When I first started following personal finance blogs, I often found myself either skipping over the articles about passive income or rolling my eyes while reading them. I’ve always been rather skeptical about opportunities that seem too good to be true, and passive income seemed to fit into that category. Though no one claims you can get rich quick with passive income, there does seem to be the sense that you can earn money while eating junk food and watching Oprah (that is, while doing nothing).
It is easy to understand why passive income is so attractive. Having extra income that you don’t have to go to work for daily is appealing. It could change your life: you could go on a great vacation or use your passive income to pay off debt.
However, responsible passive income sites are clear that just because income is passive it is not easy to earn. However, I still sometimes find myself wondering if people get in over their heads with trying to generate passive income streams.
So here is a brief skeptic’s guide to passive income — the good, the bad, and the ugly of trying to supplement your income stream without adding to your workload:
Passive income is generally defined as cash flow that doesn’t require regular work because the time or money investment was put into the project at the beginning. However, the costs associated with doing all the work up front can be a serious drain. For example, rental real estate is a common passive income stream, but you need to have the down payment and renovation money set aside in order to start that “passive” income. In addition, as a landlord, you will need to keep up on maintenance, which could determine how actively you need to be working to earn the income. Most hands-on landlords would argue that being a landlord is not passive income.
Another common passive income stream is writing, either the traditional route of creating a book or by blogging online. If you are lucky enough to sell a book manuscript to a publisher, you will earn royalty checks through the years as people continue to buy the book. It’s nice work if you can get it. As for blogging, it’s an easier route to get into but less lucrative. Ads on your website can slowly add up to money you don’t have to “work” to earn.
Other passive income ideas include creating crafts for sites like Etsy, designing apps for smart phones, or even creating videos or other content for profit sites. All of these require you to spend time or money initially for a future pay off.
Bottom line: You can’t just snap your fingers and have passive income coming to you. It takes a significant amount of work to get started.
Technically, I am already earning passive income, as I have several ING Direct savings accounts (now Capital One 360 Savings) that earn interest and I have ads on my personal website. However, neither of these income streams are enough for me to retire on, or even enough treat myself to a weekly lunch.
Though individuals who earn a great deal of interest on their investments or who have published several successful books are fully able to live off their passive income, most mortals will find that passive income is only a supplement to regular income — and probably a small one at that.
Bottom line: It takes a lot of work to get one passive income stream going. Now try developing 10 more so you can afford to quit your job. Not so easy!
The good news about passive income is that it really follows the old saying about doing what you love and letting the money follow. If you are dedicated to real estate, writing, crafting, inventing, blogging or investing, you’ll have a great time doing the “work” necessary to start your income streams, and you’ll reap the benefits in the future. Turning your hobby into income can be fun and profitable. Stephen King could easily live off his passive income and never write another word — but you don’t see him doing that because he loves his work. So if there is something that you love to do, go ahead and do it, while setting up a way for it to earn you money. That is the fun way to create passive income streams without feeling like you’re working.
Bottom line: Passive income is a possible way to supplement your regular income. But don’t let yourself believe that it will be easy, fast, or painless. Nothing worth having ever comes free.
Looking to get started earning extra income? Be prepared to put some time and effort in!
Photo from Wikimedia Commons.
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