Passive income – what is it, and how does it work?

Friday, 6. November 2020 | 0 Comments

Generating passive income and securing financial freedom – for many, it just sounds too good to be true. For most people, money and time are inextricably linked. When earning money on the side is mentioned, many will think of the traditional part-time job, for which they often simply lack time and energy. But in reality, almost everyone is able to build up a passive income. Here we’ll shed some light on what exactly the term means, what types and ideas for passive income there are, and what anyone who’s interested should look out for.

 

Table of contents

  1. Passive income – what does that mean?
  2. Passive income pros and cons
  3. What types of passive income are there?
  4. Ideas for passive income
  5. Building up a passive income – where do I start?
  6. Tips for the creation of passive income

Passive income – what is it, and how does it work? ??‍?

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The term passive income stands as opposed to an active income earned by workers, employees, or the self-employed. Active income exchanges time for money. Passive income works without this exchange; the time invested in work stands in no proportion to the earnings. Permanent income can be earned without any repeated efforts.

Earning money in your sleep or generating income while being on holidays, exercising, or working your main job all becomes possible through passive income sources.

Im Schlaf Geld verdienen

It is important to note that passive income is not a gift from heaven; it’s not money for nothing. To create a passive income source and start earning money easily, an initial investment is necessary. Meaning, time – and often at least a little money – have to be put into the enterprise in the beginning. How much work time and capital are actually required depends on the specific type and idea. There are also possibilities of earning money fast without any risk or starting capital. Following the initial investment, hardly any more input is necessary, and passive income largely generates by itself, even if you don’t actively do anything.

Passive income is characterized by three criteria:

  1. Worktime and income are disconnected
  2. Offer is scalable – income is higher than investment
  3. Income is generated through a working, automatable system

 

Passive income pros and cons ⚖️

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Advantages of Passive income 

  • Independence: Money means independence, be it from your boss, clients, investors, or the bank. Anyone who’s able to make money on the side without much effort can reduce working hours in their main job, or even give it up altogether. And that means independence from regulated schedules, annoying colleagues, or constant commuting.
  • Leisure time: When passive income significantly improves earnings or even becomes the main income, there’s finally more time that’s not spent actively working. This leisure time can be used for anything that makes you personally happy. That may be time spent on other projects like another passive income source, self-employment or a round-the-world trip, more time spent with the family, or immersing yourself in a hobby.
  • Financial security: Passive income is a welcome addition to your earnings and can in the long run even become the main income substitution. That would mean you’d have money in your account, no matter whether you’re sick, on holidays, or otherwise unable to work, without your physical presence or active work effort. This money is an additional contribution to financial security, be it by reinvesting in the same or a different business, or in old-age provision. That is how financial freedom is achieved.

Disadvantages of Passive income

  • Little planning security: Passive income is disconnected from the invested work time and work effort. Thus it is hard to predict how much money will actually be generated every month. For that reason it makes sense, especially in the beginning, to earn a passive income on the side, and keep working a full-time position.
  • The initial investment required: A passive income source cannot be created without a certain advance concession in terms of time and money. The proverb “You can’t make something out of nothing” hits the mark. As well as that, it can’t be certain from the start if the enterprise will be successful, and how much so. Not every first attempt leads to success.
  • Risk of loss: Some passive income ideas require a high financial input, for instance, real-estate, or, to a lesser degree, stock shares. Because the development of an investment is unforeseeable, the invested money could, in the worst-case scenario, be lost. Smaller sums are easy enough to get over, but the loss of large capital stakes can truly hurt.
  • Dubious business partners: Some people use the term passive income to fleece others. It is possible to earn money easily or earn it fast without risks, but it’s never going to work without any own input at all. If somebody promises just that, chances are that person is dishonest. When bigger amounts of money are requested to be part of a fantastic-sounding business idea that will provide you with a worry-free life, take it with a pinch of salt – or skepticism.

 

Analysis of Passive income 

Anyone who entertains a serious interest in passive income should know these advantages and disadvantages. Subsequently, it is advisable to consider how the pros and cons would affect your own current life situation. For most people holding a full-time job, a passive income is a nice little addition; earning money on the side, but not completely depending on it to make a living, means taking less of a risk. Once the first passive income source is running nicely and mostly automatically, you can start working on further passive income projects. And all of a sudden, it’s not just a few hundred euros a month extra that arrive in your account, but a few thousand.

 

What types of passive income are there??

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There are several ways to earn a passive income:

  • Stock shares/ETFs

Shares/ETFs are probably the best-known types of passive income. Once bought, they regularly bring in profits. To buy shares/ETFs, an initial investment is obviously required. Apart from money, time is needed to spend on research. Ideally, you set up an automatic savings plan, that claims a certain specified amount for investment from your account every month.

  • Real-estate

Real estate is one of the most popular types of financial investment, but it can also generate a passive income when it is left for rental. But when purchasing a property, a significant initial investment of both time and money is needed. Full automation can be achieved when the management of the real estate is outsourced to a maintenance company

  • Products by your own company

Own products (digital or physical) work in a similar way to shares and real-estate, but require more time in the initial, as they have to be conceived or produced. However, the financial input is usually lower. Somebody with a great idea who can invest a small amount of money like 25 Euro, 50 Euro or 100 Euro, can earn quickly earn money without any risk. To lose, in the worst-case scenario, those 25, 50, or 100 Euro, would not be the end of the world. More important factors for success with an own product are creativity and stamina. Neither of those helps you with stock shares and real-estate property. For that reason, own products are a good way for new players to generate a passive income.

  • Affiliate marketing for other companies’ products

In affiliate marketing, you receive a referral commission when somebody buys using the advertised links. The buyer does not carry any extra costs. These days, affiliate marketing is used in many sectors; digital products like the invoice management software from GetMyInvoices, or physical goods like diapers from Amazon. 

Things to remember 

All that’s needed for affiliate marketing is a platform on which to spread the links. That could be a free platform, like Instagram or YouTube, or your own website. An own blog or an advice page is ideally set up to evaluate and advertise products. An own online shop can also be used to sell third-party products through affiliate links. The initial investment is low since the passive income depends on the size of your readership, or the number of your subscribers. The more people click the link, the more money you make. The details of the partnership program are important. Apart from the percentage, you’ll receive a commission for every transaction, the contract term has to be looked at, too. To stay with the example we already mentioned: A GetMyInvoices partner receives a lifetime commission, which is extremely attractive. Other affiliate partner programs do significantly worse on that count.

 

Ideas for passive income?

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Anyone wanting to create a source of passive income has about a trillion different possibilities. The most frequently used ones are:

  • Stock shares/ETFs
  • Rental property
  • Affiliate marketing
  • e-books or book-on-demand
  • Online coursed (video or audio)
  • Designs for t-shirts, mugs, and other products
  • Stock photography
  • Pre-sets, plug-ins, themes, Alexa skills, and apps
  • Dropshipping and Amazon FBA
  • Website (blog, advice page, etc)
  • A micro-influencer on YouTube or Instagram

Find your own idea for a passive income is not always easy. It is helpful to become conscious of the difficulties of everyday life. Meaning: if something annoys you personally, the probability that other people feel the same is quite high. And some of those people will pay money if that means won’t have to deal with those difficulties anymore. They will gladly pay for a solution to their problem. If your own idea represents this solution and thus creates a value-add, generating an income becomes relatively easy. That may sound pretentious or abstract – but neither the problem nor the solution has to be world-changing. The solution to small everyday problems can turn out to be lucrative, too.

This means: it is legit to have a look at how other people created a passive income and motivated by their ideas. Yet, an innovative idea will not occur in that way.  But if you open your eyes to the world around you and consciously start searching for difficulties every day, that could be solved with a product, might just stumble over a genius idea. That has the advantage that there’ll be no or very little competition. If you copy other people, you can certainly earn some money, but you’ll have to stand up to already existing competitors.

 

Ideen für passives Einkommen

 

The following questions can lead you on the right track to a good idea:

  • Does anything annoy me regularly?
  • What doesn’t really work properly?
  • Does it exist?
  • In the everyday running of certain chores and activities, what would you like to change?
  • By far which day-to-day difficulties have been solved?

Maybe the right idea won’t present itself straight away. But the more you think about things, the more your eye for market gaps will sharpen and improve. The everyday problems your family members or friends complain about can serve as a source for inspiration, too.

 

Building up a passive income – where do I start? ❓❓❓

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Wherever the risk is manageable. Especially with affiliate marketing and online products, it’s possible to earn money fast with low initial investment and no risk. All it takes to gain some extra income in that way is a bit of time and creativity. Apart from that, there are three more factors that will prevent your first project from backfiring.

  • Passion

Sure, money is great. But will prognoses of bare figures really motivate you? Passion is an additional driver. When you choose a sector you will passionate about, the probability of giving up at the first hurdle is much lower. That doesn’t mean you have to invest in your hobby. You could go for a sector you have to become acquainted with, but that will stay permanently fascinating to you.

  • Expertise

While passion is important, on its own it is not enough to lead to success. To get there, certain expertise in the chosen sector is important, too. That means you should have a good knowledge of the area you’re working in and be able to fulfill the relevant tasks well. Don’t worry! You don’t have to be perfectly proficient in the said sector. A decent knowledge is sufficient. That can even be of advantage: because you’ll know what potential customers are looking for, and will be able to create a real added value. Often an expert lacks an understanding of Average Joe’s problems. 

  • Market

Before you throw yourself into the creation of your passive income with passion and expertise, one more aspect needs to be checked: the market. The following questions will lead you a step further towards success:

    • Are there people available to pay money for this product?
    • How much competition is out there already?
    • How many other providers offer the exact same product?
    • What sets my product apart from others? What makes my offer special?

Easy Tips 

If a simple internet search finds several providers who have already implemented your idea, consider if it really was a great inspiration. Or think about how you can develop your idea and set it apart from the mass. If there’s an oversupply in the market, it will be so much harder to stand out from the competition and earn money.

It’s a little bit different when it comes to affiliate marketing. Every new blog entry Linked to products. Instagram posts or YouTube videos even ones that connect to the affiliate product.

 

Tips for the creation of passive income ??‍♀️

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As you have seen, there are many different ideas and ways to set up a passive income. Here are a few additional tips to help with the implementation of a first passive income source:

  • Start small: Passive income doesn’t usually lead to a life-changing fortune straight away, but is, at least temporarily, an extra income.
  • Focus: Some people boast about having lots of income sources and maximizing their profits. Especially for beginners, this strategy is rarely successful. It is more promising to concentrate on one or just a few income sources and optimize those. When you have mastered that, you can diversify.
  • Long-term orientation: Earning money fast and easily is nice. It’s even nicer if that income is permanent. That’s why it makes sense to consider from the start whether there will be a lasting demand for your product and whether passive income can be drawn from it over months or even years.
  • Intermittent activity: Passive – yes; but without any intervention at all, your project will not work in the long run. Regular monitoring key to check, how the income is developing. If necessary, you can adjust the set-up at the right time.

 

 lukratives passives Einkommen aufbauen

Conclusion

Passive income sources promise to realize the dream of not having to work anymore, yet having no money worries. Building up a lucrative passive income cannot happen overnight, of course. But once achieved, unlike workers, employees, or self-employed people benefits.

Passive income helps you to enjoy financial freedom to focus on the things that are important to you.

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