So You Want Some Passive Income
Today I’m going to answer a reader question about passive income. This arose out of an actual conversation, so I can’t post a verbatim quote here. But it’s simple enough to paraphrase.
Do you mind telling me about some of the ways that you earn passive income?
Not at all.
It’s not something I talk about a whole ton on this blog, but income models are something I feel fairly strongly about. I actually think that one of the weirder things about the modern, knowledge economy is that we assign monetary value to what is, essentially, “hours toiled,” which puts knowledge work on the same footing as “guy dressed like a giant chicken, holding a spinning arrow sign next to the road.” You show up somewhere and get money for attendance, regardless of outcome.
Apart from the problem that hours worked and value delivered are so unrelated as to often be orthogonal, there is another, subtler problem with this paradigm. Hourly labor creates a tight coupling between time spent and earning power; you’re in a constant state of decision between whether you’re providing for yourself or whether you’re doing anything else. Doing both at the same time is generally called “misappropriation of company time.”
Hourly comp is ubiquitous to the point of seeming inevitable. But it’s really and surprisingly not. In this post, I’m going to explore a few pretty achievable ways of earning income that is decoupled from time. In this sense, it is passive. Last Saturday, I was sitting at a beachside bar, reading, when I got a notification on my phone informing me that I’d just earned $300 that day. The only labor I performed that day was a bike ride up and down the beach. So, it is possible. And, it’s possible for you — not just me.
That said, there’s no quick and easy path to the sweet life — far from it. I’ve been building non-labor revenue streams for years now, and I still earn a sizable chunk of my income the old fashioned, hourly way. And building non-labor revenue took me years of hard work, burning the midnight oil. So, it’s doable, but, like anything else in life, you’ve got to work at it. Passive income is passive now — not passive when you were laying the ground work. But, enough doom and gloom. Let’s look at some sources of it.
Residual Income Strategies
First up is residual income which is actually not passive income, technically. But, if you’re looking for non-labor income, it does fit the bill. Residual income is a way of reaping the fruits of your labor with a much longer tail. If you earn $120K per year and you told your employer that, rather than getting it all this year, you’d prefer payments of $1,000 per month, paid out over the next 10 years, you’d be setting up residual income for yourself.
In this example, you’d be getting a pretty bad deal. You’d be better off taking all of it and putting it in the bank, trickling it out to yourself while you earn interest on it. But that isn’t always the case. In a lot of situations, you can offer a slight discount on your labor now for better consideration later. In fact, loans with interest operate on this same kind of principle. Imagine that your employer is cash strapped and you say, “tell you what — instead of paying me $120K this year, just pay me $2,000 per month for the next 10 years.” Assuming that you can afford to wait for the cash, you’ve negotiated a better deal, and it’ll be pretty sweet when you’re working at your next job and $2,000 per month is streaming into your bank account for labor you aren’t currently performing.
Liquidity isn’t the only play here, either. You can also create incentive-oriented structures or compensation based on hitting certain milestones. It was this, actually, that resulted in my payday last weekend. Offer cheaper labor up front and payouts for results, ala some football player contracts. Build a marketing website for a client for cheap, but stipulate that you get performance bonuses if, in the next 2 years, it winds up getting 100,000 or 1,000,000 views.
Doing things like this is like stacking a field in front of you with landmines. But landmines that explode with money instead of the bad kind.
Now for some truly passive income stuff. Passive income is income you collect with little to no effort expended (at least not now). Royalties are among the most obvious. I earn royalties on books and Pluralsight courses. In both cases, these are things I did a while ago, but still get regular, steady checks for.
When you’re just starting in content creation, your royalty checks are more likely to be adorable than sustaining. If you stick with it and build a following (or just get really lucky), these may grow. They also may not. For me, the key has been never to approach these as a primary source of income. Over time, however, they’ve continued to grow, granting me a nice revenue stream with little ongoing effort.
This is another form of passive income for me, although one I employ more spottily than other bloggers. Here’s how it works. I link to a page on, say, Amazon. Here’s a good example page, advertising one of my favorite books and one that talks about passive income. If you follow the link, you’ll find yourself on a page to buy that book, but if you look closely at the URL query string, you’ll see information that uniquely identifies my Amazon affiliate account. If you buy that book after following my link, Amazon pays me a small commission. Amazon’s policy is pretty generous, too — if you buy anything while you’re visiting in that session, I get a commission.
This isn’t limited to Amazon. A lot of companies selling things through sites offer affiliate programs. This is a good way for bloggers and content creators that talk about products to earn a bit of money (as an aside, be careful with this or you can wind up with one of those really slimy blogs that’s always half-infomercial — that seems to happen when bloggers try to make blogging their primary income source). And, yes, you need a blog or some means of content generation to realize this stream, so go start you blog!
Another easy one, if you have a blog, is to allow ads on your site. I won’t say a whole lot about this, since it’s mostly obvious the way this works. But there are a couple of things worth bearing in mind. First, it’s not actually all that common for a particular advertiser to say “I’ll give you $x per month to put this image and link on your site.” Instead, it’s a lot more common to get paid by an ad serving engine that rotates the ad content. That’s how the one on my site works, which brings me to the second point. Do your best to make this relevant to your audience. I work with a company that has an audience, specifically, of developers. Not only is this a better way to make money for yourself, but it’s more likely to show people looking ads they might actually be interested in (gasp, perish the thought — but it can happen).
I’ll mention one last point, and that is building a low maintenance product. I make videos for Pluralsight, and I have my youtube series. But I might package up some videos as well and sell them as a product. I have a couple of other ideas that I’m kicking around and one in the works. Informational products (E-Books, videos, courses, etc) are particularly low-maintenance, but you could think about other things like designing and selling, I dunno, T-shirts. Maybe I’ll slap the Expert Beginner logo on some coffee cups and you can buy one with a quote like, “I think github is broken because other people can still check out the code when I have it checked out.”
You can build your own products like these, or others. Maybe you want to sell a software product — WordPress themes, phone apps, whatever. Whatever these are, once you build them and unleash them, you have money coming in with comparably less effort. (Provided you avoid the trap of building an effort-intensive product or offering a service)
It’s a Long Play
If you do any of these things, recognize that all of them are long plays. Build a blog and affiliate/advertise. You’ll need readers and lots of posts. Build an app or a product. You’ll need customers. Write a book or make a video. You’ll need an audience. Structure a residual-heavy deal? You’ll need a willing partner/client. You get the idea.
It can seem daunting, but don’t worry about that. Just dip your toe in the water. Try something and earn those first few bucks. Keep building at it and hacking at it the way you might with any hobby. Sooner or later, that trickle may become a stream or even a river.
Want to submit a reader question? Have at it here, with the following form.