Lounging by your beach house and sipping a drink may sound tempting, but it’s certainly not easy to achieve this high a passive income to make the switch. On the other hand, it’s not impossible. Passive income shows that money can buy not only goods and services, but also your own time and well-being.
What is passive income?
The term “passive income” refers to income that you earn (almost) without any other activity, in other words, without lifting a finger. The opposite is dependent activity, which only earns you money if you work. The most common forms of passive income are dividends, income from rental properties, interest on loans
Some people take the term “passive” very strictly and do not consider even renting an apartment to be truly passive income, because even there you have to look for a tenant from time to time, check the condition of the apartment, make repairs, etc. However, the proportion of this time is insignificant (in most cases), and therefore long-term renting is normally considered passive income.
Financial independence is also often discussed in the context of passive income. This is considered to be a state where a person has sufficient assets to live a fulfilled life independently of their active income from work or their own business.
What is the difference between passive and active income?
It is not a good idea to equate passive income with a business or a dependent activity, as a business is something that (usually) only earns you money if you work. If you stopped doing business, would you still earn the same or more? If the answer is no, it is not passive income, but active income.
The crucial criterion is whether the criterion is met that money is actually coming into your account without you doing anything else to make it happen. For a business, the portion that would have been coming into the account without your active participation can be considered passive income. Usually, however, this portion will be very small and only short-term.
Why passive income is interesting
The disadvantage of active income is that you are limited by your time. You can’t work more than 24 hours a day (not that you can ever work that intensely for long periods of tim). Similarly with a fixed salary – if you are getting e.g. 2000$ a month, it will be difficult to earn significantly more without increasing your base.
In contrast, passive income is virtually unlimited. If you are generating passive income while actively earning, you may eventually get into a situation where your passive income exceeds your active one.
Passive income doesn’t require your involvement, doesn’t rob you of time, and earns continuously. Achieving it also doesn’t mean you can’t work… quite the opposite. Many financially independent people continue to work, just not with as much intensity, but with far more gusto and enjoyment.
How to build a passive income?
In principle, the possible ways and forms of building a passive income could be divided into two variants, which are quite different.
1) Investing money
If you have money or are able to set aside a sum of money (regularly), you can invest this money. This can give you returns that can either be further invested or kept. The advantage of reinvesting is the compound interest effect. If you don’t have much money, you have to choose riskier investments to have a chance to multiply your funds.
2) Investing time and effort
If you don’t have enough money and/or want a higher passive income faster to build assets you will need to invest your time and effort. Essentially you will be running a business (you may need an initial investment) and/or working a lot. Online earnings that are sometimes mistaken for passive income, such as ads on your blog, Instagram or cashbacks, can serve this purpose relatively well.
How much can I earn from passive income?
It’s up to you, there is virtually no limit. You can make a few thousand a month, but you can make enough income that you don’t have to work at all.
Before we get into listing the different passive incomes, we’ll show you a calculation of how much money and at what annual appreciation you’ll need to reach your desired level of passive income, as well as how much and how long you’ll need to save each month. Now come the hard numbers. Let’s do some math together…
How much money will you need?
Below, we’ll look at a situation where you’d like to collect the same monthly amount indefinitely – perpetuity (i.e. your capital stays the same).
We will consider examples of investments that give you 8, 5 and 3% per annum.
Do not take these values completely dogmatically, they are mainly for illustrative purposes, but they may be quite close to the real results. The average annual return of an equity fund over the long term tends to be right around 8%, many ETFs perform similarly, and we consider this level of return to be sustainable over the long term with reasonable risk taking.
Tyto hodnoty neberte úplně dogmaticky, jsou zde především pro ilustraci, avšak mohou být poměrně blízko reálným výsledkům. Průměrný roční výnos akciového fondu dlouhodobě bývá právě přibližně okolo 8 %, mnohé ETF dosahuje obdobné výkonnosti a tuto úroveň výnosu považujeme za dlouhodobě udržitelnou s podstoupením přiměřeného rizika.
Můžete využít další alternativy, které dost možná budou poskytovat stabilnější výnos, avšak ten bude zpravidla nižší nebo rizikovější. Například u nemovitostních fondů lze očekávat výnos okolo 5 % ročně. U dluhopisů by pro vás neměl být velký problém najít takové, které vám nabídnou 5-8 % ročně.
The 3% valuation is to illustrate a dividend ETF that pays you dividends. There you can expect (but there are variations) a dividend yield of around 2-4% per annum, plus an appreciation of around 5% per annum on the shares themselves. These dividend stocks generally grow more slowly as they spend a portion of their funds on dividends. It’s a sort of trade-off between passive income and growing your portfolio at the same time.
We’ve prepared a table below for your specific reference. In the 1st column is the value of your monthly passive income, i.e. your possible “target”. In the next columns you can see the required value of capital that would generate this monthly income at different levels of annual appreciation.
How much should you save?
Now you have an idea of what kind of monthly income you would like. Now you need to answer the questions of how long, with what annual appreciation, and how much are you able to put away each month?
Below we have some tables by time horizon (i.e. how long you will save before you start drawing your desired passive income). The first column is the target amount, the following ones are the monthly amount you will need to invest or save at different annual appreciation.
The long-term investment horizon is your friend and your enemy all rolled into one. You will need a great deal of discipline and perseverance, and you will have to give up a lot. During that time, there will be various threats and crises where you will worry about your money. Unfortunately, these are exactly the reasons that discourage most people and they fail to stick to their goal.
Dividend shares
Some companies pay shareholders a share of the company’s profits in the form of dividends. Just register with a broker and buy one. A great example of a dividend stock is Philip Morris.
Content creation
Content is king in today’s internet age. If you can create content that engages, you can make a long-term passive income from it on YouTube, the web or any other platform.
Membership and Patrons
If you can produce quality content but aren’t very technical, you can try platforms like Patreon or OnlyFans. There are many beautiful women who earn money on OnlyFans, and they only post a photo every day where they show themselves naked.
Sugardating
Speaking of this titillating content, women can easily make money by finding a sugar daddy. That is, they get some of their income from a man who requires some attention and comfort.
Mutual funds
Funds offer automatic payouts here and there, but it’s not very common. You should also watch out for fees, which tend to be high on many mutual funds.
ETFs
Exchange Traded Funds give you broad diversification, a simple way to invest and a corresponding return. There are also so-called dividend ETFs that will pay you a dividend on an ongoing basis.
Investment Platforms
These are a modern alternative to funds. Investments and diversification are automatic and as a result there are significantly lower fees. See our separate section if you would like to learn more about investment platforms. Among other things, you will see several detailed reviews of the best platforms written by us.
Bonds
The principle is simple, you just send money to the issuer (buy a bond) and they will pay you a set return. Your principal will then be returned at the end. A lot of bonds offer interest payments on a monthly basis, some on a quarterly basis others annually. In the case of monthly payments, this can be quite an interesting passive income option. Be careful when choosing a bond to ensure that you receive the full principal (the issuer must not, for example, go bankrupt). In concrete numbers – e.g. 100k at 5% interest can generate around 500 per month.
Automated
Operate self-service laundries, vending machines (coffee, baguettes, souvenirs, alcohol), or perhaps an ATM for exchanging crowns for euros. Car wash concepts are also successful and have a very solid return on investment, provided they are located in a good location. Hire an operator to take care of everything.
Rental property
It’s a long run, but real estate has been considered one of the best investments for decades. It can be a long or short term rental of an apartment, but it can also be a garage, etc.
Cryptocurrency mining
Cryptocurrency mining is a complex process that involves using computers to solve complex mathematical problems in order to verify blockchain transactions in exchange for new units of a given cryptocurrency. Mining is not easy and requires a significant investment of time and money. For example, bitcoin mining is a highly specialised industry that is not suitable for an individual investor. This is because you will be competing with large corporations that have the resources to invest in the latest mining technologies, and do so on a large scale. However, if you really want to mine bitcoins, you can always join a bitcoin mining fund and get a share of the rewards that the fund gets for its mining activities.
P2P lending
Lots of small investors lend to other people together. This is how P2P investments work and they can also be an interesting alternative to passive income.
Buying an existing business
If you manage to buy an existing business, you may be able to collect a profit for a while without having to do anything yourself. However, you will definitely need a large sum of money, perhaps a fair amount of your time, and the business is unlikely to run indefinitely without your involvement (or you could hire a professional manager). Alternatively, you can invest in the business as a silent partner. However, this is a somewhat complicated passive income option.
Self-service establishments
These can be various beverage machines, coffee machines, parking ticket machines, self-service laundromats, slot machines, photo booths, etc.
Blog
Many people make money online by advertising on their website. You have 2 ways to do this: The more difficult option: get a direct advertiser and display their ads on your blog. Reaching out to companies and offering them space on the web is not an easy job and a lot of efforts go unanswered.
The easier option: use advertising systems from established companies such as Sklik, AdSense or Ezoic on your blog. Using ad systems eliminates the need to find direct advertisers. You enter a special code on your blog according to the instructions and the ads appear automatically based on the targeting of advertisers or in the context of your website content.Earnings from this kind of passive income can range in the hundreds, thousands or tens of thousands of crowns per month depending on the number of visitors and the focus of your site.
