Passive income has become an overused cliche, thanks to overzealous internet marketers. There’s a lot of backlash out there against the idea that you can laze around on the beach as money flows into your bank account. Forbes has gone so far as to call passive income “a dangerous fantasy”.
The problem is this disillusioned view of passive income is it defines passive income so narrowly as to render it useless. Obviously you can’t create passive income by just putting up a bad website in a few days and letting it run completely on its own for years after that.
But passive income, as money that you regularly earn without having to put in much maintenance work, totally exists. There’s even a Wikipedia page about it. It’s not some new, earth-shattering idea.
In fact, most people are working towards building a kind passive income
It’s called retirement savings.
What is retirement savings, really, if not a way to make sure that Future You will have enough money without having to work? Only instead of having something that produces regular income, Future You will have enough cash stashed away to last decades.
Passive income in the form of retirement savings
With retirement savings, you can generally expect to put in 40 years of work to ensure that you’ll have 30 years of “passive income”.
When you retire, you might have to put in some effort into choosing the right investment vehicle, talking to your financial planner, dealing with the bank, etc. Or if you’re a low-maintenance saver, you might simply follow Warren Buffett’s advice to put your money in index funds. Either way, you probably wouldn’t spend more than a couple of hours a year on such maintenance work.
May I direct your attention now to Diagram 1?
I imagine the meaning would be immediately obvious from this excellently drawn diagram alone, but let me explain regardless. :D
The blocks under the Income column represents the income you earn from working and the shaded areas are the portions that you save for retirement. (Check out these articles for tips to save money.)
These shaded areas make up the big block of savings under the Savings heading. When you retire, you’ll (hopefully) have this block of retirement savings to spend. Whenever you withdraw money in retirement, you remove a chunk of the block, so it becomes smaller and smaller over the years.
Passive income from assets
While they’re both designed to cover your expenses without you having to work, income-producing assets work quite differently from retirement savings.
Let’s look at Diagram 2.
Again, there are shaded areas in your income blocks to represent the portions you save. But instead of leaving the money alone in a savings account, you turn it into income-producing assets. See how the asset blocks are shaded differently from the savings ones? ;)
Let’s say that, after accumulating enough money, you decide to use it to buy a rental property. You fix it up and rent it out, then you start getting rent income every month from your tenant. And because you’re always traveling, you hire a property manager to deal with the tenant’s needs. Voilà: passive income.
In the diagram, the timeline that extends from the asset block represents your annual cash flow.
When your first rental property is stable, you start focusing on saving up to buy another one. This time, the saving part doesn’t take as long because you have both your income from work and the rent income from your first property. Additionally, you’ve learned a lot when you bought your first rental property, so you actually know what to do this time.
If you repeat this frequently enough, soon you’ll have multiple sources of passive income. Your passive income might grow so much that it exceeds your working income, at which point you can quit your job and not feel much impact on your finances.
At retirement, instead of a chunk of savings, you’ll have a lot of assets that produce income. And as long as you can live on passive income alone, you’ll never have to reduce the size of your assets block.
Sources of passive income
Some sources of passive income:
- Rental properties
- Dividends from stocks
- Copyrights and royalties from your own songs, books, etc.
- Interest from loans
- Income from a business that doesn’t need much active input from you
- Recurring commissions from customer referrals (eg. network marketing, affiliate marketing)
Again, despite being called “passive”, all these income sources require a lot of hard work to build in the early stages. And even after they start stabilizing, they will need a bit of maintenance work from time to time.
For example, you may have to repair your rental property, adjust your stock portfolio or appear at book signing events.
So no, the income won’t be completely hands-free, but it will be as close to passive as you can get.
I have simplified things here
The truth is there’s a lot more to passive income than I can ever hope to cover in a blog post.
For starters, obviously you don’t only get four paychecks over your lifetime like my diagram shows and that tiny retirement savings block I drew wouldn’t last 30 years (which actually is kinda like how things are in real life for many people).
And you may fail at your first couple of attempts at building passive income. You may even lose lots of money, especially in the early learning stages.
Or, on the contrary, you may not have to spend much money at all. You can set up a website for less than $100 if you want.
There’s a lot of room for creativity when it comes to how to build passive income
It can be confusing, but it can also be freeing. You can choose to work on something that excites you. After all, whatever it is, you’ll spend a lot of time and effort on it, at least at first.
So much for “passive”, huh? ;)
Images: 1, 3-5. Nomad Wallet; 2. Tax Credits (CC BY 2.0 License); 6. Images_of_Money (CC BY 2.0 License); 7. eelke dekker (CC BY 2.0 License); 8. ptmoney.com (CC BY-SA 2.0 License).
I LOVE everything about the nomad lifestyle. I have been accumulating passive income and plan to retire in December. The majority of my investments are in rental income and has worked out well for us. I did however did just have a new baby, so Im thinking only short term travel will be an option for a while.
You’ve done really well for yourself! Whatever style of travel you decide on, at least money won’t be a limiting factor for you. Congrats. :)
Hi Deia
Im Kunto from Indonesia. Been following your blog for quite sometime and it is really informative and really inspiring :)
I always hesitate to travel long term. Biggest fear is not having enough money while im on the road.
Since i read your blog, Im now more confident to travel. Thx for the inspiration. I love travelling on a budget. I feel successful if i can travel with the least amount of money :)
Im planning to travel long term since I already built a business that generates around $7000 a month. And your writing is true. The hardest part of this thing called passive income is always the beginning :)
Thx again for the inspiration and keep up the good work :)
I have been running my business for three years now and have gotten to a point where my system is enabling me to have a location independent lifestyle. I started testing my system out last October with a 10 day trip to Mexico, a few weeks ago with a 13 day trip to the Grand Canyon and now prepping for a 3 week trip somewhere. It is possible. Great site, by the way.
Thanks, Mark! Congrats, sounds like it took a lot of hard work for you to get there. But totally agree with you: it can be done.
I agree that there are lots of creative ways to find passive income streams in order to afford to travel. We have several rental properties that make a difference for us. We also work with someone to act as a distributor. We have a lot of fun selling products that we find on the road.
That sounds like an interesting business venture! Not exactly passive, but definitely location-independent income.
Love your article and we are always looking for ways to increase our streams of passive income in order to sustain our lifestyle. Thanks for your ideas!
Thanks for reading, Jen! :)
Passive income… ah every traveler (and probably everybody elses) dream. I know a few bloggers who make big bucks with passive income through affiliates but they are certainly an exception. We don’t own any real estate right now but the town I live in in Costa Rica, the real estate market is pretty bad and owning a condo isn’t ideal, even if you rent it out. But there are many options like you said! Nice write up Deia!
I know of a few bloggers who make really huge amounts of money, but you’re right, they’re the exception. They’re usually the top bloggers in their niches, so it’s quite tough to get there. But then again, with passive income, it’s never easy in the beginning.
Hi Deia,
A friend of mine just bought a brand new house in my town. I am going to rent a room in his house and rent my house out. My goal is to pay down my debts asap and begin a new career teaching english abroad. I have already taken action to update my house to make it the most attractive for renting and I’ve met with a property management company. Thanks for your blog and helpful advice. Your site has grown exponentially, you’ve definetly put in alot of hard work. Take care.
Sounds like everything is falling into place for you. This is exciting! :D
We’ve had a lot of success renting our condo out on AirBnB while we’re away traveling. Just in the last year we’ve made over $5000, which covers the interest on our mortgage, so technically we’ve lived in our house for free. It’s probably the most successful “passive” income we’ve been able to generate, although it’s certainly not completely hands off.
Since we’ll be moving every two-three years for work for at least the next 10 years, I think we’ll look at each real estate market closely before making a purchase or renting. A lot of military families got burned in the 2008 collapse. We don’t want to be over invested in a very illiquid asset.
Thanks for some practical and concrete ideas for making and saving money on the road.
Whoa, that’s quite a lot of money you made through AirBnB. I guess renting a condo out as short-term rental through AirBnB can be a lot more lucrative than as a regular rental. The problem is it’s less passive, of course. I wonder if there are property managers who specialize in AirBnB rentals now that it’s becoming more popular.
Yeah the nightly rate we can charge for short term rental is definitely better than if we were renting out our place full time. In my experience, AirBnB guests take much better care of a property than renters. I think it has something to do with the rating and feedback system and the type of people AirBnB attracts.
I think there’s definitely a market opportunity for property managers who specialize in AirBnB rentals. However, my experience with property managers so far has not been a positive one. Most of the ones I’ve seen take 10% of your money and do almost nothing in return.
Good point. The AirBnB review system does help to keep everyone honest.
I enjoyed your post! As someone who is relatively new to the concepts of building multiple streams of (semi) passive income, it’s easy to get discouraged when I read the hyped-up posts about making 5 figures a month “easily” or on the other end hearing that it’s just not possible. Thank you for a more realistic and encouraging view!
Glad you enjoyed the read! I’ve definitely heard both extremes; one side is trying to make easy money off people and the other side is probably made up of the people who didn’t get their money’s worth. ;)
We actually rent and own a house that we rent out. It makes sense for us as we want to live in an area where we could never afford to buy.
It is so different in Australia though as real estate is so $$$$$$$. We lose lots of money on our rental property and it is going to take years before the rent even covers the mortgage, let alone make an income. We are sure it will be worth it in the long run, but geeze I wish we could build a passive income from that sometime within the next ten years!!
That’s an interesting strategy to live where real estate is expensive. I was a renter when I was living in Sydney, so I’m not aware of how much houses cost exactly. It’s hard to tell as Australian houses sell at auctions and there’s no set listing price.
When I lived in Vancouver, it was easily one of the most expensive markets in North America. Maybe not as expensive as Sydney, but even my 20-year-old one-bedroom apartment was around $230,000. I guess that’s why many Canadians invest in U.S. real estate instead. I hear some Australians are getting into it as well.
It can be even crazier in Melbourne. Years ago we were renting a one bedroom apartment that would have been worth over $450,000 (I hate to think how much now) and paying $220 a week rent! Areas where we feel comfortable and want to send our kids to school, we just can’t afford to buy. It’s ridiculous. I am off to google the possibility of Australians buying property in the US now lol.
Oh wow, that’s crazy! Years ago when I was living in Melbourne (2005-ish?) I think I saw some ads for apartments in Southbank for $300,000+. I didn’t know it’s gone up so much. Let me know what that Googling leads to. :D
Good idea about investing in another country…
Might have to look into Eastern Europe, in my case:)
All the best with your ventures in Eastern Europe!
Those diagrams sure are a graphic designer’s wet dream… I’m constantly impressed by your savvy management of money, and find the idea of passive income definitely appealing. Nonetheless, I only own a 40 litter backpack with some stuff in it at the moment, so generating income (passive or otherwise) might prove a tad difficult. I have to say that I’m very good at savings though. Back when I had a job, I usually managed to save 2/3 of my salary – I would have had a great retirement if I didn’t get persistently bitten by the travel bug. Good luck, Deia!
Lol “graphic designer’s wet dream”! Why, I think that’s just the appropriate level of admiration for my awesome diagrams. :D 2/3 of salary is a lot of savings, no wonder you’re traveling for such long stretches of time. By moving every 2 years or so, I generally have places close by that I can explore cheaply. Now that I’m in Calgary, I look forward to visiting the Rocky Mountains in the summer, for example. I have to leave the longer full-time travel for later, but that’s worth the wait for me. :)