Passive income is the dream of most people. But few of them know the rules and techniques to ensure a reliable passive income. Do you want to earn money without having to work all the time? Probably a stupid question… You probably wouldn’t be reading these lines otherwise. This article can guide you or at least broaden your understanding of what passive income is and how it works. Because knowing how passive income works and the iron-tight rules associated with it is the first step to creating your own passive income. So let’s do it.
🎓 Definition: The term passive income means a type of regular income that needs to be invested in at the beginning and no further investment or activity is required (meaning significant activity or work) and the only thing added is income, profit. Thus, the idea is that the work effort (or money spent) is only necessary at the beginning, not during the course of earning and acquiring money.
The main idea and the emergence of passive income can be expressed by comparing the innovator, the entrepreneur on the one hand, and the employee on the other. The employee goes to work and is evaluated by the hour. This means that if he goes to work, he can have a decent income. However, if he leaves work, he has nothing and is dependent on his savings or state aid. In contrast, an entrepreneur or innovator often builds a business or develops an idea (a money machine) very laboriously in the first phase. In the second phase, the machine is already running itself and the entrepreneur can spend most of his time by, for example, travelling. The money comes into his account almost effortlessly. This is just an initial simple example.
Passive income and its pitfalls
That sounds very nice to begin with, but everything has a flip side and a down side, and we need to keep that in mind. Passive income can create a good financial base, but nothing is free. With passive income, the hardest part is planting the seed of success in fertile soil and watering, watching and nurturing the seed well in the initial stages. Passive income will very rarely fall from the sky into your hands!
In order to achieve a good passive income, it usually takes a lot of effort, but the principle is that the effort you put in should pay off and be minimized, preferably even cancelled in the course of earning, maximizing your profit.
As with a plant, a great deal of effort, labour and care is required in the initial phase, but once the plant grows, it only needs to be maintained and it will bear the fruits of your earlier labour. Ideally, it regularly bears fruit-money with little effort (not to be confused with no effort). Its owner must always nurture his source of passive income.
💡 Tip: If you’re interested in learning more about passive income options and have at least average English skills, be sure to check out Pat Finn’s blog for specific tips and how to create passive income. Although the texts are based in an Anglo-Saxon environment, they will provide a lot of useful information for Central Europeans as well.
Why do so few people create passive income when it’s so great?
The million-dollar question. We can identify several reasons.
- The entrenched employee culture of the communist era. People have it set in their heads to go to work and then spend all their money on consumer items in a given month. In a worse case scenario, they even reach for a loan.
- They don’t know how passive income works.
- They don’t persist. Passive income is a lot of hard work in the beginning without much result and many people fail to put their needs aside, persevere and work hard at a certain point in their lives.
How to create and secure a passive income?
While there is no ideal guide to an effective passive income, there are a few tips that may suit you and be beneficial. In order to secure a quality passive income, you almost always need some basic capital, whether it’s buying real estate, stocks, creating artwork to distribute, or property to rent out.
But it can be done without capital. It’s just that the path to passive income is a bit more circuitous, but that can make passive income all the more stable and interesting. You just have to have a good idea and go for it. In order to create passive income, you need to set aside money over a period of time that you will invest smartly in your business. Building a passive income works on the principles of the Protestant ethic on which Western capitalism and culture is based.
There are two ways to invest in creating passive income. Monetary investment and investment of your time and effort, where the two are very often intertwined. Here we have some tips on how to make a quality passive income.
💡 Tip: We discuss the investment options in more detail in the article: How and what to invest in?
The most commonly used type of passive income is real estate and its subsequent rental. Given that, for example, Prague has a long-term housing problem and rental prices are often astronomical, this type of income is extremely convenient and efficient for owners. Monthly rent, even for a small studio apartment, ranges from ten thousand and up.
Let alone a two- or three-room apartment. Taking into account that often there is no need for the owner to invest in the property any further, this kind of passive income seems to be one of the most advantageous. However, the biggest problem arises when the property is actually purchased. Due to the extremely high rents, the prices of the properties themselves are extremely high, and not everyone can afford them.
Even renting out property is not without work and you need to have a system in place. Know when to fix something and how to set up relationships with tenants. Keeping accurate accounting records is also important. Experience with repairs is really important, as it is not infrequent that some renovations or repairs bring problems rather than appreciation. It may happen that the owner of the property repairs some parts very frequently and badly. This wastes money and adds to his worries.
💡 Tip: An expert on investment renting advises people not to renovate their apartments and houses too much, as they will not get their money back. It pays most to rent out an older property in poorer condition and with old furnishings. This also eliminates the potential destruction of brand new floors, windows and other furnishings.
Renting other property
You don’t need to rent out just real-estate . You can rent out anything you buy that has value and that people may only need for a certain activity for a certain period of time, and there is no need to invest millions. You can rent out your car in this way, for example, and film and photographic equipment, for example, is very expensive but also in demand and often used on a one-off basis.
It can be expensive lenses, grip equipment (crane, steadicam), drones, lights, or even the camera itself. But for this kind of passive reception, you need to have the right circle of people around you who will use these services as regularly as possible and, in the best case, recommend you to others. There is also a high risk of theft, so you always need to be insured in some way if you rent the item. A written contract or a financial deposit is ideal.
Stocks and how to make money on stocks?
Stocks can certainly be considered a profitable form of passive income. Securities that confirm that you are a shareholder, i.e. that you have certain powers in the case of a given company, which may include a share of the company’s profits (the so-called dividend). It is the dividend that is often likened to a source of passive income, as the dividend payment (for some companies) comes relatively high and regular. The advantage is that even in this case there is no need to invest millions. Much smaller amounts, usually in the tens of thousands, are sufficient. Once held for the long term, they can provide good quality passive income. The risk, however, is that there is a possibility of them falling through and you may lose money.
How do you eliminate the risk of losing your money through investing in stocks? The answer is simple. Diversify your investments. If you have a higher volume of money invested, then diversify within investment platforms as well. It is not good to have all your investment money in one pile. In the second part, also diversify across stock titles and markets.
When you split a bundle of money into two piles – one part invested in Visa and the other in Mastercard – you’re putting yourself at considerable risk. You are investing in one segment. If the segment goes under, so does all your invested money. If you want to invest even more on the safe side, you can opt for an ETF where you buy small portions of a large number of stocks, greatly reducing the risk of a potential spike or loss. Don’t be afraid of Czech stock titles like ČEZ either. Investing in stocks can bring you interesting appreciation, but you also need to be properly interested in the subject to earn more than ETFs and indexes.
Investing in stocks today is really easy. You can use the great and intuitive Revolut app. Where you can also make three (now only one) stock trades per month for free without any fees. The trading costs you nothing and the dividend is credited to the app automatically. If you want to delve into trading a little more, you can use one of the brokers eToro, Plus500 or the popular investment platform XTB, where you don’t pay fees for holding ETFs or shares.
🎓 Interesting fact: Shares are a great investment in the long run. In the long run, they bring their owners 7-8% appreciation per year! Technology companies have done very well in 2020, sometimes earning as much as 100%. Tesla was a prime example, with an annual appreciation of more than 740%. Stocks are also a good weapon against high inflation.
A good idea is the best passive income
Having a good idea and bringing it to life is the best guaranteed passive income. Here, you have to reckon with an extremely difficult gateway that only a select few percent will pass. Look around you and research what the people around you are lacking and what they would be willing to spend their money on. Today’s times are very dynamic and open to new ideas. Trends are changing every day and catching trends is a great opportunity. The following picture beautifully illustrates the dynamics of today’s world.
It is not enough to have a good idea in your head, you need to process everything thoroughly and well. You also have to go hard for the idea. In the first phase, passive income definitely does not await you.
You can use your property for promotional purposes of your favourite companies. Most often we are talking about a house, a car, a plot of land. You can approach an advertising agency and ask if any of the companies are interested in using your area to place their advertisements. If the advertisement does not work, then try to commercially use and rent out any of your property.
Another place to ensure effective earnings is the internet.
How to make passive income on the Internet?
The internet seems to be a convenient helper for passive income, plus it is working from the comfort of home, but not all that gliters is gold. You can make money online using Instagram, YouTube, Blog, or you can offer your own work for sale, an e-book is ideal, however all of the above requires some work.
Especially in the beginning, on the one hand you have to stick to the rules, but on the other hand you have to be original and give added value that users won’t find elsewhere on the internet.
If you want to start an internet business with the vision of passive income, it is important that you enjoy it! Run a business and generate passive income in a field you enjoy, have knowledge in or a competitive advantage over others in the same topic.
Making money on the social network Instagram can be very convenient and profitable, although it is not passive income in the true sense of the word, but it is very close to it. The hardest task, however, is the initial step. In this case, you need to become a so-called influencer. That means having a lot of followers – people who follow you and make your account popular. And once you are in the wider consciousness among the Instagram community, it is possible to earn a very decent income by collaborating with various companies and presenting their brands and products, thus you are paid by the company for advertising.
However, there is a lot of competition to be reckoned with. To facilitate earning income from Instagram, use interesting, original and engaging content for the widest mass of people (or conversely, great targeting), proper use of hashtags, constant reminders on Instagram stories and most importantly, great activity of your account that will keep people interested, so Instagram does not only require initial efforts, but it needs your care all the time, however, you need to realize how small efforts it often is.
A lot of influencer Instagram accounts, consist of nothing but photos of the “normal” life of the influencer in question (food, sports, leisure activities, selfies, etc.) and it really doesn’t take much work. A successful Instagram account can also be profitably sold much like a website. For selling an IG account, the parameters of followers, their activity and the agreed paid collaborations per month are important.
Instagram is a quality and effective marketing tool rather than a source of passive income. As with other similar industries, it is extremely difficult to get started and then relatively easy.
In the case of YouTube, passive income is a bit more complicated, and even less passive, than Instagram, but the earnings here can be nice. YouTube is video-based, and anyone can create their own channel with their own content for free. If the channel has enough subscribers, it can then be monetized and you can earn amounts that will be paid by YouTube itself. This amount is based on the number of shown ads on the given account, i.e. the number of views of your videos.
Similarly, you can also make money, like on Instagram, by promoting a certain company through sponsored videos, which can make very nice money, but again, you need to break through to make it worth anyone’s while to pay you for promotion. There is a lot of competition on YouTube and it is not easy to get famous here. Plus, unlike Instagram, making videos and coming up with the content and then processing it takes a lot more time and work, and you also need to be careful about copyright.
However, given that the YouTube community is mainly made up of kids and teens, one can bet on simple and entertaining content and follow the trends there, i.e. no need for any mind blowing talent or originality, just being in the right place at the right time.
You can make money on the Blog by displaying ads, but you need the ads to have a lot of views, so the Blog should have a lot of traffic. So it needs to be maintained and updated. This can be done by you, but others can also do it for you, but few people will do this work for free, although even that can be lucky if it is, for example, his hobby. However, this cannot be relied upon.
Self-activity is anything you create that you can redistribute (not just) via the internet. If you’re lucky, this is a very effective way to earn passive income. But to get started, you need a lot of talent in addition to often a large investment. This way you can sell a book, an e-book, a piece of music or a film, for example. Creating a quality work of art is not for everyone and even after a lot of investment, work and advertising, which also needs to be invested in, no one can guarantee you success. However, if success does come, this kind of passive income is very effective.
Product? Yes. A digital product is definitely closer to passive income than a traditional physical product, as it can be replicated very easily. You just copy it. What is a digital product? It is a course, an ebook, an app or even a simple software that can fill even a tiny hole in the market.
At the start, you have to create this product and then also spend time marketing it. Both of these are very time consuming, however, you can then have automated sales and just collect for the products you sell. Some digital products like ebooks don’t need to be marketed further. For example, software or apps need to be further enhanced and updated. On the other hand, the potential of a software or an app is many times higher than an ebook or a video course.
Multi level marketing
We know multi level marketing mainly in negative connotations. But the idea behind it is quite simple. Multi level marketing often focuses on a product that is twice as expensive as it would cost you in a store or online shop. Always at the beginning, the pawn starts selling the products in question and can work its way up quite quickly. Because the product is overpriced, everyone in the pyramid above gets a piece of the pie from the sale of each product.
By getting higher up in the pyramid or hierarchy of the company, you get some passive income from selling to people below you. While I am not too fond of the world of multi level marketing, it cannot be denied that this segment can generate passive income after some initial efforts.
If we stretch the meaning a bit, we can also think of bonds as passive income. Our money invested in bonds will “earn” us around 1-3% per year. There are corporate but also government bonds on offer, which are issued mainly during financial recessions.
However, bonds, along with savings accounts, don’t even outpace inflation now, so they effectively earn you nothing, and you’re really just putting the brakes on inflation devaluing your savings. Bonds have a place in all larger investors’ portfolios as a kind of insurance against stock market fluctuations. For the small investor, however, they are only a kind of weak brake on inflation.
A specialty of almost all banks is to lower and raise interest rates on savings accounts. What is the purpose of this? First of all, marketing! In the acquisition part, banks attract a great interest rate, which is often even more discounted. Then, after less than half a year, they dramatically reduce the interest rate. People often no longer leave the bank and keep their accounts.
With returns of 0.3-1%, savings accounts are little better than ordinary accounts. However, you often don’t lose liquidity in savings accounts and can use them in a similar way to a current account. I have included savings accounts in this category purely to show that they have little to do with passive income these days. The idea that your money will multiply in the safety of a bank is misguided. Most of the time, inflation is about twice the rate of interest on savings accounts. So savings accounts are only good for holding money for a certain period of time when you are looking for a suitable investment.
Bitcoin and cryptocurrencies | Passive income?
Again. Bitcoin and cryptocurrencies are investments that meet the definition of passive income much less than stocks, since you never have any dividend from Bitcoin that can be considered passive income.
But why am I even bothering to write about bitcoin? In 2020, the cryptocurrency experienced unprecedented growth reminiscent of the 2017 jump. The price of bitcoin was flying upwards of 10% every month. It made many people who invested early rich. But this is not a passive income.
The lesson from bitcoin for other cryptocurrencies is: invest early and don’t put too much of your portfolio in these alternative investments. On the other hand, if you believe in these projects, you can certainly support them not only with your purchase.
Best passive income
We’ve just talked about selected types of passive income, so which is the best one? Unfortunately, there is no such thing as the objectively most efficient and best passive income. Which passive income is best to invest time and money in depends on many factors, but these are purely individual. They are financial disposition, asset disposition, time disposition and talent, so you need to consider all these options and ask yourself what you have at your disposal and use it to your advantage to start earning passively.
Passive reception experience
Speaking from my own experience here, I would choose the path of writing an e-book myself. Since writing is my hobby and I am able to spend hours a day on it and at the same time I have knowledge in fields that could appeal to a wider audience and about which not much literature has been written, certainly not in the Czech Republic, this option of passive income is the most ideal for me personally. In addition, writing an e-book does not require a financial investment, it just takes a lot of time, but in case of failure, at least one does not lose money.
Furthermore, there is the advantage of the possibility of translation into other languages, which makes it possible to target a much larger audience than just the domestic one, and in case of proper advertising, promotion and public interest, one could talk about the prospect of a very pleasant passive income. Successful people who have created streams of passive income are now, on the other hand, already thinking about where to invest or even donate the money.