Passive income seems to some to be the holy grail of financial freedom. The definition of Passive Income in Wikipedia, states that “Passive income is an income received on a regular basis, with little effort required to maintain it.”
So what do you mean by little effort? Examples of Passive Income includes the following:
- Any type of property income / rent;
- Earnings from a business that does not require direct involvement from the owner or merchant;
- Interest from a bank account / P2P Loans / Invoice Financing
- Royalties from publishing a book or from licensing a patent or other form of intellectual property, such as computer software product;
- Earnings from internet advertisements on websites;
- Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;
If you look at the list above, (and seeing it from the point of view of a ‘lazy’ person) .. some of these sources are more passive than others while others require more proactive actions.
If you really dig into it..
- Property income: In fact, some people do not consider rent from property as passive income as a reasonable amount of effort is required (esp. if you did not engage a property manager). For instance, late night calls should your tenant loses his/her keys, the pipe chokes, and constant search for new tenants (in a weak rental market), the cleaning up after your tenants leave, etc
- Earnings from a business that does not require direct involvement: First you have to understand the business, and trust the founders.
- Interest from a bank account / P2P Loans / Invoice Financing: Interest from bank accounts are pretty straight forward but very meagre. P2P loans and Invoice Financing require effort on your part to study the companies’ financial and to invest before the loan is fully funded (can be quite tricky at times).
- Royalties from publishing a book: ll you need effort to write a book first and publish it to receive royalties.
- Earnings from internet advertisements: You need to spend a considerable amount of time and energy to set up a successful website (with reasonably good site traffic) before you can earn from internet advertisements.
- Dividend and interest income from owning securities: It is not always as passive as it looks, ad you need to understand what you are investing first and to constantly monitor your investments.
- Pensions: Frankly, pensions don’t just drop from the sky, you need to be in a job first. You are lucky if you have one.
Having said that, the first step is always the hardest. Once the process is in place, it is more a matter of streamlining it and taking it a step higher up the passive ladder.
Make lemonade out of lemons
Having a full time job, kind of forces one to think harder on passive income. I like to think of it as an advantage rather than a handicap. You are literally not there but the income has to keep rolling in… woah…
That is, if one is thinking of having secondary sources of incomes. Well, then again, many are blissfully going about their life, not having a thought about passive income.
Well, typically your job would have taken up most of your time during the weekdays, while your family responsibilities take up the rest (and the weekends). Of course, if you do not have a full time job or other commitments, you will have the freedom to try out all kind of endeavors.
On the flip side, as one get older, the human capital decreases (expenses might not). So why not start early and think of the possible streams of income one can earn when we are old?
The Thinking and the Actions
Yes, the hardest part seems to be the thinking.
“Thinking is the hardest work there is, which is probably the reason why so few engage in it.” Henry Ford
Occasionally, I would think of the following:
- Set up an online shop / service
- Set up a coin laundry
- Invest in a startup
And many more…
I feel that the thought process and actions (as a result of these thoughts) are important. It sort of prepare you for any potential opportunities. You begin to look for ideas and clues purposefully.
For instance when I walk pass a vacant shop spaces in my neighborhood… I would query about the rent, size of shop etc. I observe the no. of people patronizing other coin laundry outlets.
Around the end of last year, I met up with a couple of start up founders.. although it wasn’t financially fruitful, but it made me became aware of certain things.
Conversations with startup founders (read here)
For example, I met up with the founder of a car rental company. He was in fact looking for loans (not Angel Investors). And it made me aware of one potential avenue to seek passive income. Well, then the issues of getting the proper legal paperwork, right assessment of his company’s financial (including the details of the cars etc) start surfacing. Also what happens if he defaults, what avenues can I seek to chase back the loans.
So mentally – these have already been running through my mind …. before I came across Crowdfunding (or more specifically P2P loans). Yes, there are risks involved with P2P loans, but having thought about the hassle of loaning money directing to strangers, the ease of P2P loans could not be understated.
“Money is only an idea. If you want more money change your ideas.” Robert Kiyosaki
Another important step is to set targets. Like how much passive income you intend to achieve every month, every year etc… Well, quantity is one aspect, but ‘quality’ is another aspect. One shouldn’t just go for the highest yielding dividend stocks, but rather look at the stock / company holistically (its balance sheet, growth, payout ratios etc).
The invisible hand
Yes, sometime help can come unexpectedly.
Between dividends from stocks and interests from P2P loans, the latter require more ‘physical’ actions. Well, if you want higher effective interests, you would need to reinvest in new loans almost every month. While for dividends, you don’t always get dividends every month.
Some time back I was highlighting some of the issues I had with securing P2P loans. Well, it wasn’t as passive as I had wanted …as the take up rate for some loans can be very fast, and I do not have ready access to the internet at all times.
Portfolio (Capital Gain/Loss vs Cash Flow) (read here)
Then, recently (less than 2 weeks after my above blog post), I was informed by Funding Societies that they have this option called “loan selection option B”.
For loan selection option B, funds will be automatically allocated into loans that fit parameters you set and the parameters that you can set for loan selection.
Wow, now even investing in loans can be automated (like setting up parameters to trade remotely even while you are sleeping.. :p). However, the risk here is that you may not get to review / choose all details of the SME before you invest personally (since the ‘allocation’ is already done for you).
Yes, it is an improvement. Nevertheless, I feel that there can be more improvements to be made since the parameters are rather limited (eg. the auto-investment option is not sophisticated enough to invest in loans based on industries; this applies to avoiding loan listings of a certain industry as well).
The thrill of the game
Well, the path towards the holy grail of financial freedom is never easy. But that doesn’t stop me or many others from trying. In fact there are some who became very successful by making it their lifelong mission.
How Pat Flynn Made His First $3 Million In Passive Income (read here)