How to Make Passive Income: What it Is and Getting Started

Roughly seven years ago, I began experimenting with making money online. Before that, I didn’t know anything about creating websites, marketing, affiliate programs, or anything of the sort. I just wanted to know if it was indeed possible to have cash flowing into my bank account while I slept. I began to do some research and saw all types of crazy schemes that people used to generate income through the internet. Eventually, I got started writing for a company called Associated Content (which got bought out by Yahoo! and is now defunct) which paid me money based on the number of views my content would generate. At first, it was a few bucks a month and eventually grew to a few dollars per day. It wasn’t a lot but it confirmed for me that I could get paid outside of the hours (and during) the hours I went to my job each day.

I quickly realized two important things from this experimentation with passive income generation. First, that if I wanted to create enough money to live off of, I’d have to scale up my operations. Secondly, I learned that it would be necessary to diversify my income streams because they could be turned off at any point in time, much like getting fired from a job. That is what happened with that original Associated Content cash flow stream, it paid out monthly for a few years, and then the site was shut down from its then current form.

These lessons were very important for me to understand viscerally. Many people believe that having a good job is the key to financial independence and with the right career path, luck, savings, and investments this CAN BE true. However, it isn’t guaranteed. As with everything, there is risk involved and the intelligent course of action is to minimize risk through diversification. People tend to carry this thinking over to generating residual income, as well. They are constantly on the search for one big idea or fail to ever attempt getting started making money online because they don’t have that ‘big idea’, which will generate mountains of dough every day, and allow them to do whatever they want to with their lives.

OK, ask yourself. What’s more secure, creating one website that generates an extra $1000 a month or having twenty sources of income generating $50 a month from each? Obviously the second and it’s none too difficult creating less than two dollars a day passively and can easily be replicated again and again. It would simply take the time and effort to create these streams or pay to have them created on your behalf.

For this post, I want to present to you, what passive income is and some different sources of creating residual money. In future writings, I will get much more in depth on how each of these can work towards making one financially secure/independent but for now let’s focus on the 30,000 foot view of things.

Also, please don’t get discouraged when you are starting out making small amounts of money. Keep at it and it will grow. You will learn so much by working consistently for years and not treating this type of thing as a get rich quick scheme (although you potentially can, get rich relatively quickly with the right skills/ideas).

There’s nothing wrong with creating a page on a website that makes $2 a month in revenue and only took you an hour to create. Yes, you may make $20 an hour or more at your day job but that $2 for the webpage can grow and/or continue in perpetuity. After a year, you’ve made $24 for that hour and you’re still getting paid for as long as that webpage gets traffic. I have work I did 5-6 years ago, which has generated and still is generating thousands of dollars in income, and only took around an hour to complete. That’s the idea, to create streams of income, which flow towards one another to create a river that doesn’t dry up.

 

What is Passive Income?

I’ve seen some debate as to what qualifies for money being truly passive. However, just to keep things simple, I am going to define it as revenue that is being created while you go about your day and aren’t actively working on it. Now, of course there are varying levels of passivity. Some streams of money require no work after the initial action, while others may require simple maintenance, and others require fairly consistent attention (but still less than a full time job).

I never particularly cared about having to do some upkeep or whatnot in order to maintain or grow my ‘passive’ income, as it was still better than having to go to a job each day and only get paid for the hours I was there, doing that job. That’s the main difference and the best aspect of creating income sources for myself, money is coming in while I’m simply existing as a human being and it doesn’t matter if I’m being ‘productive’ in the traditional sense. I can sleep, workout, go to the beach, have sex, or whatever else and that cash is still trickling in by the minute.

Your ultimate goal with passive income doesn’t have to be quitting your job and doing (basically) nothing. These sources can also be used simply to stir up supplementary income, sort of as a mini pension plan or something like a yearly vacation fund or simply designate the small income you generate to pay off your monthly phone bill. You can scale this thing to as large or as small as you’d like.

Personally, I wanted to create the freedom of not working in an office each day and the ability to do (most of) what I want to with my time, without having to completely sacrifice other areas of my life. I do still have a job, which pays me, regular non-passive income. The cool thing is that I work remotely from wherever I have internet connection, I get to learn the details of running a business without risking any of my own capital, further diversify my sources of money, and send a high percentage of what I make into an index fund held in a retirement account…which, generates dividend income…oh look! Another source of future wealth!

That is another interesting aspect of residual money, you can use it to create even more of it by utilizing the wonderful concept of compounding. For example, there were websites that I have owned, which threw off steady streams of extra cash each day and every week or month (depending on the payout structure) this money would be deposited into an account. I would then take this money and use it as investment capital for buying shares of companies I was interested in. Most of these companies, also paid dividends to me as a shareholder, which was either used to purchase more shares or pooled into my brokerage account to help buy shares of other companies that I felt were of better value at the time. So, my residuals were used to effectively purchase more residuals, further expanding and diversifying my income.

This can go on and on, until a complex web of holdings has been assembled, that is hard to screw up once it has been assembled. Sure, a company may go bankrupt. Your website may lose it’s traffic. Your books sales might tank. BUT all together, the many streams of income which you have created will continue on, barring some cataclysmic disaster. That’s the beauty of diversification, if one falls, the many will pick up the slack.

 

Passive Income Generating Sources

I’m going to first briefly cover some more traditional streams for residual income before moving on to the online variety, which generally takes less money to get started up. Not saying I’m any kind of expert in the investment options, I’m presenting here first. These are some things you’ll have to take the time to research and learn about on your own.

Equities

One of the most common sources of generating passive wealth is by investing money and buying stock in already established companies. Obviously, this is what many retirees have done either directly or indirectly through some work-related retirement plan. This method is also one of the best methods to generate long-term passive income and wealth creation.  It does however, take capital in order to get started. The cool thing, is that it is completely non-discriminatory, if you can get the cash, you can own the stock and immediately start getting dividend income (assuming the company pays one, otherwise, money will be generated  only through price appreciation of the shares). So, if you had 1 million dollars today, one could easily construct a diversified portfolio of well-run blue chip stocks that paid 3-4% per year in dividends…giving the owner $30-40 K a year in pre-tax income.

Awesome, right? Obviously, the challenge is investing the money over long periods of time and through price appreciation and/or dividend reinvestment, have a substantial net worth in the future. For most, this will hopefully occur by retirement age but if you can generate more money earlier in life, the process can be sped up much more.

Another aspect of this, is that, most people don’t have the temperament to hold individual stocks long-term or even the know how of buying shares at a rational price. A lot of people panic sell, buy shares at horrendous valuations, trade in and out of positions, and trigger endless taxes and fees. All of which, ends up cancelling out most of their good decisions, and lead to getting sub par returns. The choice for most people looking to invest in stocks should then be some kind of low fee index fund, that they simply contribute to each month without having to do much research.

For those, who are willing to learn and do the work of buying individual securities there are many low or no cost options to get started. For example, Loyal 3 is a website which offers free buying and selling of dozens of major company’s stocks. The minimum investment is $10. Also, there are direct stock purchase plans (DSPP) and dividend reinvestment programs (DRIP), which are offered directly from corporations as a low or no cost way to invest as a small investor.

Bonds, MLP’s, REITS, ETC.

These are some other investment vehicles, which can generate passive income:

  • Bonds (corporate bonds, government bonds, municipal bonds, etc.)
  • Master-Limited Partnerships…probably should ignore these unless you absolutely know what you’re getting into.
  • Real Estate Investment Trusts (REITs)
  • Peer to Peer Lending
  • Mineral Rights…again, not something the vast majority will ever need to know about.

 

Real Estate

While direct real estate ownership can be somewhat simulated through owning REITs, real estate can be a great source of ‘passive’ income for those who have the talent and work ethic to develop the skills. This could of course be anything from houses, condos, hotels, industrial complexes, etc. Now, of course, if you’re a landlord you have plenty of work to do with your properties but you can always give up a portion of  your profits and outsource this work to a property management firm. All of this is outside of the scope of this article, though.

 

Online Streams of Passive Income

Now we can get into the passive income sources which don’t necessarily require large amounts of capital or even any upfront money at all. These are the things which we can create online in order to further build out our streams.

 

eBooks

I mention this one first because it can be done completely for free. All one needs to do is write the book and upload it to a platform such as Amazon Kindle. You can set the price, give Amazon their cut of the sale, and have a built in audience of users who may be looking for a title such as yours. Once it’s uploaded and ready to go, the income stream is completely passive, and money is deposited into your bank account each month.

Naturally, there can be expenses involved in any advertising or book promotions that you may want to do. However, it can also be done without any costs and promoted in other ways.

What skill set does this require? The ability to string together coherent thoughts on a topic. You can also pay someone to ghostwrite a book for you but I have no experience with setting up that kind of thing.

Ask yourself, do I have any specialized knowledge or unique takes on a topic which may be helpful to others? Any life experiences, which can benefit potential readers who currently face the same issues? Perhaps, you’re just a damn good storyteller and you have want to release a novel or series of novels. Figure this stuff out, plan it, and make it happen.

For instance, the one ebook that I’ve released thus far, “Game Without Games“, relates my experiences with dating and women when I was in my late teens and early twenties. I approach it not from a ‘how to’ approach, rather, relating these topics to my own personal philosophy on life. I was banking on the fact that there’d be other young guys who were in similar situations and could benefit immensely from having what I learned distilled down to them, without having to go through it themselves.

Now, I did get a bit lazy with the promotion and was working on other projects in lieu of that. But it is something with which I could ramp up the income fairly rapidly, with some concerted effort. Most of what will drive sales on Kindle is getting enough reviews and popularity so that your book is featured on other pages, “Customers who Bought this also Purchased…” section. Once you reach a certain saturation point, sales will be at least pretty consistent.

Are ebooks a big money maker? Possibly. Though even if you only sell 3-4 copies a day, you’d be around 100 copies per month, multiplied by 70% profit on each copy sold and you’d have at least a steady income of hundreds of bucks per month.

 

Websites

Niche/Authority Sites

It is easy to get the idea in one’s head, that if I simply build a website, that I can make lots of money off of it. Well, the truth depends on what kind of website you create and how you plan on monetizing it. I’ve talked to plenty of people over the years who had started their own personal blogs, worked on things for a while, and then became disheartened when they weren’t creating a self-sustaining money stream.

The problem with a personal blog is, even with good traffic, how are you going to monetize it? Sure, people come to your website to read an article but are they ready to buy something because you mentioned it in an article about your last family vacation? Probably not.

Two very simple questions you can ask when brainstorming website ideas are:

  1. Does this help solve a problem for someone?
  2. Does this condense information into manageable chunks for people who want to know?

A classic example of a website which solves the first question, is one built around how to get into better shape. People may need to lose weight or build muscle (problems) and the website would offer up solutions to these problems. The website owner could then offer workout/diet plans, personalized coaching, and make money off of advertising.

An example of the second question could be something like a website which reviewed cameras. People who are shopping from cameras want things broken down for them and made easily accessible, so they don’t have to scour the internet in search of specs and reviews on every single type of camera they may be interested in. Folks are busy and they want things simplified so that they can make easy decisions. This type of website can be monetized with ads and affiliate links to some place like Amazon, that sells digital cameras…any time someone clicks your link and buys something, you get a commission.

Since we are talking about creating passive sources of income, these website will need to be geared towards creating ‘evergreen’ content. This means that, the content on the website is relevant for long periods or time or basically forever. People are always looking to get into shape, so, a fitness website is always relevant. A post about dieting is still valuable after 5-10 years. Meanwhile, a blog about topics such as sports or celebrity news, always need to be updated because the content is only relevant during that news cycle (and tougher to monetize), which kind of defeats the purpose of having a residual income stream.

These types of websites can be created by you or by purchasing an already existing website through a broker or auction site such as, flippa.com. The good thing about just buying an already existing site is that, it already has traffic, useful content, and is often already generating money. Often times, you can get a website for cheap which has solid traffic numbers but it just poorly monetized by the owner, and quickly get sizable returns on your investment by making a few simple changes to things like advertising placement or improving upon affiliate product promotion.

The whole creation of websites, creating content, getting traffic, etc. is something I plan on tackling in depth in future posts and I don’t want to make this one 100,000 words in order to cover all of those topics. As such, I’ll leave it at that for now and move on to other aspects of online passive income.

Ways to Monetize a Website

  • Advertising (ex: Google Adsense)
  • Selling Advertising space directly to an individual company
  • Amazon Associates
  • Install Viglink
  • Clickbank Product sales (affiliate programs, ebooks, etc.)
  • CPA offers (If someone signs up for an offer you get a commission)
  • ebooks
  • Personal coaching
  • eCommerce store
  • paid membership (create exclusive premium content)
  • Create digital products
  • Create an online course/class
  • Create an app for smartphones
  • Consulting/Business Services
  • Rent Your page to another business (ex: Ranking a website high in Google search for local dentists and then renting the page out to dentist offices in that area for a monthly fee)
  • Referral commissions
  • Building email lists (not a direct monetizing method but can be used to market the other options on the list)

 

Drop Ship eCommerce, Private Label, Fulfillment by Amazon

These are some of the methods of passive income creation, that I am least familiar with but, I thought that I’d mention them anyways so you can explore them further on your own.

We are all aware of eCommerce stores and making purchases online. Obviously, it can be a very lucrative business to get into. However, one of the issues holding many people back from starting down this path is the idea that they would need lots of start up capital and then having to warehouse their physical product stock, which may or may not sell.

Another way to approach this type of business does exist. By utilizing third party companies to handle the stock and shipping for you, you can avoid having to interact with the customers or dealing with the hassle of shipping physical products.

To put this in clearer terms, let’s take a look at a basic example: You want to sell t-shirts. You have designs created and a market you wish to target. In order to create your own t-shirt line, you can create a store on a platform such as Shopify, find a supplier who will print t-shirts on demand, and upload the products to your store. Now, when a customer buys a t-shirt the supplier prints that shirt and ships it out to the customer (you carry no stock, the shirt only gets created when someone buys it). The supplier gets paid for their services and you get sent the profits without having to deal with any aspect of the sale beyond getting traffic to your store.

That’s the basic idea of it. How much work is involved on the upkeep and interactions with the customers will be entirely based on the structure which you set up. It is arguable how ‘passive’ this method is, although, so much of the work can be outsourced (usually for a fee) that it is entirely plausible that one wouldn’t have to do much to have a successful and mostly hands-off business model.

Fulfillment by Amazon

One could also set up a very similar model of private label creation by leveraging the power of Amazon’s customer reach and fulfillment abilities. With this method, you wouldn’t even need to create a website.

Here’s a simple skeleton structure of how this works:

  • Search on Amazon for potential products which you could sell. Something that is fairly popular but without much competition.
  • Once you have an idea for a product (or line of products: for example, a line of yoga equipment/accessories)
  • Utilize sites such as Ali Express or Alibaba in order to source a supplier to manufacture your products. You can work with them to create labels and put your logos/graphics on the product. Thus, a private label brand is created.
  • The supplier then ships the products to Amazon distribution facilities. Amazon’s website can walk you through this.
  • You upload the products to your store on Amazon.
  • When customers buy the products, everything is handled through their Amazon accounts, and Amazon ships it out + takes care of returns.
  • Your profit is what is left after paying the manufacturer and Amazon takes their cut. The money is sent directly to your account.

This method does require that you research heavily to find the right product niche which actually creates sales, source a reliable and inexpensive supplier, and have a large enough profit margin to make it worthwhile. Yes, it takes work to set up but once you’ve got things running smoothly, it’s pretty automatic. Plus, once you have a supplier nailed down, its pretty easy to work with them to get another product created…thereby expanding your product line and sales (people will often buy related products together, so if you have the ability to bundle multiple products, it can be a seriously profitable business).

 

YouTube Videos

There are many people who have become celebrities off of YouTube and have managed to carve out a solid full-time income from it. Once the video is created and uploaded, there is really no work to be done except to let the view pile up (maybe some promotion). Creating videos consistently, raises the odds that at least one of them will be a hit, and allow those viewers to discover your other content.

Becoming a YouTube partner and collection advertising revenues is really easy to set up. Although, it can be a good source of revenue, it often isn’t until you have a serious amount of traffic and even then it won’t be boatloads of money (in most cases). The great thing about YouTube is that you have a built in audience which you can direct to explore your other content on a website, promote your ebook, product, or service, or any other way you can think of to monetize your viewership.

 

Conclusion

I hope that this post has answered some of your basic questions about passive income and has given you some things to ponder as to how you will proceed into generating your own monthly residuals. Remember, that not all passive methods are entirely passive, and most will take some level of work up front to set up properly. However, once you have done so and have cash finding its way into your bank accounts each month, it won’t particularly matter too much that you might have to do some work in order to maintain it. This doesn’t have to be a path towards a job-free existence, it can serve as income diversification in order to protect you from the downsides of life and make it easier to enjoy some luxuries that your 9 to 5 might not be able to furnish you with, on its own.