Welcome to part 2 of my brief Passive Income guide! This part is a little more technical, as we follow some fundamentals of building wealth.
The concept & Where to start
There are 3 underlying rules relating to passive income which are useful to keep these in mind when setting up your streams.
1. Money is made when something of value is exchanged
This one seems pretty obvious, but is overlooked all the time. Whenever someone makes money, it is because something of value (something that a person is ready to pay money for) has been created then exchanged. For a baker for example, their time and value (skill) are put into making a baguette. When that loaf is sold, they make money. You aren’t going to make money with something if there has been no value added to it (and this extra value must come from somewhere!) :
Income = time x value (skill and effort)
As the time in a day is always limited, a person will tend to want to improve their own value (maybe by getting a degree) in order to increase their income. But as there is always a maximum price someone will be inclined to pay for this added value, income will always reach a cap.
2. Your value must be consumable multiple times, and simultaneously.
Following on from the above, something that has been created and can only be exchanged once (like a baguette) isn’t very valuable to you for the long term.
One of the most important aspects of passive income is creating value that can be sold, rented, or traded repeatedly, to multiple people, at the same time (removing the “time” metric altogether from the above equation).
3. Value must be created (or added) manually, but can be delivered automatically
Your value must be created somewhere, by something, but it doesn’t need to be delivered to the customer by you. A great example of this is that gorgeous t-shirt design you made and plan to sell. Instead of yourself printing and selling the t shirts, it would be much more effective (in terms of time and effort) to upload your design to a service such as Teesprig, and have them handle the advertising, printing and shipping whilst you sit back and do what you love best (designing)!
Your passive income can thus be generated in 3 ways
Selling the value that you’ve created – this can usually only be done once, (except for digital goods!)
Renting the value that you’ve created – this can usually only be done to one person at a time, but can be done continually.
Selling or renting secondary value – if you’ve created something that creates secondary value, such as a website (which creates the secondary value of “the attention of your readers”), you can sell or rent that to third parties (through ads, etc).
Think about a source of value you personally can create then put it into something you can sell or rent passively. Today, digital platforms are by far the most efficient ways of gaining passive income.
Cost (financial or time) to Income ratio
Money makes more money,
But time makes money too.
Passive income will always have a cost. Whether this be a cost to you in time (as you create something yourself with skill and effort), or a financial cost to you (as you invest your money into something), it is essential to think of this when setting up your passive income method. Some people have more of one than the other, and that’s why the passive income sources that best suit you will be very specific to you alone – it is always better to choose something that works for you depending on your skill set.
Passive income methods have a very high cost (financial or time) to put in place, as well as often relying on exploiting knowledge or a skill. This being said, by taking the time to set them up, a person has more free time to continue with their own ventures elsewhere. It is important to think about the cost to income ratio when pursuing a new passive income stream – those that ask for a smaller investment on your part, but give back relatively high earnings are what you’re after!
Try choosing a mix of passive income methods, some that require time and some that require an initial monetary investment, to diversify your portfolio.
Compounded Wealth Building
Some people might imagine passive income as being a way to sit around on the beach all day, but the real point is to free up your time to pursue even more fulfilling endeavors! The truth is, if you’re the kind of person to put the time aside to invest in different passive income schemes, you won’ t want to spend the rest of your life doing nothing!
Passive income dramatically increases the number of man hours in your day (your skills can work for you even when you’re not using them and aren’t confined to 9-5 work days). Furthermore, by continuing to live within your starting budget, you can reinvest a majority of the income you make back into other passive income methods, compounding the amount you gain year on year.
The point of passive income is to free your time for more fulfilling endeavors — whatever those may be.
If you stuck with me till now then I’m thankful! In the next part I will introduce examples of different passive income methods, as well as some useful links that you can follow to find out more!
As always, tips are very welcome and appreciated!