Not all passive income is created equal. There are many different ways that you can make money while you sleep!
In general, passive income is money made from assets that you control. Whether that be things you own that aren’t being used, spare time that you need to occupy, or using existing wealth to increase your cash flow.
The four types of passive income that we cover in this article are:
1. Cash-Flowing Assets
If someone’s ever told you, ‘you need to spend money to make money,’ they were probably talking about building cash-flowing assets.
Cash-flowing assets are investments that require wealth but create steady cash flow in the long run. These are assets like real estate, buying an existing business, or dividend funds.
It takes money to get started on these, but the investment payout can also be pretty high.
2. Build Assets
Building or creating something that can be used by others for a cost is a great way to generate an income stream. Rather than existing wealth, these assets typically take time and skill to build properly.
If you have ever wanted to create software, build a website, or write a book, they could be a great way to test out your skills and create a passive revenue stream for yourself.
3. Reverse Passive Income
This form of passive income cuts down on existing monthly expenses to create extra expendable income.
You may be unintentionally spending more than you need to on things like your power bills or mortgage payments. By refinancing or changing a few simple habits, you could free up some of your existing income and reinvest it back into opportunities to make even more money.
4. Share or Sell Assets
You can use, sell, or rent out items you already own that are collecting dust.
Have an extra room in your house that you can rent out to a housemate or Airbnb? Maybe you have old baby equipment that don’t need anymore? This is a way that you can create wealth with things that are no longer useful to you.
This doesn’t have to be limited to physical items. You can use extra resources like time or skills to build wealth. If you go for an evening walk and can make money walking a neighbor’s dog, go for it.
If you have any assets that can easily be used to create income quickly, don’t let that opportunity go to waste!
HOW TO SAVE FOR PASSIVE INCOME INVESTMENTS
Many of the passive income ideas on this list require a financial investment on your part.
So, where does that money come from? From your savings, of course.
What’s your current savings rate? In other words, what percentage of your after-tax monthly income are you setting aside for investing?
Current Budget Audit
Take an uncomfortably close look at your current budget. Start with the revenue side: four weeks’ net pay as your monthly income. (Four weeks’ pay is all you can count on in any given month, so your budget should be based on that, not your annual income divided by 12.)
Next, list all fixed monthly expenses. This includes your rent or mortgage payment, your car payment, your home internet bill, and any other monthly expenses that are consistent month-to-month.
Then list out your variable monthly expenses that you incur every month, but which vary. Food, entertainment, water, gas, and electric bills are all examples. Go back six months to form a long-term average.
Finally, look at irregular expenses. These hit you every year, but not every month. Examples include holiday gifts, birthday gifts, wedding and baby shower gifts, insurance, travel, healthcare costs. Review every statement for the last year, and then form a monthly average.
Spoiler alert: you won’t like what you find. Most Americans spend far too much on variable and irregular expenses and don’t even know it.
Armed with this knowledge, uncomfortable as it was to compile, you can start hacking away at all of your fixed, variable, and irregular expenses. Set to work on a new budget, brainstorming creative ways you can cut your fixed expenses, not just your variable expenses.
The best way to do a free budget audit is with help from the free tool: Personal Capital. Learn more in my Personal Capital review.
Automate Your Savings
Once you’ve tightened up your budget and set a higher savings rate, it’s time to ensure you achieve it every month.
How? You probably have a checking account for day-to-day expenses. Perhaps you also have an emergency fund. That’s a great start.
Now, set up a separate high yield online savings account for irregular expenses. You’ve set a budget for each irregular expense; now set up automatic transfers to take place every payday for your irregular expenses. Then, when the holidays come around, or your insurance bill comes due, you can pay from your irregular expenses fund.
Consider opening an account in a different bank to use for passive income investments. Then, just as you did with your irregular expenses, set up automatic transfers to take place every time you get paid. This portion of your paycheck is your savings rate.
Discipline fails all of us sooner or later, so automate your savings, so you don’t have to rely on it. Out of sight, out of mind, and what’s left in your operating checking account is what you can live on month-to-month.
As the months go by, your investment funds will pile up, and you’ll be ready to start investing to build passive income streams.
Increase Income Streams
To help make enough money to invest in passive income ideas, you need to increase your income streams. Do you have a side hustle?
A side hustle is anything you do to make extra money outside of your full-time job. Anyone can go out and make a few hundred extra bucks a week on the side.
You can do anything – mow lawns, walk dogs, shovel snow, babysit, code online, tutor, make deliveries, drive people, flip on eBay, sell a product on Amazon, participate in focus groups, blog, or an infinite number of things. But not all side hustles are created equal since some can make you a lot more money than others. The best side hustles are the ones where you own your time.
PUT YOUR MONEY TO WORK WITH A PASSIVE INCOME
If you take nothing else from this list, consider this: increase your savings rate, automate it, and then put that money to work for you.
Robert Kiyosaki uses the metaphor that every dollar you save can be dressed for work and sent out to earn money for you. Most of the passive income ideas above come with some degree of risk. Many require education on your part if you are to succeed.
Just because passive income doesn’t require work, it doesn’t mean it doesn’t need work and money upfront!
Build passive income streams while you’re young and fit and can harness the power of compounding over time. By doing so, you set the stage for retiring young and wealthy. We feature success stories all the time on our website, of everyday people who retired at 29 or 32 or 36 based on their rental income.
But if you don’t learn how to make passive income while you sleep, prepare to work until you die.
Comments