10 Sources Of Passive Income
In my last post on emergency funds, I discussed the concept of passive income – that is, having sources of income that do not require you to be employed in your primary job, on which you can rely as part of your emergency fund.
In a way, this is a core part of Robert Kiyosaki’s ‘Rich Dad, Poor Dad‘ philosophy. In fact, he consider ‘wealth’ to not be a measure of the amount of stuff you own, the house you live in or the money you have in the bank, but rather your ability to maintain your current lifestyle indefinitely without exertion on your part. In other words, having your money work for you.
In a different way, this is also the central theme of Tim Ferriss’ book ‘Four Hour Work Week‘. The basic premise is to work out what your dream lifestyle would cost on a monthly/weekly basis, and concoct a method of earning that much (plus a certain percentage for savings) with a minimal input from yourself (four hours a week, to be exact).
Both these books are bestsellers, having sold millions of copies worldwide – yet how many people can you recall having resigned from your workplace to go and explore the Arctic Circle or retire at 40? In reality, most people suffer from what Kiyosaki calls “Analysis Paralysis” – the inability to take action for fear of it being the wrong decision, so instead examining every available option ad nauseum. Moreover, most folks aren’t comfortable with the idea of chucking it all in to go live the dream. Many find security and comfort in a Monday-Friday job, and often society itself clings to the notion that doing any differently is just lazy.
Perhaps then, a passive income of this kind is ideally suited to supplementing an emergency fund. With even a conservative passive income, a modest emergency fund of a few months in expenses could be stretched that bit further. So, here’s my list of 10 potential sources of passive income:
- Shares / Stocks – Many ‘blue chip’ shares and stocks reliably pay dividends (usually about twice a year). These can often be reinvested if you don’t need the income, and taken when you do.
- Managed Funds – As with shares / stocks, managed funds often have a return expressed as a dividend.
- Property – When rented, property obviously produces some level of return. Obviously in most cases, it’s cost-prohibitive to own property outright, so there will be some sort of loan attached. If your rental income is more than the cost (repayments) of the mortgage, then happy days – your property will be “positively geared”. If your rental income is less than the cost of the mortgage and you need to contribute the difference, then it is “negatively geared”. In Australia, this difference is a tax deduction and can have benefits in terms of minimising the income tax you pay. In terms of having a passive income however, this is obviously not suited. Be aware too, of fluctuating interest rates. A property that you purchase that is positively geared in low-interest times, can quite easily become negatively geared as interest rates go up.
- P2P Lending – There is an increasing market of peer to peer lending transactions as more and more people try to avoid banks. Websites such as iGrin allow people who want money to connect with people who have money to lend. As a lender, you can get fantastic interest rates on your money (you are, after all, effectively ‘being the bank’), although it also comes with the risk of the people you lend money to failing to repay. Most sites do offer information with regard to credit rating and debt-to-income ratio, so be sure to do your homework and make educated assessments about what you can afford to loan.
- Art – Like property, there is a strong rental market for art. Most of this demand lies in the corporate sector where companies want modern, striking pieces to hang on their walls, but don’t necessarily want the capital expense of potentially millions of dollars in decorating costs. Renting art is a tax deduction, and allows them to have the most popular artists represented on their walls. Unlike property, outright ownership is quite achievable with most galleries considering pieces as low as $5,000 to be eligible for rental. What you’ll get is a fixed return (as a percentage of value) over a defined timeframe. Management fees are often negotiable. Try Art Equity and Art Index in Australia.
- Monetise Existing Activities – Whilst not technically passive income, if it’s something you already do, why not make it profitable? Into running? Offer your services exercising local pooches. Knitted so many sweaters your kids and family feel obligated to wear them in summer? Sell more on Etsy. Have a talent for photography? Sell your photos on stock sites. Remember, this isn’t about doing more stuff, it’s about making your existing adventures financially attractive. With this in mind, don’t analyse it from a $/hour of your time perspective.
- Monetize Your Areas Of Knowledge – Let’s say you’re an architect by trade. Noticed how owner-builders often want to be their own architects? Why not create an eBook on Architecture for DIYers? Using self publishing avenues available, a bit of paid advertising in search engines and a simple online checkout system, you can be selling your knowledge within days. Virtually everyone has knowledge that can be sold in some way to a suitably specific audience. Teacher? How about a Get Your Kids Ahead In Science series? Accountant? Do Your Tax Return Yourself In Less Than An Hour. The point is, that once you’ve set it up, you needn’t do much at all to keep it ticking along.
- Rent Your Stuff – If you have things about your house that you don’t necessarily want to get rid of, but you just aren’t using, consider renting them. There’s a market for almost everything, from cars (try Drive My Car) to fitness equipment. If you’re going somewhere (or you have a holiday house that is unused when you’re not there) you can even rent your house out for short periods, fully furnished (try Stayz). Even if you’re not going anywhere, consider renting your house for use as a set in movies, TV shows and commercials.
- Interest Bearing Accounts – It’s not the most exciting place to put money, but interest bearing accounts are one of the most secure places to store cash. More to the point, when we’re talking passive income, they’ll cough up a fairly reliable amount of money at the same time every period. Look for one with a high interest rate that calculates daily and pays monthly (or more frequently). It’s worth noting that you don’t want a term deposit because interest is only paid on maturity, and that’s unlikely to be a regular enough source of income to form part of an emergency fund.
- Set And Forget Businesses – Unlike many small and micro businesses which are extremely high maintenance, there is a set of no to low maintenance endevours which simply tick over. They don’t make their owners fortunes, but they do provide a passive income. All these businesses are product-based, often online or mail order, and many use the services of a fulfillment agent that arranges shipping of orders and often manage some level of customer service. If you’re considering taking this route, however – be aware of setup costs and teething time.
So, rather than stewing over how many years it’s going to take you to sock away several months worth of expenses in case of emergency, why not consider working to create passive income streams to supplement your savings? A passive income is unlikely to ever complely replace a nest egg on which you can rely, but it will certainly help to extend its life if you were to cease receiving your primary income. Better yet, the more sources of passive income you develop, the greater the level of overall security you enjoy. Nice.
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