9 Ways Wealthy People Make Money with Passive Income and 5 Tips For Getting Started.
Making money (passive income) while you sleep, take extended vacations, take cooking classes in Italy, or relaxing with your family at home.
Sounds perfect, right?
After reading books like E-Myth (twice in a month), the Rich Dad Poor Dad series (multiple times), and most recently The 4-Hour Workweek (while on a beach), it became very clear to me that the wealthy earn their money differently, and I wanted to learn how they did it!
Passive income can be generated in a variety of ways, most taking a lot of up front time & effort, like my current financial planning business. So, having passive income is great, but it appears it still takes a lot work to get started. Let’s take a look at what passive income is and how to create it.
How to Create Passive Income
To quote Pat Flynn, a very successful passive income expert (he’s made millions), “We don’t have to trade our time for money one to one. Instead, we invest our time upfront, creating valuable products and experiences for people, and we reap the benefits of that time invested later,” he says, adding, “It’s not easy. I just want to make sure that’s clear.”
I think he sums it up very nicely. Create valuable products, services, and experiences for people, and reap the benefits of the upfront time invested later. Keeping in mind it is not going to be easy.
The traditional way most people generate income to is to trade their time for money. The very nature of generating money this way means it is limited, we can only work so many hours a week, and can only earn so much money an hour.
Passive income puts this concept on its head – rightfully so! Instead of being limited by time, leverage it. Use your time to create something that will not be limited by time.
Doing this correctly means you can actually start to work less, but earn exponentially more. So where do you start?
5 Tips before you get started
Yes, passive income sounds perfect, but here are some tips and things you should think about before getting started.
- Why do you want passive income?
Are you doing it just for the money? It has been my experience, and that of many others, if your reasons for, well, doing almost anything, are genuine, that it will be evident in all that you do. If you are looking to generate passive income, then do so from a place of wanting to help people. To improve people’s lives. If you have a passion and desire to help people realize their hopes, dreams and goals, you almost certainly will make money doing it.
- It is going to take a lot of work, upfront
Creating passive income can be a simple process, but simple does not mean easy. Be prepared to spend some serious time and put in a lot of effort. Doing something to improve people’s lives is rarely done quickly or with little effort, it is the nature of doing some of value.
- Offer education and value, for free
People love to buy, but they hate to be sold to. Potential customers will be more likely to buy from you if they feel you are genuinely trying to help them. Education is a great tool for doing this, giving people the information they need to make good, informed decisions, enabling them to make a purchase!
- Make sure you have critical mass
In order for you to make the kind of passive income you would like you need to make sure the market segment you want to help has critical mass. If you have the best widget in the world, but only 14 people need or want it, then you don’t have a viable business. The great article 1,000 True Fans, by Kevin Kelly, cofounder of Wired Research, talks about if you have 1,000 people who are your customer, each paying you $100 a year, you now have $100,000 a year of passive income. The point is that you don’t need to serve the entire human population, just enough to have critical mass.
Research who you want to help, how you want to help them, and if there are enough of them to generate a sustainable business. Then you can build your platform to share your story through a blog, podcast, etc.
- Passive income is not 100% passive
Yes, even once you have created your passive income machine, it still needs some attention. Just like a car, it needs to be maintained. Granted you won’t need to spend 40+ hours a week on it, but spending a few hours a week or even a month will still be necessary to manage your business. Continue to watch your cash flow, reinvest some of it in your business, and enjoy the rest! Managing your business will help you keep the passive income machine running.
9 Ways Wealthy People Generate Passive Income
So, how do wealthy people generate passive income? There are many ways, some being more of the traditional type and others that are new & contemporary. The following ways the wealthy generate passive income are only some of the ways you can create and generate passive income, not to mention all the nuances that each of them contain.
- Invest in real estate
Investing in real estate has been around for ages. Whether you are looking to buy your first duplex or getting into a large commercial property, rental properties can provide passive income through rents with some very appealing tax benefits. This method can be harder to get started with given the initial capital needed in most cases, but is certainly a great way to generate passive income.
- Own a portfolio of dividend producing investments
This is a very passive way of generating income, but the catch is that you need a lot of money to build this passive income machine. For example, you find a combination of dividend producing stocks & bonds (this also can be done with CD’s (and other cash equivalents) that you are comfortable with, the yield (or passive income) generated on the portfolio is 5%. In order to generate $50,000 a year in passive (dividend) income you would need $1,000,000 in your account. (CDs are FDIC insured up to $250,000 per depositor per insured depository institution.)
Yup, that’s a big chunk of cash. If you are fortunate to have saved a significant amount, then a dividend portfolio is certainly a viable option.
- Earn royalties from creative works like books, music, & screenplays
Creating original content that other people love can be very rewarding to you from a personal growth perspective (people value something you have created) and from a financial perspective (people are willing to pay you for it). You create something once, but keep getting paid a royalty for it long after you completed it. Music is a nice example. You write/perform the song once, and then sell it online. Each time someone downloads your song you are paid a percentage of that sale, what a nice way to generate passive income!
- Build a Financial Planning, Investment & Insurance business
By selling insurance (could be property & casualty, life, disability, etc.) to your clients you are paid an initial commission, but more importantly you would continue to get renewal (passive) income from the insurance you placed for many years into the future, as long as you serviced that client to keep them happy and on the books.
You could also do this by charging for financial plans and managing people’s investments. The fee’s you charged would be recurring as long as you managed the relationship to keep them happy. This approach to passive income has a much higher barrier to entry due to needing qualifications, licenses, and building relationships over time. If done correctly, it can be a very lucrative source of passive income.
- Ad revenue from your website, blog, and social media
A great source of passive income is advertising dollars from other businesses and people. If you have a website, blog, or strong social media following, other businesses will start to take notice. A trick I have learned in this space is that it is much less expensive and faster to go where people already are then to try and create it yourself. But, if you create it yourself, then others will come to you. This is how you turn you blog, etc. into passive income. Let’s say your blog has 300,000 visitors a month, that’s quite the following! Other businesses and people looking to advertise a product or service would rather come to you and pay you to have their advertising on your blog. This is less expensive for them since you have already created an audience for them, and great for you since they are paying you for this audience.
- Create an App
This is certainly not in my wheelhouse, but time and again people have been able to make a lot of money from creating and selling an app. You can offer the app for free to users, and if enough people use it you can then charge for businesses to advertise (just like #5) with you. You can also offer a version of the app that has no advertisements, but the user must pay a nominal fee to have this version. Either way once you have created the app and it is in the marketplace, it has a ton of potential to generate passive income. Depending on the app, you could also be bought out by a larger company and given a lump sum to walk away. This happened to Garret & Jessica Gee. Garret developed an app that was eventually sold to Snapchat for $54 Million!
- Patent Royalties
This is more common than people realize. Have you invented something that everyone would love but don’t want to build a business around it? This could be a product, process, drug, etc. Big businesses are looking for and willing to pay you royalties in exchange for being allowed use your intellectual property
- Licensing Fees
Have you developed a particular brand or system that others can benefit from? The options here vary quite a bit. For example the rock band Def Leppard is able to license their brand because of their massive success. Or look at a college sports franchise like the UW Badgers, who have created an amazing brand around a great sports team (Go Badgers!), everything from t-shirts to coffee mugs. All of these are potential sources of passive income, if you are the one that has created the brand or process of course!
- Invest in Businesses
Another form of passive income can come from investing in private equity opportunities in businesses that are growing. There are certain limitations on who can invest, but can be a great way to generate passive income from profits in a business that you have very little if any active role in. If you invest in and now own part of the business, and it is successful, you would then be entitled to regular profits from the business, and potentially even a great return on your original investment. You can do this by either purchasing some of the business with your money, or lending your money at a certain interest rate to the business.
Attitude of the Wealthy
As you may have noticed, there is a common theme throughout all the ways the wealthy generate passive income. All of them require you, in the beginning, to trade your time for money while building your passive income machine. Eventually you will be able to leverage that time into exponential passive income while being able to work less and less. The attitude being a willingness to take some risk, work hard, and create something of value. If you put good in, you will get good out. Wealthy people tend to choose this attitude more than others.
So, creating something of value that improves people’s lives, marketing it to an audience that has critical mass and wants what you are providing, and understanding it will take some time, effort, and risk, seems to be the secret sauce to creating passive income. This is simple, but will not be easy. Are you ready to get started?
Thank you for taking the time to read this post!