Passive income is exactly what it sounds like: a way to earn money without putting too much effort into it.
A quick search on TikTok for “passive income” shows thousands of videos, while #passiveincome on Instagram has over 4 million posts. Some people flex your income stream and others teach you (or sell you a course on) how to create your own passive income streams.
It’s a hot topic for good reason, yet it may seem out of reach for those of us who haven’t grown up with financial literacy. This is a breakdown of the basics you need to know to start building wealth through passive income.
What is passive income?
The idea of passive income is to create one or more sources of income that you don’t have to actively work for. You don’t have to trade your time for money to earn that money.
A popular way to earn passive income is to rent out houses, especially with short-term rental sites. Putting aside the gentrification that often comes with this specific money maker, the idea that running a short-term rent is 100% passive – meaning it never needs your time and attention – is rarely true, especially if it only has one or two properties.
The Airbnb account must be managed and marketed, the property must be cleaned between each guest, the property taxes must be collected and paid, the revenue must be organized, and the garden must be mowed. Even if you outsource this work, you will likely need to do some or most of these things yourself at first. (Once you start cashing in, you can hire help.)
I’m not saying you can’t make money on short term rentals. I’m saying money won’t magically appear in your bank account without any work.
Despite what all social media millionaires say, true passive income is incredibly rare. Most things require a human touch.
I PREFER TO THINK OF “PASSIVE INCOME” AS “MUCH LESS INCOME FROM WORK”. I KNOW IT IS NOT DANGEROUS, BUT IT IS THE TRUTH. AND IT IS VERY POSSIBLE TO USE “MUCH LESS WORK INCOME” TO CREATE WEALTH.
How to get started
As a financial educator, what I try to help people do with their money and their lives is to find the best financial option for them. It’s not about duplicating what someone else has done, because you don’t necessarily have their tools, skills, time or goals! Rather, what works for your life?
So, to find out which passive income idea is best for you, answer these three questions:
How long do I have to get it off the ground?
How much time do you have to dedicate to the initial investment? Using our Airbnb example, this would be finding a place to rent, buy, possibly renovate, furnish, and list it on short-term rental sites.
What are my current skills and how can I develop them?
Take what you already know and use it to earn more! There is no need to reinvent the wheel here. Make a list of the things you are good at or the skills you possess. What we are looking for is something you can offer to others and something that someone will pay for repeatedly.
How much money do I want to bring? Is it something more? Are you looking to replace your full-time income? And if so, what’s your timeline for doing it?
Answering these questions will help you determine which areas are worth investing time and effort in. Creating a full-time passive income stream can take longer than simply generating an extra $100 per month.
Earn money with less work
After answering these questions, you should have an idea of what you can pursue. For example, if you decide to have 5 extra hours a week, a skill set in cooking, makeup, design, etc. and you want to earn $500 a month, now you have a clear direction to follow.
Now how do we make it work as little as possible?
You could record yourself cooking a certain recipe and sell videos on how to create it and then maybe create a series with a certain theme (e.g. recipes to make in 30 minutes or less, traditional African/Nigerian recipes, vegan twists on Nigerian dishes, etc.).
You can make videos for YouTube and monetize yourself so that the videos continue to make you money after you’ve shot them once.
You could write a book and sell it for years to come through desktop publishing. You can also create designs on Canva and sell them online or create a makeup channel to share demo videos and even monetize on Youtube or Patreon.
Remember: we are working ahead so that you can make money on an ongoing basis.
Easy passive income ideas
Even simpler, you can use things like investments to generate passive income. You can start investing with small amounts of money and over time, thanks to compound interest, your money will start earning.
Compound interest is when your money earns interest on its own. Invest $100 and earn $10 in the stock market. That $10 is your interest and, over time, it grows
You can earn even more by buying things like dividend stocks. A dividend is a payment that a company sends to its investors, basically as a “thank you” for investing in it.
Between compound interest and dividend stocks, investing can be a very passive way to earn extra money.
Ultimately, passive income can go a long way when it comes to creating wealth and I encourage people to try and find a way to add it to their income. It is always a good idea to earn money from more than one source and the less work you have to do to make money, the better.