A Beginners Guide to Passive Income
Within my last article, I explained why I wouldn’t want to be a full time day-trader and one of those reasons was due to how time consuming it can be. I touched on how I am more focused on passive income streams and many people were interested to find out more about this subject, alongside some examples that these low-maintenance income streams can bring.
In this article I will explain what passive income is, how it differs to active income, and a range of examples that you may consider to apply in your own life. These varied examples are purposely both crypto and non-crypto related as I know a few of you reading may be slightly over exposed to crypto, and could probably benefit from considering other options and diversifying, just a little.
What is passive income?
Passive income is essentially when you consistently earn from an income stream that requires little to no maintenance. It often involves the individual making a sacrifice in advance whilst knowing that if they patiently wait, they will one day reap the rewards. This sacrifice can be in the form of time or money and will become clearer when reading the below examples. If you’re generating income whilst you’re sleeping, it’s more than likely a passive income stream.
How does it differ from active income?
You probably guessed it but I’ll explain briefly. Active income is a simple exchange of time for money, and is how most people live their whole life. You work 40 hours a week, in exchange for $1,000. You are giving up your time to earn that $1,000 and therefore, it is actively being earned. Most people aren’t even aware that there are different types of income, which already puts you ahead of the masses!
Three passive income examples, explained.
Rent out a room or a property
Last week on Twitter I put out a poll, asking if people viewed a house as an asset or a liability. The poll itself isn’t directly relevant to passive income, but two of the most common responses were:
- “if you rent out the property and it generates income, it’s an asset”
- “if you live in the property you own, but have tenants in a spare room which covers the mortgage, it’s an asset”.
These are great examples of passive income as you have paid the price upfront to make a purchase and that property or room within the property, will bring you returns with little to no effort involved. On the other hand, I must stress that passive income isn’t always as straight forward as collecting a check every month. If the boiler breaks or the roof starts leaking, that is on you to repair. That shouldn’t stop you from considering this option, you just have to be prepared for these situations and accept that it is part and parcel of being a landlord.
Cryptocurrency mining is a modern example and a relatively new source of passive income. In theory, you buy the equipment and hardware required, install everything appropriately, set up the software and bingo! You leave it switched on 24 hours a day, 7 days a week whilst it earns you a bunch of shitcoins. Again, not so straight forward. You have to consider the electric costs and then ask questions such as — what coins are you going to mine? Is mining profitable right now, with current market conditions? What the hell is a hash rate?
Cryptocurrency mining shows that there is much more to consider than just buying the equipment in advance. You are also required to put the time in to understand what mining is, what you need to do and ultimately, how to be profitable. Once you know all this inside out, then it is truly passive income.
If you are interested in finding out more about cryptocurrency mining or are just beginning, I recommend taking a look at H4SHR8. They have plenty of resources, guidance and support to help you get started. Visit their website for more information.
Sell an eBook
The third and final example, selling an eBook. You write a book and it theoretically continues to sell a consistent amount of copies for the next 10,20,30 years. This is a prime example of passive income. You put in the work to create a masterpiece and you endlessly reap the rewards. Like many other passive income streams, there are hurdles to jump before you claim that success.
Firstly, you can’t just write a book about anything. It has to be something you are highly knowledgable about (unless it’s a book for kids) to ensure you provide value for the audience via a high quality book. Speaking of audiences, it will help if you have one of those too. It is extremely difficult to build up momentum and recognition no matter how great your book is, if you haven’t got some form of marketing plan or target audience. Before you even begin to write, there are many things to think about and have in place. A high quality book isn’t going to take a week to write, patience and persistence is crucial.
I think by now you get the idea of what passive income is, so I won’t continue to give an in-depth explanation of any more examples. However, here are a wider range of options that you can consider and research further yourself:
Affiliate marketing | Dividend paying stocks | Start a YouTube channel
Staking altcoins | Sell an online course | Advertisements on your car
With passive income, there is almost certainly going to be an upfront cost of time, hard work and money. Usually, it’s a mix of all three. However, the key is that once you begin to earn after all your hard work, there should be little to no maintenance or effort required as money continuously flows into your bank account (or bitcoin wallet, amirite?).
It is extremely important to understand that with passive income, comes risk. It is very rarely butterflies and rainbows from beginning to end. Like I mentioned earlier, if a boiler breaks at your rental property, it’s on you. If your mining hardware breaks, it’s on you. If the dividend paying stock declares bankruptcy, it’s ultimately, on you. Passive income enthusiasts are the people who are willing to take a risk to create freedom for themselves. In my opinion, it is well worth the risk:reward and it pays off ‘most’ of the time. On the flip side, it’s always wise to hedge your bets and diversify into a range of income streams.
If you play the long game and be patient, whilst remembering why you are doing this in the first place, you will eventually reach your goal.
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- As the title suggests, this is a beginners guide and there is much more to learn about passive income. There are endless amounts of free resources online!
Everything that I have wrote is subject to my unprofessional opinion and nothing should be considered as financial advice. This article has been wrote for educational and entertainment purposes only.