An Intro to Passive Income, Popular Ways of Getting It and the Mindset You Need to Start Creating It

by David Ning · 43 comments

passive income provides freedom

Most of us have a job where hard work is expected and necessary.  We offer our knowledge and/or labor to the company we work for in order to get recognition, satisfaction and compensation in return.  Although this is the way most people make money, the minute we stop working, the income stops.

On the other hand, a popular idea that’s been floating around the internet is passive income.  The idea of it is that money is being earned with or without our involvement.  Once it’s set up, the recurring income will come continuously.

Anyone can quickly see why this idea is popular.  Here are three extremely good advantages:

Provides Freedom
If your passive income is higher than your living expenses, then you free yourself from the daily grind of working for someone at least 8 hours a day.  You can enjoy your life and do what you want, while earning enough money to sustain your lifestyle.

Offers Diversification
To borrow a popular term from investing, passive income provides diversification.  An extra income stream provides an extra layer of safety for you and your family.  Nothing is a guarantee in life and unexpected events happen.  You may lose your job or the money making opportunity might turn out to be a total scam.  The more avenues you can earn money from, the more financially secure you are.

Continuous
Passive income doesn’t stop coming when you stop working.  Even if we love our careers and want to work 7 days a week, there comes a time when we need to retire.  At that point, our income from our jobs will end.  It doesn’t matter how valuable you were to the company.  If you stop working, they will stop paying you.

Passive income on the other hand works even without you thinking about it.  Even if you retire, the money will keep coming to you.

Creativity is the most effective way to generate passive income.  All it takes is some thinking and you could be on your way.  Here are a few popular passive income streams that we are all familiar with to help you get started.

Dividends
Many companies distribute money (otherwise known as dividends) regularly to share holders to attract investors.  In order to take advantage, all you need to do is buy the individual stocks of the company or own the mutual fund or index fund that holds the company stock.

Interests
Perhaps the most common of them all, interests earned on any financial accounts are really another form of passive income.  You literally put your money in your account and watch your wealth accumulate.  With the interest rate at 1% even with high yield online savings accounts, you might need to have a large sum in your account for the interest to be meaningful.

Making a Timeless Product and Selling It
Many people become rich because they created a unique product that they own the rights to.  An author that gets royalties from a book that was written; a creator collecting licensing fees for an invention; and a singer making money from every CD sold are all good examples of this.  Once it’s created, money flows to you as people have a need for the product.

Network Marketing
There are many programs out there that allow you to make money off the efforts of people you refer.  This type of scheme, sometimes also referred to as a pyramid scheme, got a bad name many years ago.  At one time, many fraudulent companies that had no real business model used this scheme as a marketing tool.  They would advertise the benefits of making money, while asking you to pay an initial fee to sign up.  Once they had a bunch of people falling for the trick, they would close the business. Many people either lost money or heard of these stories, so they are skeptical whenever they see a company rewarding people using this scheme.  However, if the company you build your network with has a legitimate product, it can be a powerful way to make passive income.

Blogging
Many people think blogging is passive income but it really isn’t.  Those who regularly read blogs know that many bloggers spend hours every day thinking and writing content, as well as managing the blog layout amongst other things.

One incorrect perception about passive income is that it is effortless.  Looking at the examples of passive income above can explain this best.  For dividends and interest to be significant, the principal (money that’s put in the financial account) must be pretty big.  In order to generate this big base, you have to work for it.  With any product, a lot of effort needs to be spent creating it.  With network marketing, hard work needs to be put in to build the network of referrals.  So if you think passive income is effortless right from beginning, you are misinformed.

The first step of generating passive income starts from having the right mindset.  You need to be:

  • Willing to think of ways to make money that may or may not be published by others.
  • Understand that although the ultimate goal is to work less and still make enough money to sustain your lifestyle, it involves hard work at the beginning.
  • Be on the lookout for ways to add an additional income stream.
  • Understand that many of the ideas aren’t going to work.
  • Have the confidence that you can do this because many people are quite successful at it and end up living a dream.
  • And most importantly, have fun doing it.

If you have what it takes, start now.  Spread the word about passive income and continue looking for ways to increase your income streams.  One day, you might just be able to tell your boss that you are leaving without financial worries.

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{ 43 comments… read them below or add one }

Joe @ Simple Debt-Free Finance July 24, 2008 at 9:46 am

Great post David.

Anyone wondering how the rich got rich, should understand passive income – it’s the road to riches, whether it’s royalties from CD or book sales, an income from a business or dividends and gains from stocks. Unfortunately, as you point out, applying the principals and creating a passive income stream is not as easy as understanding the theory. But then, if it was that easy, we’d all independently wealthy. ;-)

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Dividend Growth Investor July 24, 2008 at 9:51 am

MN,

Great post on P I. I like your approach that passive income generation is a long process and should not be viewed as a get-rich-quick type scheme.
As for blogging, if you create timeless content which could be alway found easily through google, you could theoretically make passive income from blogging. But blogging is a very active source of revenues for most.

I think that dividends and interest are the two most “passive” income sources out there. But that’s just me..

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James - Forex Trading Blog July 24, 2008 at 12:55 pm

That was an excellent post.

You can’t beat passive income. I have numerous websites, some of which I haven’t touched for months, yet they still bring in between $200 and $500 a month.

Another great way to create passive income if you run websites is to promote affiliate programs that pay recurring commissions such as autoresponders and web hosts. That way you can get paid over and over again from each person you refer.

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Joe @ Simple Debt-Free Finance July 24, 2008 at 1:20 pm

If you like to write, and have an eye for spotting content that’s timeless you can also earn a passive income writing like Blogging, it takes some effort in the beginning but you don’t need to have a blog to do it. You can use sites like Hubpages or AssociatedContent if you don’t have a blog…

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Sandy Morris July 24, 2008 at 6:13 pm

In today’s world more streams of passive income the better…I was one who had 2 streams – 1 mortgages and 2 real estate investments….Now you can see why we need multiple streams so if 1 or 2 start to dry up you have another one continuing.

Good article.

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Greg July 24, 2008 at 6:41 pm

Darn you and that pic, now I want to go fishing.

By the way, Network Marketing plans and pyramid schemes are two very different things. You’re right on about the good companies, though.

Nice post.

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Sam July 25, 2008 at 1:00 am

I think this is my only motivation why I blog. To have a nice source of passive income. Eventually, I’ll lave my 9-6 job and spend more time with family. I know it takes alot of effort and time first, but once its done, it will be all worth it.

@James: I hope to follow your steps..wow untouched websites earning $200-$500/month..not bad eh?

Sam
Fix My Personal Finance

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marci July 25, 2008 at 10:01 am

And remember none of them are for sure things… interest can change, people can quit buying or hitting sites, etc… however, one does what one can. Best to not have all your eggs in one basket.

Interest, dividends, and carrying land sales contracts work for me, and hopefully will carry me into retirement – I-m ‘semi-retired’ now – at least that’s what I call working parttime so I have company paid health insurance :) And yes, it was hard work getting them all to a point where they produce the money works for me.

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Richard Wilson, hedge fund blogger July 30, 2008 at 3:17 pm

Great post here. I just quit my full time job to blog professionally last month. I have advertisers who paid a set rate of $99-$399/month to advertise on my blog and this sometimes feels like passive income because I can take a week off if a seed some posts to publish during a vacation…BUT as mentioned above it is not real passive income. If I stopped posting I would get dropped from blogrolls, loose some search engine rankings and eventually all of the advertisers…

Great post, feel free to email me if you are a blogger looking to make a living out of it. Happy to share my story.

- Richard

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corey December 9, 2010 at 10:29 am

How do you blog? I would love to learn…

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andar909 August 10, 2008 at 2:22 pm

hi, andar here, i just read your post. i like very much. agree to you, sir.

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Dividend Growth Investor September 5, 2008 at 12:46 pm

MoneyNing,

I was wondering what dividend stocks do you own in your portfolio?

Best Regards,
Dividend Growth Investor

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MoneyNing September 5, 2008 at 1:37 pm

Dividend Growth Investor: My dividend paying stocks are:

Altria (MO)
Phillip Morris (PM)
Exelon (EXC)

The others that I own don’t pay a dividend I believe.

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Paul September 16, 2008 at 2:22 am

wow…

your post exactly matches my sentiment when i started out in my blog in earning a passive income too. Except that your reflection is so much more detailed.

Greato. Hope to hear more good stuff from you.

Paul

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Moneymonk January 7, 2009 at 2:13 pm

I see blogging as extra income, however, I only out in a few hours a week, so it can also be passive

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PerfectMoney February 22, 2009 at 1:35 am

Automatic money making is What most everyone thinking of now,Include me.I myself plan to have “blog for money,though before it is build into reality I build now,my virtual blogging success reality with joining to become Virtual assistant,with around $200-400 permonth doing forum and Blogwalking,I could stay both side.learning How to blogging success and get paid for my response to it,and as bonus all of that improving my English skill

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Jerry June 19, 2009 at 7:29 am

Blogging is certainly not passive. But, you’re right about passive income providing some insurance for your lifestyle. You never know what life has in store for you. The more streams of income you have the better of you are. This leads to feeling completely secure. Who wouldn’t want that?
Jerry

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Bill January 24, 2010 at 9:40 pm

I am a very cautious and lazy investor. I put together a 5 year ladder of FDIC insured CD’s. The passive interest it throws off I use you buy shares of the Vanguard Total World ETF (VT).
CD’s and a total world etf. That’s it.

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marci January 25, 2010 at 8:55 am

Ditto on the Laddered CD’s with auto rollovers… effortless and continuous, yet something is always close to available for emergencies, if needed. Interest goes into the investment stock pool for auto buys… :) Not much effort on my part (once it was all set up) and the money keeps on making money for me :)

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Mac Sage February 8, 2010 at 10:31 am

While blogging may not be passive, there are many ways to make your blog more passive. One is to develop a group of regular “guest bloggers” who write a piece for the opportunity to get additional exposure.

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Steve-Personal Success Factors March 16, 2010 at 6:46 am

I’ve been one of those guest bloggers, and I agree: it’s a win-win situation. The successful bloggers who have done this seem to do very well with their blogs. I’ve now got another goal to add to my list for the next year :)

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Elucid March 1, 2010 at 2:58 am

Dont forget about making money off a website that you have built or will. If a website becomes very popular, it can make a huge sum of money by hosting advertisements.

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Garrett Miller March 3, 2010 at 2:26 am

Hey now, don’t leave out us web 2.0 attraction marketers (network marketing + internet marketing, including blogging). We’re doing what we can to change people’s perspectives on our industry… As far as passive income goes, though, GO FOR IT. I’m so glad I figured that out at 19.

Solid post.

Garrett

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Jr Deputy Accountant March 7, 2010 at 11:09 am

Most bloggers who try to monetize in the “passive” sense don’t do very well and for good reason. If you’re going to expect your readers to put up with ads, you have to make it worth it for them. People seem to think you can come out of nowhere, slap some ads on your blog, not add any value and make tons of money. That’s just not how it works.

Why do bus shelters have ads on them? The bus shelter is doing someone a service – giving them a dry, somewhat comfortable place to wait for the bus – so it’s reasonable that in exchange for that service, the person using the shelter will put up with advertising. It’s the same with a blog – and if you aren’t adding value to your readers’ lives as a blogger, they aren’t going to put up with your ads.

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Glen March 13, 2010 at 5:32 am

One issue with passive income is that we find out about it too late. Our schools teach our children to be employees (which is fine if you’re doing what you love) rather than owners of businesses or income streams. I will be breaking the cycle with my kids.

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Steve-Personal Success Factors March 16, 2010 at 6:48 am

No matter what the product, I don’t think there is much passive income to be had. It requires ongoing, hard work. However, once the initial hard work is done, provided that there are systems in place to keep the work going, I can see that the income is passive. But it continues to require much oversight: there is no such thing as automatic pilot.

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Todd May 17, 2010 at 6:14 am

Just what I needed to get back on track. Thanks for the interesting post.

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Dean September 26, 2010 at 1:51 pm

wow this is bad advice. You have to consider both taxes and inflation.

oh, you are making 3% on your savings? That’s great, but a ~1/3rd of that is taken out in taxes and what is left is subject to another1-4% is loss of purchasing power due to inflation. If inflation is high enough you’ll be losing real wealth.

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MoneyNing September 26, 2010 at 2:18 pm

I think you’ve misunderstood the point of this article all together. No one ever said that 3% is or isn’t enough, nor did I say that I was making 3% with my savings. Even at an interest rate of 0.3%, savings are a form of passive income, period. Thus, it’s listed here.

If your current passive income stream doesn’t cover your expenses, then you need to create more streams, spend less, or even use active income to support your lifestyle.

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Jake January 8, 2011 at 1:17 am

That is totally not true. Many many many times in the last 100 years has inflation been over 3%.

If you have enough money sitting in savings to consider it an ‘income stream’ and you’re only earning 3% you’re doing a huge disservice to yourself.

The only time to ever sit in cash is during terrible economic times and even then gold is just one example of something that tends to perform well during troubling economic periods.

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ABD October 22, 2010 at 12:44 pm

Would you include rent (as in being a landlord) on this list?

At least, the IRS thinks that rent is passive income. I wonder how much money individual people who own a couple of houses really make from being landlords, once you take into account all of the maintenance costs of owning a house.

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Pat July 19, 2012 at 2:45 pm

ABD, I think you have discovered the origin of slumlords – those who collect the rents and rarely repair the leaks.

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Greg Jeffries November 19, 2010 at 6:04 pm

Amazing article I LOVE passive income streams…. They’re the Best. Everyone deserves to invest their time in the things they truly love and spend more time with their families instead of working 40 hours or more per week.

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Tim Wright June 11, 2012 at 8:14 am

Hi,

I am teaching my daughters about living off their dividends by the time they are 50. We set a small college fund and they are going to go to community college and invest what they would have spent on living away from home. I show them how much we get monthly with dividends and it inspires them to start doing DGI on their own – they are only 15 and 16. Start early time, is your greatest asset.

Cheers

Tim

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Tie the Money Knot June 11, 2012 at 8:48 am

Multiple streams of income are a good thing, as it represents diversification. We don’t put all our eggs in one basket when it comes to investments, so we shouldn’t do that in terms of income generation either.

Plus, the reality is that as people get older, the option to work may not be there for a variety of reasons. One being that health issues have a way of creeping up when you don’t expect them too. It’s best to start young, and work toward going after passive streams of income.

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Jenn June 11, 2012 at 2:04 pm

I really like your point about passive income not being effortless income. Dividends and interest require less time than blogging or creating a product but are still ways people can earn with little effort.

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Mike June 11, 2012 at 7:29 pm

I recently started a blog so I’m hoping that this would be the start of some passive income for me.

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Marbella June 13, 2012 at 2:39 am

The old saying says you should not put all your eggs in one basket. Create and get yourself several small extra income. Anyone can become a major income source one day.

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Jules June 13, 2012 at 3:04 am

I’ve had a blog now for almost three years. I’ve made exactly $5 in AdSense money on it. I blog because it’s fun for me, not because I expect any money from it. I’ve had several advertising offers that have all fallen through, and it’s gotten to the point where I will delete any emails from would-be advertisers because I just don’t want to deal with the back-and-forth for a month while they make up their minds to refuse.

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Trent June 18, 2012 at 4:19 am

If everyone’s making passive income; who is actively generating the money? :)

I run a blog, with 30,000+ page views in the last two weeks and it generates nothing. I don’t put much advertising on there for the users. Perhaps one day it will hit a critical mass of users for me to warrant selling ad space. Until then – many hours, hard work and no returns…

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Mark July 22, 2012 at 8:22 am

I am in so much debt I don’t see how I’m going to get out of it. My life is a mess, I’m separated with twins whom I adore. I’m 62 years old and about to be forcibly retired from my company, don’t have time to start an online business….

I need a miracle in my life

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Trent July 22, 2012 at 11:49 pm

Miracles don’t happen. A better attitude is what you need by the sounds of it. If you’re being forcibly retired, I would say you have plenty of time to start a business. It’s not like they’re going to fire you; so just stop putting all your energy into it, and spend the time working on your own business. Sure, put the suit on and walk into the office, but just slow down – chances are, people won’t even notice.

Your debt is typical of most Americans living a dream they cannot afford through stuff they do not need. Time for a garage sale to get rid of the things that are weighing you down – all that money you can pump into your debts – sell on eBay (best margin for profit).

A defeatist attitude isn’t going to help you get on top of your life.

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Jean July 28, 2012 at 1:36 am

I think that early on in our careers, a passive income almost becomes a necessity, especially these days as prices are so high for everything and it is hard to make ends meet in our initial incomes.

-Jean

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