A personal blog about life, business and money – not to be regarded as Financial Advice

What is Passive Income, anyway?

There are SO many ways to create passive income. It’s a brilliant way to supplement your income now and can play a huge part in planning for your retirement.

But what exactly IS passive income? How can you do it? And is it even right for you?

Personally, I like Wikipedia’s definition: “Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it”.

That’s not to say there’s no effort upfront – there is!

But the idea is that once you’ve set up and/or established your passive income streams, you continue to receive that income without needing to keep putting so much work, time or resources in

And it makes perfect sense.

Firstly, because your income becomes far more stable.

If your business is seasonal, up and down from month to month – or if your salary (or partner / spouse’s salary) is project-based or variable – you feel a deep sense of security from knowing you have other, predictable money coming in.

Passive income also gives you some protection from life’s unknowns.

  • If you fell ill and couldn’t work tomorrow or for the next 3 months – would the money stop coming in?
  • What about if you (or your partner / spouse) lost your job? Would the bills still get paid?
  • What would happen to your income if you took a year off to have a baby?
  • Or to care for a sick child or elderly relative?

The good news is that passive income doesn’t have to be complicated. And having just the basics in place helps you feel SO much calmer and in control of your own financial future!

So here are 4 options YOU could think about, to start creating new passive incomes streams in your life.

1. A hands-off business model – where you continue to draw an income, for little or no actual work.

This goes back to putting the effort in upfront. It takes time and energy to plan and build a business in this way – either with staff who run it for you, or by creating new products and services that you can create once and leverage over and over, with far less ongoing work.

Let’s take a ‘traditional’ service-based business as an example – a graphic designer.

The traditional approach is to sell your graphic design services on a one-to-one basis. You provide a quote; you deliver the work; and your client pays you accordingly for your time. All good.

But financially speaking, the downside here is that if you can’t (or don’t want to) work, you don’t get paid. You’re always trading time for money. And if your marketing doesn’t bring in any new clients this month, cashflow grinds to a halt and there’s nothing there for you to take out.

So what could you add into this traditional service-based business model, to start generating some passive income?

  • Could you develop online courses and programmes, teaching small business to do their own graphic design – putting the time in upfront to create them once, and then selling them over and over again?
  • Could you create a graphic design ebook, toolkit or other digital products, to sell online and through your website?
  • Could you automate more of the way you acquire customers and make sales, with a sales funnel? 
  • And what about other recurring revenue streams – like a membership for graphic designers just starting out? It’s not truly passive, because there’s level of ongoing work required each month, to provide new content and trainings (although you can bring in other experts to deliver these). But you KNOW that recurring revenue is coming in, without having to start from zero every month!

Clearly, each of these ideas takes considerable time and effort to create upfront. And each still requires work to market them and provide customer service.

But once you’ve created that digital asset once, the revenue can continue flowing for months and years to come, with far less hands-on work needed than working with clients one-to-one.

And it’s a great way to build multiple streams of revenue into your business, to stabilise your cashflow!

2.  Royalties.

Royalties are perhaps passive income in the truest sense – from books, audiobooks, apps, music and jingles.

Again, you invest the time upfront to write the book; build the app or write the song. And they may require ongoing time to promote them, update them or resolve technical issues.

But once created, the royalties from these assets can provide passive income for years to come (just ask Elton John!).

3. Rental Property

To be clear – rental property is ONLY truly passive if you get a managing agent, so far less of your time is needed to work on managing the asset yourself.

Of course, this does reduce your profit margin – but frees up your time!

But when you invest in the asset upfront, you then have a predictable rental income every month, as well as a long-term asset in your portfolio for the future.

4. Dividends from investments.

Companies usually pay dividends 6-monthly (sometimes annually), which are tax-free if less than £2,000 p/a.

Research from Capita Asset Services showed that between 2000 – 2016, the value of dividends paid by Britain’s listed companies exceeded the £1 trillion mark. So it’s clear to see WHY investing in dividends is such a popular passive income strategy!

Dividends from investments you hold might include:

  • Shares you’ve been gifted; bought from your place of work; or through a company share-save scheme;
  • Shares you bought because you like the company – usually household names like Apple, Coca Cola, Unilever, Shell Oil and so on;
  • And share offers when public companies privatised – like British Gas and the Post Office.

Depending on how much you have invested (and how much the company pays per share), it’s possible to build a strong passive income stream with very little of your time required on an ongoing basis.

That said, it’s not without risk – the value of investments can fall as well as rise and you could get back less than you invest (and if you’d like professional advice on your investments, just click here now to get in touch!).

So! Like I said earlier, creating passive income to cover your basic monthly outgoings is one of the best ways to feel calm and in control of your finances.

For more like this, click here now to get your FREE copy of ‘4 ways to get off the financial rollercoaster’ – our handy guide, full of quick and easy action tips to stabilise your income and create a sustainable wealth plan.

Or to find out how we can help you with building your nest egg, planning for your financial future and managing your investments – just click here now to get in touch!

Until next time,

Claire

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