 3 years down the line. I am a regular guy with ambitions to have a passive income stream, and I can help you!

Passive income, as I'm defining it here, means doing a lot of work up front so that you don't have to continue to do much (or any) work on something, but you'll continue to generate revenue indefinitely. I'll define the five basic sources of potential passive income as I see them right now, and I'll give you my own personal experiences with each one thus far, including a little research I've done on each concept. At the end, you will at the very least have a rough idea of which direction to head in first.

Source

Quick Caveat

The first step to generating passive income needs to be a twofold concept:

First, make sure you are out of debt (the link is a quick article I wrote suggesting how to make this work for you without sacrificing your lifestyle). Once you're no longer under the gun from the credit card companies, you can focus a very small percentage of your money in a positive direction, or at least stop hemorrhaging money. Second, allocate resources to setting up your passive income streams. This boils down to either time or money. If you're like me, time is going to be the more available of the two resources at first, but eventually you'll make the shift to extra money, and your time will become more available.

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Method 1: Royalties (Simple Example: Writing)

Main resource required: time

The main idea: Royalties are fun. You essentially create intellectual property of any sort, and then you allow someone to license it. Every time someone purchases the IP (intellectual property), or sometimes every time they view, listen to, or watch it (if there's ad revenue), you make a little bit of money. You can write articles, create music, make an indie movie, or even take pictures and then allow a site to put them online.

How to get started: I've had a great experience here on Hubpages. There are quite a few other sites out there, and I've written for Infobarrel (trustworthy), Bubblews (very low pay and not extremely trustworthy ownership), Zujava (not trustworthy ownership), and Squidoo (RIP) as well. All have their quirks, and you'll need to use your judgment (although Hubpages is kind of a no-brainer since it's right here and very easy to use). You'll need to work hard at first to build up a good social network both on the site where you're writing (don't neglect this network!) and via other social media like Facebook and Twitter. You won't blast out there into Googleville right away, but over time you will learn the ropes and get better at this.

My home, or my first real estate investment property
My home, or my first real estate investment property | Source

Method 2: Real Estate Investing

Main resource required: money (but also a fair amount of time)

The main idea: You purchase a home or apartment unit (or, later, a commercial real estate property). You rent said property out to tenants, who pay you monthly rent that is hopefully considerably more than your monthly mortgage payment. When you have a good handle on this, you hire a property manager at a percentage of the rent in order to help you take care of the property (instead of constantly fixing it up yourself).

How to get started: Step one for me is to pay off my current mortgage. That's what I am doing right now. I own a small house (about 1000 square feet), and it's very important to me to have it paid off by the time I'm 40. I've been advised by friends to go ahead and start investing in real estate now, the premise being that if I could rent out my current home for more than I'm paying for it, I could just move out, but two things in that concept don't sit well with me. First, I don't want to move. I like my house. Second, I am not going to feel comfortable investing (especially post-2008 real-estate-bubble-bursting) until my own property is 100% paid off. I mean to make that happen soon by paying an extra $1600 per month against the principal (yes, I'm completely serious).

My next plan is to purchase another small single family home like this one, and rent it out. I've had enough bad experiences in the past with landlords to know that I don't want to become the slumlords I hated growing up, so I won't do that. Instead, I'll start really small, building my assets up one home at a time until I can afford a property manager to take over the day to day tasks. I figure I'll buy my second house (first "investment property", although your home is really your first) in a few years, after I have a substantial down payment (at least $40,000) to lay down so that the monthly mortgage payment (plus an extra $200 or $300 against the principal) isn't going to be higher than what I could rent the house out for.

Your first step, though, should be to own your own home. If you're paying rent, consider purchasing a house instead of flushing that potential investment down the drain every month. Put yourself in a position to where you will own your own home, even if it's 30 years down the line! If you are making mortgage payments on your home, consider investing another $100 a month against the principal if you can afford it. Cut down the time you'll be spending money by several years just with that one simple step!

Revolution BJJ
Revolution BJJ | Source

Method 3: Own Your Own Business

Main resource required: time and money in equal portions, but so much time in the beginning

The main idea: If you're good at doing something and think you can do it better than anyone else, you'll likely start your own business at some point (or you'll start 2 or 3 if you're like me). It's quite a rush, but you'll need to educate yourself by reading the E-Myth Revisited before you go too much further. This will give you the concepts of how to do business properly without going insane (and losing sleep, and having all your free time eaten up). Keep in mind that for the first decade, running a business is anything but passive, and may continue to be an active venture for you, as it still is for me at Revolution BJJ and US Grappling.

How to get started: Read the aforementioned book. Seriously. Get a real idea of the hours you'll be spending, and prepare to be all-consumed for the first couple of years building up your structure. Marketing will be tremendous in the beginning, so you'll want to educate yourself as to how that might work (check out this article on how I tripled the size of my gym with Facebook marketing on a low budget). You'll likely want to start by forming an LLC to make it official (LLC means you can lose money the first few years without having to go bankrupt, and your personal assets are protected... see what you're getting yourself into?).

Make sure that whatever you do is something you absolutely love and are passionate about. Understand that many of the things you do for your business won't be precisely what you want to do with your time, but they're going to be all-important in ensuring the quality of the product or service you're offering is the highest it can be.

Method 4: Financial Investing

Main resource required: money

The main idea: I need to start by saying that, although it "takes money to make money" with this option, it's also necessary to educate yourself as to the various different methods of investing. In short, you could do anything as conservative as starting a savings account with your bank to earn a very small percentage of income, to investing in individual stocks (or Bitcoin), or investing in a long term Roth IRA. Start by categorizing them into short vs long term investments, and low vs high risk.

How to get started: By far, the easiest way to begin is to put a few hundred bucks in a savings account. You'll likely be appalled at how slowly this money accrues any sort of income over time, but it will at least give you a very real idea that this is, indeed, possible. Start with a round number like $1000 (if you can afford it) and don't touch the money under any circumstances! You'll be able to watch the money creep along.

After you get sick of watching the financial version of a slug race, you'll likely want to do some more serious investing. I was fortunate enough to open up a Roth IRA about a decade ago, and I've seen the money increase by about 50% over the years. Of course, I can't touch that money for another 20 years or so, so that would go into the aforementioned long term investment category. For short term, consider CDs or bonds. You may also want to investigate stocks that pay dividends if you're a bit more hands on.

For me, the plan is to invest in a handful of individual stocks - companies I believe in, like Amazon, who has a long history of steady growth in spite of bumps in the market. This must be viewed as a long term strategy, though, unless you are really going to spend a great deal of time learning about what it takes to make money investing in stocks. That's not for me.

Solarcity

Method 5: Selling Energy

Main resource required: money

The main idea: Invest in an energy source on your property, and sell it back to the power company for a marginal, nominal profit.

How to get started: This one is the newest to me, but I got really excited when I started thinking about this prospect. You'll need to research your local electric company to find out if they have any sort of buyback program, but there are thousands of people with solar panels on their property who are now able to sell the energy back to the power company.

Unfortunately, in VA, Dominion has stopped doing this, but I'm still hugely in favor of this as a long term passive income source, because it could potentially be truly passive, and there's no reason not to use the sun's energy while we are able to harness it. Keep in mind that as the technology improves, your solar cells (or whatever energy investment you choose) might need to be updated or even replaced, so the question is to determine whether you will have to ultimately spend more money to keep the equipment updated than you would make from the power generated. Either way, though, your own personal power bill could go down as low as zero, so it's worth investigating.

Get Started!

To sum things up, you may be able to earn passive income (put in the time now so that you can just earn over time) with the following methods:

  • Royalties (start by writing here)
  • Real estate investing (own your home first)
  • Own your own business (prepare to work insanely hard)
  • Financial investing (start a simple savings account first)
  • Invest in energy (solar, if possible)

In general, it's important for you to have an asset column with which you can invest, and it's ideal if this is completely separate from the rest of your money. Invest money that you have earned via other investments, as Robert Kiyosaki outlines. Once you have built up the ability to invest, it becomes a positive feedback loop of growth.

What strategies have you used so far? Share them in the comments!


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    • goatfury profile image
      Author

      Andrew Smith 2 months ago from Richmond, VA

      I agree completely, and would actually suggest investing in a money market account whenever possible. There is generally a financial threshold for this, however. If you've met the threshold, it is a no-brainer.

    • Kara Skinner profile image

      Kara Skinner 2 months ago from Maine

      Investing in energy is an interesting idea. I hadn't heard of that one yet. For financial investing, a better idea than a savings account is a money market account. The additional risk is negligible, it's set up through your bank, and the interest rate can be more than double that of a savings account.

    • goatfury profile image
      Author

      Andrew Smith 5 months ago from Richmond, VA

      Thanks!

    • Entrepreneur247 profile image

      Adam Snyder 5 months ago from United States

      Investing in real estate is a great way to make passive income, but most people can't afford to get into rental properties. What most people don't realize is that there are many ways to make a passive income and the ways that you outlined here are a great starting point. Thanks for the great article.

    • goatfury profile image
      Author

      Andrew Smith 7 months ago from Richmond, VA

      Ha! I am actually likely to edit this title later on today, so sadly, this comment will make less sense in the future.

    • MarloByDesign profile image

      MarloByDesign 7 months ago from United States

      After reading your intelligent points in your Hub, I can tell you are not a dummy!

    • goatfury profile image
      Author

      Andrew Smith 17 months ago from Richmond, VA

      Thanks, Glenn! I'm enjoying learning as I go.

    • Glenn Stok profile image

      Glenn Stok 17 months ago from Long Island, NY

      What a great hub! I related to just about every point you discussed. Maybe because I followed a similar path as you had.

      I'm retired now, but half my life was involved with my own business were I received residuals on computer software I had written. That was one form of passive income. But as you said, it involved a lot of insane time and effort. So it wasn't really passive at all.

      Even the monthly passive income that I make from my writing involves continuous work. I enjoy doing it, however, so don't get me wrong. But I do spend more time updating old Hubs than I spend writing new ones.

      Real estate was another, but not in the sense of being a landlord. Ever since I was 30 I owned my own property and I noticed I was always way ahead of the game compared to friends who kept paying rent out of their monthly paychecks. Of course those days may be over since the 2008 real estate crash. I noticed ever since then that my home stopped growing in value.

      With stocks it's a different story. One has to be right with selecting a good company as well as with timing. Even good companies like Microsoft and Intel that doubled every 18 months throughout the 90s ended up crashing in the year 2000.

      I could go on, but getting it right in life is a never ending story.

    • goatfury profile image
      Author

      Andrew Smith 18 months ago from Richmond, VA

      Good point, although this would still go under the broad category of "royalties."

    • Aelbarsha profile image

      Abdelhakim Elbarsha 18 months ago from Benghazi/Libya

      Another effective passive income stream is self-publishing on amazon kindle. A short book of 15 pages or so, with a price of 0.99$ and enrolled in Kindle Unlimited program, is more rewarding than writing articles for royalties, especially if you keep on writing and publishing with passion.

    • goatfury profile image
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      Andrew Smith 19 months ago from Richmond, VA

      Infobarrel has been okay for me, but I've done very little over the past year with it. Still, with a few more shares, I should be able to get the $50 mark.

    • yecall profile image

      yecall 19 months ago from California

      Oh here is the article you told me about. Yes, these are all passive income. For me, the real estate one seems overwhelming to learn and energy could be so great but it depends on where you live. Infobarrel was hard for me as they rejected my first three articles! So I gave up but maybe I shouldn't have.

    • goatfury profile image
      Author

      Andrew Smith 20 months ago from Richmond, VA

      Glad to hear it! It's just something to think about for longer term investing.

    • swalia profile image

      Shaloo Walia 20 months ago

      Investing in energy is a new concept for me. Never heard of it before!

    • goatfury profile image
      Author

      Andrew Smith 2 years ago from Richmond, VA

      Thanks, Marlo! I'm probably the most wary of individual stocks, although I'd look at it as a bit of a gamble, which makes it sort of fun. Haven't gotten that far yet, but in about 2 years I do plan to play a bit.

    • MarloByDesign profile image

      MarloByDesign 2 years ago from United States

      Excellent ideas! Rated 'Useful'. I agree with your Roth IRA long-term investment ideas; however, I prefer to stay away from individual stocks.

    • goatfury profile image
      Author

      Andrew Smith 2 years ago from Richmond, VA

      Thanks, Wired! Let me know if you figure anything out. I'd love to put our minds together as we figure this stuff out.

    • WiredForSense profile image

      WiredForSense 2 years ago

      I'm following your tips with interest. I'm a newbie here and looking at ways of making royalties during 2015.

    • goatfury profile image
      Author

      Andrew Smith 2 years ago from Richmond, VA

      Yeah, I hear you. The Kiyosaki article I linked to talks a bit more about the "asset column" concept. It was a really eye opening one to me.

    • LindaSmith1 profile image

      LindaSmith1 2 years ago from USA

      goatfury: I know but I am a bit of a scardy cat. I retired early and still not able to collect social security. Even when I do, it won't pay my bills. It is more than just investing, you have to look at the current dividends. To even get a few hundred dollars a month in dividends, it could require 20-30 thousand dollars in one stock investment.

    • goatfury profile image
      Author

      Andrew Smith 2 years ago from Richmond, VA

      Linda, for me it's all about diversifying, and nothing is without risk. However, with that diversity, you can minimize the average risk and look to increase your total earnings, especially passive income. I'm certainly a novice at all this stuff, but I'm an eager learner!

    • LindaSmith1 profile image

      LindaSmith1 2 years ago from USA

      Some good ideas. I was going to buy some stocks, but my dad told me to hold off, not to do it. When it comes to money I would listen to him. His advice turned out to be wrong. He passed away before the stocks took off. I could have tripled my investment if I had of bought the 2 stocks I wanted and sold them. One was 50 cents a share at the time.

    • goatfury profile image
      Author

      Andrew Smith 2 years ago from Richmond, VA

      Thanks, Emi Sue! If you come up with any new ones, just let me know.

    • emi sue profile image

      Emily Lantry 2 years ago from Tennessee

      great ideas that you listed here.

    • goatfury profile image
      Author

      Andrew Smith 3 years ago from Richmond, VA

      Thanks, 101Ways. I think I'll just feel more comfortable waiting to pay off my first home, simply because we all watched the real estate bubble burst because people owned homes far beyond their means. I'm all for fiscal responsibility and long term planning.

      Dr. Mark, I'd agree, although I do believe it is possible to make a business passive income if you sell to someone else with terms that allow you to receive income from it for years to come. There are other scenarios I could go into, maybe in another article down the road, but in the meantime, neither business is anything close to passive for me!

    • DrMark1961 profile image

      Dr Mark 3 years ago from The Beach of Brazil

      Not enough, but HP is adequate to pay utilities, internet, and my dog food bills.

      I do not consider a business as passive income at all. It just requires too much time, and if you are away for a week things can fall apart--unlike HP or another passive income source.

    • 101Ways2Life profile image

      Alana Niall 3 years ago from Christchurch, New Zealand

      Hi Andrew, great article with useful tips. I have used the first three methods, and have found them very useful for earning money. I tend to agree with your friends - don't wait till you pay off your home to buy your first rental property. The capital appreciation begins from the day you buy the investment property. Why would you want waste that time? Besides, there are tax benefits to be had, which I hope is true in your country - the US. Voted useful.

    • goatfury profile image
      Author

      Andrew Smith 3 years ago from Richmond, VA

      Thanks, Mark! How do you do over all with passive income?

    • DrMark1961 profile image

      Dr Mark 3 years ago from The Beach of Brazil

      uInteresting strategies, and comments too. I have several, but about two years ago I started writing here, and if you are interested in focusing on it the income is definitely there. The nice part about having the articles here is that they earn 7 days a week, and if am busy working elsewhere, or even if I travel, the articles keep on earning--the very definition of passive income.

      Your studio looks great! Good luck on all of these sources.

    • goatfury profile image
      Author

      Andrew Smith 3 years ago from Richmond, VA

      Ron, thanks for the tips. I think I'll start really small, like one house down the road from my current home for example, and just manage that for a year or two before adding any others. :)

    • RonElFran profile image

      Ronald E Franklin 3 years ago from Mechanicsburg, PA

      Real estate investing, at least the aspect that requires you to be a landlord, isn't for everyone. I've had a couple of experiences with it and they didn't go well. One was a property in another state. Although I hired a management company, they didn't do a good job, and I was too far away to know about it. Then I had a local property with a bad tenant. For me, all this was definitely more headache than profit.

    • VioletteRose profile image

      VioletteRose 3 years ago from Chicago

      Very useful, thanks so much for sharing!

    • goatfury profile image
      Author

      Andrew Smith 3 years ago from Richmond, VA

      Thanks, Michael! I'd like to do that- I enjoyed keeping some of my Squidoo pages updated as well. Check out my "shoestring budget" hub too, as that might help you in the shorter term.

      Suzanne, let me know if you figure out some other investing strategies too. I'm always open to new ideas, as planning for the financial future is ultra-important right now. And thanks!

    • Suzanne Day profile image

      Suzanne Day 3 years ago from Melbourne, Victoria, Australia

      This is a very interesting hub. I have tried out having my own business (but unable to make it passive so it has to stay active), Hubpages (love it, but sloooow work for making $), stocks with dividends and that's about it. I've heard a lot about property investment (can be expensive) and energy investment (good idea!). I find getting umbrella stocks which track the stock market and pay dividends (like AFI in Australia) are an excellent investment long term. Plus occasionally, friends will give me a stock tip. Agree with you that savings accounts are totally like slug races! Voted useful and up. Thank you for a great read!

    • Michael Kismet profile image

      Michael Kismet 3 years ago from Northern California

      I'm so deep in student loan debts, buying real estate seems so far away from my means! All I'm doing to earn in ways of passive income is writing, I wished I would have started much sooner. I enjoyed reading through your article, and I hope you attain all the success you're after.. Oh, and you should consider keeping this article updated on your progress, we would all be interested to know how it's coming along for you.

      M

    • goatfury profile image
      Author

      Andrew Smith 3 years ago from Richmond, VA

      drpennypincher - if I may ask, what type of business(es) did you run? I'm excited to round out my income streams!

    • drpennypincher profile image

      Dr Penny Pincher 3 years ago from Iowa, USA

      I am currently doing methods 1,2, and 4 to generate passive income. I have done 3 in the past. Method 5 is interesting, we have net metering here in Iowa so you can spin your electric meter backward and get paid. Nice write-ups.

    • goatfury profile image
      Author

      Andrew Smith 3 years ago from Richmond, VA

      That's awesome, Pawpawwrites! I'm 38, but I got an earlier start with the Roth IRA (thanks, dad!). I still have a long way to go, though.

    • Pawpawwrites profile image

      Jim 3 years ago from Kansas

      Investing is a great idea, especially for those under 30. It is how I was able to retire early.