Ultimate Guide to Passive Income

Ultimate Guide To Passive Income

As we’ve discussed many times through this website, the ultimate long-term ultimate financial goal for many is financial independence, or having your investment income cover all of your lifestyle expenses. 

Whilst this is a dream for many, few people actually achieve this given the time and or money that is needed to generate this high level of income. 

Obviously the sooner you start the sooner your investments/investment income will be able to fund your lifestyle expenses, however even if you are a little late to the party, there is no reason why you can’t put together an investment plan to build your portfolio and passive income. 

Whilst this article does focus on passive income this may not be the ideal investment to target. Look at your financial and investment goals when targeting investments, know your risk profile as well as the time and money you can put towards a potential investment and look at a balanced diversified portfolio that provides both growth and income options for your portfolio. 
Below we go into this in more detail in our ultimate guide to passive income.  

What is passive income?

From Wikipedia “Passive income is unearned income that is acquired automatically with minimal labor to earn or maintain. It is often combined with another source of income, such as a side job.” 

The bigger the passive income stream, the longer the time frame or the larger the capital investment is usually needed to generate this. 

Ideally passive income (particularly larger amounts) will be well diversified and should involve minimal input to derive.

What are some examples of passive income?

Some simple examples of passive income would be share dividends, rental property income or profits from a company that you may be an owner or silent partner of but don’t perform any labor or have any day to day involvement to achieve this income.

Other examples of passive income include income derived from renting out your car or power tools, royalties from a song that you recorded or income derived from software or a video game that you created.

Passive income v Active income

We touched on the passive income definition above whereas active income is any income earned as a result of your labor. Investopedia defines active income as “income received for performing a service. Wages, tips, salaries, commissions and income from businesses in which there is material participation are examples of active income.”

You will also find (as you move up the management/experience food chain) that some of your active income will become passive. For example if you are a manager running a team and you have bonuses tied to your compensation package as a result of your team’s performance then these performance bonuses could be partly seen as passive income as it is as a result of your team’s labor of which you are overseeing. 

The lower you are experience and education wise, the more active your income will be. 

How much can I earn with passive income?

There is no cap in what you can (eventually) build your passive income levels up to. The amount of passive income you can earn will depend on several factors (in no particular order) including time, amount of capital to invest, experience/knowledge, leverage or scaling opportunities as well as a little luck. 

If we look at the long term goal of financial independence (i.e. replacing your current active income with passive income from your investments) for most people, building a passive income stream of this significant amount will take a lot of time and or capital investment to build to this level. 

Providing you are willing to commit and put in the time and the resources, there really is no limit to what can be achieved. Similar to the compound rule of investing, the quicker you get started the more likely you will achieve your passive income levels sooner. However when building passive income don’t necessarily focus on the monetary amounts, focus on quality of investments and the money will follow. 

Focus on the process rather than the short term results. Yes it’s great to have a goal (and we recommend setting financial goals) however don’t focus too much on this (in the short term). Focus on building your processes, building your knowledge and your contacts. The results will come. 

Can I earn passive income with no money?

As weird as this sounds, yes you can, however it may take some time and (a lot) of sweat equity on your behalf. When starting with little to no money this obviously takes away some of the more traditional forms of passive income investments such as real estate and shares however there are opportunities in areas such as building a business. 

If you go down the building a business route, to turn this into a passive income investment you will need to scale this or at least focus on providing goods or services that require little future input by you. An example of this could be creating an online business where you sell digital products such as courses. 

To get this business off the ground you would need minimal ongoing expenses such as website hosting, possible membership of a course provider (some of these take a percentage of sales as their fee) or a presentation/editing/graphic design cost (there are free options that may be suitable) however the main inputs will be your time to create the course content then building an audience to sell these courses to. 

Once you start selling courses, you can reinvest some of this income into your business to hire people to make more content or update courses, pay for marketing and eventually move you out of the business yet receive a nice amount of passive income. 

Is real estate income passive income?

Yes is the simple answer. If you have a large amount of cash (or access to borrowings) you can purchase several properties (after doing detailed research) and earn your passive income from these properties. You can either hire a property manager to look after these properties which means all you need to do is to receive your income and pay for any maintenance and expenditure that the property manager will inform you of, basically pure passive income. 

Alternatively you could do the property management yourself to keep more of this income however your work will increase. 

If you were looking to build your wealth through property by flipping houses (buying run down properties and renovating these with the aim to sell for a profit) then this can be a more active form of income if you are doing most of the renovations yourself. If you are hiring contractors to do all the work then this becomes a more passive investment however as it’s not going to be rented, rather it’s going to be flipped (for hopeful) profit (and not be rented for an income) then it’s not classified as passive income.

Do websites generate passive income?

Yes and websites (and online businesses) can be a fantastic form of passive income. Depending on the website will determine the type of income that is generated. For example let’s say you have an informative style website that earns an income through advertising on the website once people visit the website. 

In the short term you wrote all the content yourself and reinvested the (eventual) earnings into the website and eventually built up a team where you basically manage the site for several hours a week earning substantial passive income.That is the ideal goal for passive income investors in the website or online business area. 

Alternatively once you build your website (or websites) up to a certain level you could also look to sell these websites and invest in other areas.   

The great thing about websites and online businesses is that they can be set up for next to nothing (the cost of website hosting) and if things work out can eventually bring in several dollars of income per month and can be sold for 6 and 7 figures once the website hits certain revenue and traffic levels. 

Earning money through a website also offers you several monetization methods including advertising, selling products, affiliate commissions, sponsorships or memberships.  

Can I earn passive passive income from stocks or shares?

Yes you can and this form of passive income is one of the most popular and easiest. The difficult part about this is buying the right share and owning enough of these shares to provide you with a sufficient passive income to enable you to replace your current employment income. 

The most common form of dividend producing shares are commonly known as “blue chip” shares and are commonly listed on large share markets such as the New York Stock Exchange or the Nasdaq Stock Exchange. 

When investing in shares make sure you understand the risks involved in buying shares, the risk profile that you are comfortable investing in and the type of share you are looking at purchasing (ie dividend producing or a growth company that don’t typically pay high amounts of dividends). Always do your research when investing and reach out to licensed professionals should you need further information. 

Can a “gig” role provide passive income?

No, unless you can turn this gig into a business in which you can scale. Traditionally a gig role is active by definition so unless you can build a business or scale then it’s unlikely to become passive income. 

Can I earn passive income from Kindle?

E books or online publishing can be a lucrative form of income if you have the audience. There are some authors that are earning 5 and 6 figures a month from Kindle however to get to this level you will need to cultivate a large audience and provide high quality and entertaining work.

Best shares for passive income

Whilst we can’t recommend a specific share or investment (this will depend on factors such as risk profile, amount you are investing and the investment time frame among other things) you will be searching for shares that are high quality, have low debt levels, and historically pay a decent dividend. 

There are some share investments (such as Real Estate Investment Trusts) that have a significant percentage of their taxable income that must be paid as dividends. 

Look to diversify any significant shareholdings across a range of asset classes and asset sectors. 

Best Exchange Traded Funds (ETF’s) for passive income

Again we can’t recommend a particular ETF or investment however the same approach used above when looking for a quality dividend producing share should also be used when looking for quality dividend producing ETFs. 

Most of the top ETF providers offer ETFs that are focused on high dividend yields however do your research on any potential investment to make sure it is of a decent quality and that you are comfortable with the investment risk profile the prospective ETF offers. 

Like with shares, quality should be your main focus when looking for an ETF.

Are there any passive income hacks?

Whilst nothing can replace hard work and quality, there are some steps you can take to speed this journey up. The earlier you start your passive income journey, the sooner you will be building up the amount of passive income that you are earning. 

If you have savings or access to capital for investment purposes, look for quality assets such as real estate, blue chip shares or established businesses that are well run. 

If you are building your own business look for ways you can scale (particularly once your business is earning an income that you can reinvest). 

Do your research, know exactly how much time or money that you are prepared to risk or invest and don’t be afraid to have a go. Set goals, be consistent, stay the course and you will be surprised how quickly your investments and passive income builds up.    

What are some passive income e-commerce ideas?

There are plenty of ways to earn a passive income from online business or e-commerce. You can set up your own software business (software as a service), you can build or buy your own income producing website, you can sell a physical product online either from your own website or utilizing an online marketplace such as Amazon or Etsy. You can also enter into the lucrative digital products niche (assuming you have a unique selling proposition that will translate to orders and eventually passive income).  Some of these ideas are more passive than others however there are plenty of ways to make money in the online space. 

Can digital products provide passive income?

Further to the above point, digital products are a fantastic way to earn passive income. Whilst you will likely need to do a substantial amount of upfront work to create these digital products (as well as setting up a marketing funnel),  once you’ve these are ready to sell there is very little maintenance (aside from the occasional product update and customer queries) need to keep this passive income stream going. Scaling digital products is a lot easier than products of a more physical nature. 

Can I earn passive income as a beginner or with no experience?

Yes and no. Whilst we recommend that you start your passive income journey even if you have little to no experience, it’s highly unlikely that you will earn passive income unless you are purchasing an income stream such as shares, property or a business.

Growing or cultivating an income stream takes time, particularly ones that are substantial. Stick to your plan, stay consistent and it will build. Also when you are in the beginners stage learn as much as you can, be like a sponge and don’t risk too much of your capital in the early stages of your investment journey. 

Is passive income possible with no money down?

Yes, however as mentioned earlier a lot of work is likely needed to generate significant investment income and before you can grow and scale to get this income to become more passive. 

When faced with the issue of having little to no initial capital you will have to rely on your own wits and knowledge and will need to invest significant time into your investment venture.

Obviously you need to find an investment opportunity where there are no financial barriers to entry, ideally starting a business would be your best option. 

Do I have to pay tax on my passive income?

This will depend on the amount of income and the location you live in however in most cases yes. It is highly recommended that you find a quality accountant before you embark or in the early stages of your investment or passive income journey and this is doubly important once the passive income starts to build up.

Can I earn passive income today?

Whilst you can start the process to build your passive income today, earning passive income will take time unless you have purchased an income stream. Even if you purchase shares or an investment property there is usually a lag between taking ownership and receiving an income.

Can I become a millionaire with passive income?

Yes, most definitely however building up investments that are valued at a million dollars will likely take a significant amount of time. As we’ve mentioned earlier, don’t focus on the amount, focus on the process of growing quality investments. Put in the work, keep doing your research, minimize your risk and stay consistent, your investment will grow as will your income.

Is a side hustle passive income?

Not initially, however once you scale this it can turn into a very lucrative passive income stream. When looking to start a side hustle look for ideas that you can scale quickly and without having to invest significant money or resources. 

Other ideas could be to research successful investors or business owners that have come from a similar background to you and look for ideas about how they achieved success or tips that they used to become successful with their side hustles or investments. 

Can I earn passive income from home?

Yes you can. Given the access to research and information that the internet has provided there is no limit to what you can build from the confines of your house. Designing a new product, building a website or online business, researching the latest property or share market trend can all be done from your home. 

What lifestyle can I live with passive income?

This is entirely up to you and your success. Focus on growing your investments and living within your means. Keep investing in yourself and keep building (and investing in) quality investments and before too long you will be amazed at what you have achieved. 

There’s no reason why you can’t build an investment portfolio that allows you to replace the income you earn from your current job; however this will likely take significant time and dedication to achieve.

What are passive income business ideas?

When looking at businesses you should be focusing on those that provide a good return on capital, are easy to scale and don’t require a significant amount of employees to run. 

An example of this would include a business such as vending machines, laundromat or equipment hire. When selling or renting out products be wary of investing a lot of money in stock/inventory. 

Can I earn passive income through social media such as Instagram or Pinterest?

Yes you can earn income from these social media channels however there is a greater likelihood that this income will likely be less passive than you would like.

Making money online (i.e building a website) or through social media (i.e influencer) usually entails a substantial amount of initial work to build up a network, followers or sales funnel and it will likely take time before you are earning any income from this.

If you have the reach or followers then this can be a great way of earning an income particularly if the products or services are aligned to your beliefs and followers needs. The more successful you become the easier you can scale or implement relevant systems and procedures and the more passive this income can become.  

Is Etsy a good place to earn passive income?

If you are a creative person, Etsy can be a great platform to earn an income. There is a wide range of ways you can make money on Etsy from creating unique printables through to creating and selling cute stuffed animals. 

Again when starting out your income isn’t likely to be too passive as a significant outlay of your time will be needed to grow this stream. The more successful you become, the more you can scale this and turn this income into a more passive one. 

Can I earn passive income from Amazon?

Yes you can and if you are in the right area (and with a bit of luck) you could be earning thousands of dollars per month. There are several ways you can earn money from Amazon, the most popular ways include:

  • Amazon Affiliate Marketing: Earn a small commission promoting Amazon products
  • Amazon FBA: Sell your private label products through Amazon
  • Amazon Influencer: Earn an income by recommending Amazon products via the Amazon Influencer Program
  • Amazon Kindle: Earn an income by selling your books through Kindle Direct Publishing
  • Amazon Mechanical Turk: Perform tasks through Amazon’s crowdsourcing platform
  • Amazon Flex: Not that passive, earn income delivering Amazon goods through their Flex platform. 

We go through these above methods in more detail here however Amazon offers some great ways to earn passive income either through one of the above methods or through several of the above methods.

What are some passive income strategies?

We touched on this a little earlier in this article however we will go into more detail here. 

Let’s look at three examples, two traditional passive income options and one more modern stream. 

Example One Dividend Producing Shares

Shares are a great investment for someone with a long term investment timeframe. Depending on where you are in life and what financial objectives you have, investing in high quality income producing shares can substantially boost your portfolio and help get you closer to financial independence.  An example of quality shares producing dividends can be seen with the worldwide giant, McDonalds Corp (listed on the New York Stock Exchange). 

In 1983 you could purchase a McDonalds share for $1.20’s according to the website Macrotrends and the dividend in March 1983 was 10.75 cents a share

Fast forward to 2022, the McDonald’s share price was $277 in December 2022 (not taking into account share splits between 1983 and 2022) and the most recent dividend per share of McDonald’s stock was $1.52. The current dividend is well over the 1983 purchase price per share for McDonald’s, a great advertisement for long term investing and the power of compounding top quality investments. 

Example Two Purchasing an Investment Property

The other big investment option is property. Let’s look at Los Angeles county over the years. In 1992 the median property price in Los Angeles County was $214,005, while the average monthly (3 bedroom) rental income was $1,005

Fast forward to 2021 and the average property price for Los Angeles County was $826,500 while the average monthly rental income was $2,735. 

Example Three Building an Income Producing Website

The first two examples involve an asset class where in most cases you need to outlay a substantial amount of capital to purchase a significant asset with a substantial income however in this example you can start with next to no money. 

Whilst experience in understanding the online world is preferable, it’s not needed, however the less experience you have the longer it will likely take you to earn an income from this investment. 

Also bear in mind that building an income producing website is difficult and time consuming and there is no guarantee that you will earn an income from your website. However if you are interested in this strategy there are plenty of great online resources to help you build a profitable website. 

What is the best form of passive income?

What may be good or the best for one person may be different to another. This could be due to financial, experience, location, or a whole myriad of reasons. 

If you have the money to invest in quality income streams then shares or property would be a great starting point. 

If you don’t have the money to invest (at least in the short term) then setting up a website or online business is a great alternative for those who are cash flow poor. 

Whatever your financial circumstances, building a strong investment and passive income portfolio should be high on your agenda. Not only does this insulate you from cost of living increases, it also helps you speed up your financial independence journey and allows you to start living your life on your own terms. 

Even if you don’t have the knowledge or experience in these fields, the quicker you start your investment or passive income journey, the quicker you take control of your financial destiny.