Passive income is often described as “making money while you sleep,” but there’s more to it than that. If it really was that easy, everyone would be counting dollar bills while also counting sheep. If you have enough money, you can buy assets like an Airbnb rental property, crypto, and stocks that make money on autopilot. But what happens if you don’t have the funds to get started?
The answer for many creators and bloggers is to make the assets themselves. Larger assets, like property, involve investment capital that not everyone has, but creating assets yourself “only” requires your time and effort as investment, so you can reap the rewards later.
It can be slow progress for some activities—hopefully your jaw won’t hit the floor too hard when you look at this screenshot from my monthly Medium earnings:
Medium pays its writers based on the number of “claps” each piece gets, so if you don’t have a large audience or your piece doesn’t reach a lot of people, you don’t end up making much. Your income is also dependent on how much you continue to maintain and promote your profile. I haven’t written a Medium piece for over a year and that’s reflected in my monthly earnings. (When I was publishing semi-regularly, I was getting a whopping $3 to $5 per month.)
It can be an uphill struggle. What we call “passive” income isn’t really that passive at all. Not in the initial stages, anyway.
The great part is you already possess the skills you need to get started. Maybe you’ve got a library of blog posts live on your site, or you’ve filmed a load of footage that’s gathering dust on your hard drive. This is the kind of stuff you can pull together (or create from scratch) and use to generate passive income over time.
If you’re willing to get paid absolutely nothing while you build up your passive income strategy, it can be an amazing long-term revenue stream and a consistent cash flow. Here’s a guide to passive income for beginners.
What is passive income?
Passive income is income that requires low effort to maintain.
You’re not exchanging your time for money like you might do at a 9-to-5 job. Instead, you’re creating an asset that you can sell or generate revenue with, regardless of whether you’re at your desk or on a beach in the Maldives. There are plenty of passive income ideas, like writing a book, creating a course, selling items on Amazon, and running an affiliate marketing program.
But none of these activities are as passive as people like to think. You have to put in the work upfront, like actually writing the book you’re going to sell, filming the videos for your course, and choosing the products you’re going to put on Amazon. And you have to do all of this without getting directly paid, in the hope that it will pay off for months or years afterward.
The work doesn’t end when you’ve created the asset either. Then comes the follow-up work of building an audience, creating social media ads, researching content ideas, and actually promoting your product. The asset won’t sell by itself, and people often underestimate how much effort it can take to get eyeballs on your product and then convert those eyeballs into customers.
Despite this, passive income can be a nice additional revenue stream (something that’s never been more important in a shaky and recovering economy).
What are the different types of income?
Passive income is one of three types of income. Each one provides a different way to generate revenue, and they can be used individually or in tandem, depending on your financial goals:
- Active income. Money earned from services or doing an agreed task. This can include salaries, tips, and fees, and involves exchanging your time and skills for money.
- Passive income. Money earned from doing the work upfront. Examples of passive income include selling digital products, advertising, and rental income.
- Portfolio income. Money earned from investing in assets. It usually requires an upfront investment and can include dividend stocks, real estate investment trusts, renting out a spare room or leasing, interest, capital gains, peer lending, mutual funds, and royalties.
Earned income vs. passive income
The biggest difference between earned income and passive income is that, with earned income, you’re paid for your time or output. It doesn’t necessarily have to be hourly, but you have to actively produce or do something in order to get paid, whereas passive income involves doing the work upfront.
Both types of income require work, it’s just a case of when that work happens. Someone paid by a brand to write blog content every month is generating earned income, while someone who writes 20 blog posts upfront for their own site and monetizes them with affiliate links is generating passive income.
Earned income is the traditional income model because it doesn’t have as many risks. The concept is simple: you do the work you know you’ll get paid for. Passive income is a good side hustle for creators and influencers with full-time jobs or other responsibilities who want to continue building their brand.
What are the benefits of passive income?
Gain additional cash flow
Possible wealth creation is obviously the big draw of passive income. It can provide an alternative wealth option, accelerate early retirement, support a nomad lifestyle, and increase your net worth. Creating multiple revenue streams also means that you’re not reliant on one that could fall through at any moment.
Showcase authority and expertise
Selling a digital product or creating an asset that people can buy requires an audience. The more you put your name out there with your product, the more people will hear about your brand and consider you an expert in your industry. Deep diving into a course, a book, or another type of digital asset highlights your knowledge of a topic and boosts your authority.
Grow your audience
The bigger your audience, the easier it is to generate passive income, as you have a wider reach of people to sell to. Getting extra money in the creator economy involves growing an audience and generating traffic to your site or product.
Scale your sales
One of the biggest benefits of passive income is it’s scalability. You’re not selling hours for money when there are a limited number of hours in the day. Instead, you’ve created a product that you can sell multiple times in one day—compare getting paid to design a webpage for a company (which will provide a one-off payment and take several days of your time) with selling a book about graphic design to 1,000 people in one day.
What should one remember about passive income?
Like with anything money related, the IRS has something to say about passive and residual income.You still need to understand and abide by local income tax laws:
- Know how the IRS defines passive income. Passive income is defined as either “net rental income” or “income from a business in which the taxpayer does not materially participate.”
- Know what counts as “material participation.” The IRS has a set of guidelines for what it calls “material participation” that determines whether someone has actively participated in business or other income-producing activity.
- Know when passive income is taxable. Hinit: It always is. It’s usually taxed at the same rate as salaries, but it can receive different treatment from the IRS.
Disclaimer: This is by no means financial or tax advice. It’s best to consult an accountant to discuss your individual case.
How much can you make from passive income?
There’s really no upper or lower limit to how much passive income you can make. It can be anywhere from a few extra pennies a month to hundreds of thousands a year, depending on the value and scalability of the product you’re selling. A high-ticket product that has the potential to scale will bring in more revenue than a low-cost item that’s not particularly scaleable. For example, someone selling a $10 ebook will need to reach more people to make the same amount as someone selling a $999 online course. If you’re working hard to drive increasing amounts of traffic to your product each month, you can expect to see a higher return, but you’ll also expend more time and energy.
Personal finance YouTuber and author Frankie Calkins earned $800 in January from passive income streams, including YouTube channel advertising, book sales, and affiliate marketing, while another person has made more than $100,000 from dropshipping ($6,000 alone on selling a plush elephant pillow for babies). One of Udemy’s highest-earning teachers makes $17,000 a month selling online courses, and this person made $6,500 in one month selling t-shirts on Amazon.
Revenue is entirely dependent on how much time, effort, and resources you put into building it, the scalability of your product, how much you’re selling it for, and how big the demand is for it.
How to get started with passive income
The initial stages of generating passive income are the hardest, because that’s when you’ll be investing the majority of your time and energy. Creating your asset upfront involves coming up with a marketable idea, planning it, and actually creating it.
1. Plan your asset
When considering your asset, think about:
- Scalability. This means there’s no difference in the workload upfront, but you can sell more. For example, there’s no difference in the workload involved in selling one book or 1,000 books.
- Marketability. One of the most important parts of generating passive income is finding an audience. The more marketable your product is, the easier it will be to sell at scale.
- Authority. Create something that doesn’t require you to learn something completely new. If you’ve never run a marathon before, don’t create a course about running a marathon.
For best results, use insights you already have to define your asset. If you’ve got 100 blog posts on your website and you notice that your most popular posts are about crocheting tiny animals, think about an asset you can create around that topic.
2. Create your asset
Once you’ve planned your asset, it’s time for the hard work to start. You can make life easier for yourself by using content you already have to form the foundations of your asset (like the blog posts on crocheting tiny animals), otherwise you’ll need to:
- Outline your asset if you’re creating a digital product or set up your store if you’re planning on going down the ecommerce route
- Gather content or create your asset, whether it’s product descriptions for your store or the individual chapters in your book
- Design the final look of your asset, which could be the cover design of your book, the branding of your online course, or the logo for your dropshipping store.
3. Build an audience
Your asset is beautifully polished and ready to sell. Now, it’s time to build an audience of people who will buy it. This is the part a lot of people overlook. You might have written the best book in the world on crochet animals, but if no one sees it, you’re not going to make any sales.
There are multiple ways you can promote your product, and the platforms you choose should depend on who you’re targeting (Gen Z? Try Snapchat. Florists? Instagram might be better). Here are some key channels you can use to build an audience:
- Social media. Share relevant content, connect with your target audience, and make use of features like hashtags, Stories, and Reels to reach new followers
- Email list. Use a freebie to encourage people to sign up to your email list. Once they’re on the list, you can nurture them with high-quality content until they’re ready to buy your product
- Website traffic. Drive people to your site using social ads, PPC ads, and SEO. The more people who visit your site, the more chances you have to sell your product.
4. Create a passive income strategy
Once you’ve made your first few sales, how will you keep the momentum going?
Create a marketing strategy that includes your most successful channels and consistently post content and build an audience on them. For example, you might decide to send a weekly newsletter to your email list with a link in the footer to your product, or you might decide to guest blog on five high-authority sites a month to boost your SEO and reach.
The ultimate aim is to create a passive income strategy that doesn’t involve a ton of work (after all, you’ve already put in a lot of time and effort at the start). Automate social posts where possible, bulk write your newsletters, and pick and choose enjoyable ways to promote your product. Maybe you speak at conferences, appear on podcasts, attend networking events, publish regular content, or start a Twitter chat.