One of the key elements to becoming financially stable and even financially independent is building wealth. The most popular ways to build wealth include investing and establishing a passive income.
What is Passive Income?
Income from your investments is actually a type of passive income so I’ll start by explaining the two types of income you can generate.
Active Income: Income that you receive from job compensation, tips etc. In other words, this is the income that you receive from working or trading hours for money.
Passive Income: Income that is generated with very little work or active participation. In other words, it’s the type of income you can earn while you’re sleeping. Passive income doesn’t require your active participation 24/7.
Passive income is my favorite type of income because after you’ve establish your source of income, you really don’t have to do much on your end to continue earning money. With passive income, you can earn money while you’re working another job, playing with your kids on vacation or even sleeping.
It’s a less stressful way to earn money as it doesn’t force you to spend countless hours exchanging your time for money while living paycheck to paycheck month after month.
One of the reasons why it takes people so long to improve their finances and work toward financially independence is because they spend too much time focusing on increasing their workload and the amount of hours they work instead of generating various different streams of passive income.
Financial Stability vs. Financial Independence
Financial independence is a lot different from financial stability. Financial stability refers to your ability to have the means to pay all your bills, save and invest and live a comfortable life.
Financial independence often refers to a financial state in which you have absolutely no debt (this includes your mortgage), plenty of liquid savings and assets, an ample amount of retirement savings, proper insurance and an estate plan, steady investment income, and really no need to continue working a traditional job to support your family.
People who have reached financial independence will most likely work because they want to, not because they need to. There’s no lender or bank telling them where their money has to go or what they need to spend money on each month.
I say “people who have reached financial independence” because this is not a fairy-tale. Financial independence is not only accessible to celebrities and people who inherit their family’s fortune. Every day people like you and me can work toward and achieve financial independence and it all starts with creating passive income.
Establishing passive income takes lots of time and effort, but the outcome is often well worth it. Here are four ways to help you establish passive income and become well on your way to financial independence.
1. Real Estate
Investing in real estate is a popular and effective way to establish and earn passive income. The commercialized ‘American Dream’ revolves purchasing an ideal 4-bedroom house for you and your family. Behind closed doors, that often means struggling to come up with a down payment and financing 80% or more of the purchase price of the home and taking out a mortgage all just to spend 30 years paying it off.
When you ditch the commercialized American Dream and purchase a modern or starter home that you can afford you’ll be able to free up more money to invest in other properties and obtain tenants to pay you monthly for rent. From a numbers standpoint, this looks a whole lot better than scraping up money to pay your own mortgage each month.
Owning properties and being a landlord does require a bit of work on your end regarding maintaining the properties and dealing with repairs, but if you find good and loyal tenants, you most likely won’t have to do a ton of work on your end and you can look forward to collecting money each month after putting limited effort in.
2. Affiliate Marketing
Affiliate marketing often involves a website owner or blogger promoting a third party product through a review, link or advertisement in order to earn a commission from the sale.
After the initial work regarding creating the review, content or embedding the ad onto your site is complete, you simply adopt a ‘set it and forget it’ approach and earn an income based on how many people click the link and make a purchase.
Affiliate marketing works best if you have a large following and offer helpful and legitimate solutions to your audience on a regular basis.
The key to becoming successful with affiliate marketing is maintaining loyalty among your audience and only promoting products that you have experience with and would honestly recommend. People who start promoting anything and everything don’t see much long term success because people don’t appreciate someone trying to make a quick buck by selling sketchy products and services. Reader loyalty should be most important when it comes to affiliate marketing.
If you respect your audience’s needs and interests and stay true to yourself, it’s very possible to earn a decent amount of passive income from affiliate marketing. Pat Flynn, owner of smartpassiveincome.com earned $74,705.96 in affiliate marketing income in the month of April alone. About $37,500 of that is from one single source or affiliate marketing.
3. Earning Royalties
You can earn royalties from writing books, songs, creating informational CDs or DVDs or developing popular products. Initially, writing a book or going through the process of creating a product takes a lot of work. Then, you also have to advertise and promote the product.
But once that’s all complete and the sales start coming in and people leave you reviews, the royalties you earn will start to become a source of passive income. You can even set up an affiliate program for your product(s) so others can help promote it and while they will earn a portion of the sale, you will still earn income too without putting in any further effort to help generate it.
Investing in stocks, bonds, ETFS your 401(k), annuities and more is a great way to earn passive income. With investing, the most precious thing you have is time so it’s important to start early. The tricky part however, is deciding how to get started and which stocks or mutual funds to invest in.
A financial advisor can help you determine an investment strategy to yield the best return and diversify your portfolio. You can even start without an advisor by reading and educating yourself about investing. You can also take up some classes to become more knowledgeable about the subject if you the investment realm is new to you. Regardless of how you educate yourself, investing is something you don’t want to put off. When done right, your returns can pay off for years to come.
Have you started investing yet or establishing streams of passive income? Which one of these techniques would you be willing to try?