Passive Income – Why It is Important For You To Know About

I was going to write a post today about my experience with outsourcing work. However, the work I have outsourced is not finished yet, so that post will have to wait for a later date. Instead, I thought I would explain a simple yet incredibly important topic of passive income.

In theory passive income is money that you earn without having to expend additional effort. And I don’t mean something like winning the lottery. Common offline examples include dividends from stocks, rental income or bulk candy vending.

In practice most passive income strategies involve a fair bit of work at the start but should only require minimal work in the long run. To better illustrate this, let me use the real estate market as an example since you are probably already somewhat familiar with it (you do live somewhere right?)

Now, I am going to use simple numbers here for simplicity sake. Obviously, real world examples will be different depending on where you live but I hope it will serve to clarify the difference between earned income and passive income.

Say you buy a slightly run down house for $10,000. You now have a choice, you can either rent out the house for $100 a month, or make some cosmetic improvements to the house and try to resell it for more.

Let’s assume that you opt for the latter option because you heard you could make killing flipping houses. You do some work to the house and a month later you are able to sell it for $15,000. You just made $5,000 right? WRONG!

Your actual profit was much less than this. First you have to factor in the costs of materials, say $1,400. Then you need to factor in your time say 40 hours a week for 4 weeks and you only value your time at $10/hour. This means your own labor costs are $1,600. Then you have to factor in additional costs such as carrying costs, taxes, broker or agent fees. Say these come to another $500.

This means that your $5,000 profit has been reduced to $1,500 ($5,000-$1,400-$1,600-$500). Moreover, you now have to go out again next month and do it all over again. Your income is tied directly to how much work you are willing or able to do.

On the other hand say you rent out the house. It still takes you a few hours the first month to find a tenant, do background checks, make sure the house is in good enough condition. However, once you have found a tenant they keep paying you rent every month. Of course from time to time there will be problems but overall you need to spend much less time dealing with them.

Plus, within 15 months you will have been paid as much in rent as you would have made in profit flipping the same house. Then every month after that you will continue getting rent checks assuming you have a tenant in your house.

Now obviously, this is an extremely oversimplified example but I hope you can see the power of passive income. It allows you to keep earning money without having to do a lot of extra work. Over time, if you can grow the size of your passive income streams you may be able to stop working and retire on it, if that’s what you want to do.

So What Does Passive Income Have To Do With Starting An Internet Business?

In a word, everything. The Internet makes it easier than ever to create one or more passive income streams. These streams will not make you rich overnight, but in the long run they are setting you up for financial independence.

The two examples I am most familiar with are creating a website and doing pay per click advertising. It takes time to create both but once they are built they can keep earning you money month after month almost on autopilot. You will have to spend time optimizing them but this does not take too long, especially after you have some experience doing it.

Contrast this with selling things on eBay. Every time your auction ends you have to create a new one. Plus, you have to spend time shipping out products, dealing with feedback, etc. If you take a week off your income will fall to zero.

However, if you take a week off from your passive income sources you will still be earning money. Of course, you can do both and I actually recommend that you do, since you never want to have all your eggs in one basket. In the long run though, you need at least some sources of passive income to multiply your results.

Finally, I just want to say that running a blog is NOT a good example of a passive income strategy. Once you have created a popular blog you have to keep posting to it regularly, or you will lose your readers and your income will fall to zero. This process can take awhile depending on the loyalty of your readers and size of your blog but trust me, without new content your blog will eventually stop earning money.

You can of course outsource the writing work and turn it into a more passive form of income generation, but you have to be careful with this due to quality standards. Anyway, I will make a post in the near future about my experience outsourcing work, both the good and the bad.

Want to Learn more about passive income? Then the following sites may be of some help:

Five Ways to Create Passive Income With Little or No Money

Ewen Chia’s SuperAffiliates.com

Secret Income Streams