Passive income 101

Passive Income Illustration - Palms Beach

Passive income – it sounds great, doesn’t it? Making money in your sleep!

If you would like to make money while you are sleeping, you can nod your head a little to show me you are with me. But, there are some important things to remember about passive income. And that is what this is about.

  • The only two ways you can make a passive income
  • One common mistake people do
  • Two ways you can avoid that mistake and decrease your risk.

Two ways of making passive income

So, if we are going to be strict, there are only two ways of making money passively.

Either you already have money that you invest in some way and this investment makes you more money without having to work for it. The money is working for you. The investment generates money on its own, while you can sit back and relax.

The second way is to do the work upfront. You work, set something up, and then make money passively when this first investment in time generates sales or income in some way. The work that you have already done is generating money for you, also when you are not working, or even in your sleep. =)

For a normal guy like me, and for most people, the first option is no option when you start out. So, we have to take the second road and do the work upfront to get started. How long it takes can vary a lot.

No quick scheme

But you can be sure about one thing, there is NO QUICK SCHEME that makes you money with no investment upfront. You cannot make passive income without making an initial investment, either with money or work. If you hear about something like that, and you buy into it, the one making the money is most likely not you, but the one selling it to you.

Semi-passive income

Nowadays it is also pretty common with a kind of semi passive income. You do make money while you are sleeping, but you also work at it during the day. Because if you stop working, the passive income will drop over time. It is not sustainable.

So, for example, imagine you make money on youtube ad revenue and some affiliate links on your channel. Once you stop working on the channel, you will still make money passively. But… it will most likely go down over time. The youtube algorithm will stop favouring you once you stop publishing new content.

So, you do still make money.
It is passive,
But you also need to be a bit active to keep it going.

The mistake – all eggs in one basket

Now we come to the mistake. And this is something you learn about from pretty much the first day of you learn about investing. It is about diversification. Basically this is about not putting all your eggs in one basket. If you invest in the stock market, you don’t only own one company’s stock. You try to diversify.

In the same way, if you want to have a passive income that is more stable over time, and also more carries less risk, you need to diversify.

With the example from before, imagine you have a youtube channel and you make some ad revenue from it. You also have affiliate links from different companies in every video description. You might make enough money every month to survive and save some.

But what happens if youtube decides to change their algorithm? Which happens all the time! What if your view count is cut by 50 % from one month to the next? Now, all your income streams will likely take a hit around 50 %. All of them go down, because all of them depend on youtube.

Or what if youtube for some reason decides to ban your channel? You are down to zero.

Decrease the risk – more platforms

So, what can we do about it? First of all, it would make sense to use more than one platform or social network to drive traffic to your affiliate links. Then you wouldn’t be dependent on just youtube. So, you could use Youtube, Twitter, Facebook, Instagram. This is part of the solution. But you can do better.

Decrease the risk – more sources

It also makes sense to not only have affiliate links maybe. So you have different kinds of streams of income. When one goes down, another one goes up hopefully. Or at least stays the same.

So, you could have youtube ad revenue, affiliate links on several platforms, an online course, an e-book, an app… The possibilities are endless.

This way you would not put all eggs in one basket.
You would have a more stable income and be less sensitive to just one channel or income source.

So, those are some important things to consider when you start your journey towards passive income.

If you have your own experiences or tips, feel free to leave them in the comments. Or if there is something you want to learn about, let me know.

We’re on this journey together. See you soon!

Take care!

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