The truth about passive income

There’s been a lot of interest about passive income swirling around me lately. With more attention on the FIRE (Financial independence, Retire Early) movement in recent years, many people are looking to cash in on passive income, seeking a flexible lifestyle that is unconstrained by the 9-5 grind. There’s an increasing number of videos, ebooks, courses, and podcasts touting the “quickest” and “easiest” ways to make passive income. If you come across any of these, trust your gut. If it sounds too good to be true, it probably is.

The truth about passive income is that it is not a get rich quick scheme.

It takes time and effort to build meaningful streams of passive income. In that sense, “passive income” is a misnomer. At the beginning, there’s nothing passive about it.

And after you’ve built streams of passive income? You may still need to put in a bit of effort from time to time to maintain them.

Oh, and those passive income streams you’ve worked so hard to build and maintain? None of them are guaranteed.

Even with these caveats, it is possible to eventually make big changes to your life with the help of passive income. The key is to find the “best” types of passive income for you as a unique individual. We’ll chat about four main categories of passive income below. Which ones feel like they hold a special bit of synergy with your personality? Which ones could potentially support the lifestyle you envision for yourself?

1. Income from investing in financial instruments.

This is the source that I rely on the most for my own streams of passive income. It involves investing money in financial instruments that generate periodic payments (also referred to interest, dividends, or distributions). While the potential for capital gains is an important investment consideration, these proceeds are usually not included in the definition of passive income.

It’s important to understand your risk tolerance. Depending on the financial instruments you choose, you *could* lose some or all of the money you invest. If losing money makes you feel incredibly anxious, invest in safer instruments, knowing that you may be forgoing some potential for higher returns.

To generate a meaningful level of passive income, it takes time for your money to compound. For example, it took me 18 years of investing to feel financially comfortable with quitting my full-time job. I now have a reasonable amount of passive income to supplement the active income from my part-time work, but it’s important to realize that this doesn’t happen overnight. If you’re interested, I talk more what I do in this video.

Type 2. Income from renting out real estate property.

Rental income from owning real estate is a popular way to generate passive income. It’s not something I’m interested in myself, but a lot of people use this method with great success. There’s an initial investment of time and money required to seek out a property, purchase it, and get it ready for renters. Then you have to find suitable renters and maintain the property if there are any issues. The financial risk in this category comes from any periods of time when you can’t find renters. While the property sits vacant, there may be commitments that you’d still be responsible for paying (e.g., mortgage payments, property taxes, etc.).

Type 3. Income from a business that you can eventually step away from.

Starting a business takes an incredible amount of time, energy, commitment, and passion. Eventually, you may be able to sell your business and serve in an advisory role, or step back from your business and have trusted employees manage the day-to-day operations. Again, there’s no guarantee that this will ever happen, so there’s a risk that you could put in all the initial resources without ever achieving a passive income stream.

Type 4. Income from creating something that you can sell in perpetuity.

This category can overlap with starting a business but focuses on a creative product that you can sell in perpetuity. Some examples are writing a book or putting together an online course, but again, there’s no guarantee that people will buy (or continue to buy) your book or online course.

This is another category that I enjoy dabbling in but not for the purpose of making money. Instead, I pursue creative projects that I’m passionate about. For example, I started my YouTube channel as a creative outlet, but I recorded and posted many videos before I ever earned any money from them. I continue to post videos because I enjoy the process and the interaction, but there’s no guarantee that they will continue to generate passive income in the future. YouTube could change the way it pays creators or people could stop watching my videos.

What’s the point in trying if it’s so hard to generate passive income?

Here’s the thing: Time is going to pass regardless of whether or not you’re doing something that could potentially generate passive income down the road.

My advice is to follow your interests.

If you’re working at a full-time job that drains your energy, start setting aside a little bit of money every time you get paid. Invest that money in something that suits your risk tolerance. Maybe this will gradually lead to you buying one or more rental properties.

If you have a business idea that you can’t stop thinking about, take a step toward your vision and see what comes next.

If you feel a spark toward a creative project, explore it and see where it takes you. Enjoy the process.

There are lots of ways to make passive income, but they all take some time and effort. So take a step forward, but forget about the money-making aspect for now. Take another step forward, and another, and another. Eventually, likely when you’re least expecting it, a door will open. Step through it, and live your dream.

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