Six Ingredients for Generating Passive Income

September 27, 2007

Who doesn’t want to spend more time doing what they enjoy and less time working for money? After reading about both active income and passive income recently I came up with a list of things that can help you move towards generating passive income.

The Idea
You need either a great new idea or a great way to package and distribute an existing idea that hasn’t reached its potential. If you don’t have either one, don’t despair.  If you are observant and curious your list of potential ideas or twists on existing ideas will grow over time.

Always ask lots of questions and regularly give yourself time alone to think(driving to work, early morning walks, lunch break in the library, etc).  Stay in touch with the media whether through newspaper, radio, or the Internet to keep a steady flow of new information mixing into your idea pool.

The Courage
Eventually you’ll need to try one of the ideas on your list.  Courage will be required because doing something new can be daunting, in addition to the fact your first idea could fail.  Courage will keep you going when you doubt yourself and will help you try the next idea on the list when the first one flops.

Many successful entrepreneurs fail at several ventures before they find one that works for them.  Think of it this way, the things you learn and groundwork you lay working on the projects that fail will give you the experience you need to run with the idea that finally takes off!

The Time
We humans can only absorb, process, and act on a certain amount of information in a given day.  It seems there is never enough time in the day to do everything we need to get done.  So, how can we pursue our ideas if we don’t have sufficient time? 

One way is to utilize the time of others.  It might mean partnering with another person or hiring someone to perform specific tasks.  Timothy Ferriss gives some good examples of in his book, The 4 Hour Work Week.  He had an idea, got it up and running, then hired people to keep it going while he travels the world.  Okay, technically its not passive if you’re still working 4 hours a week but that’s passive enough for me : )
 
The System
One thing that enabled Tim Ferris to leave his business in the hands of others was the system that he developed for getting things done in the company.  He doesn’t have to be present because he has processes established and documented he can hand to an employee and walk out the door. 

Your system might be the partners and processes you use to distribute an eBook, movie, or CD you create.  It could be the training program you offer to teach people how to sell your product or perform your service. It might be the franchise you establish.  It could be the  software you build to automate a job.  Once established, you let the system do the work instead of you.

The Friends
Raise your hand if you haven’t had at least one stupid idea in your life. Friends are a great sounding board for your ideas to help weed out the ones with problems you hadn’t thought about.  They can offer suggestions and if you work well together they could even become business partners. Plus spending all your free time working on new ideas can get old, it’s nice to have a little comic relief now and again.

The Money
Notice money is the last thing listed. Sure you need some to get started, but lack of money shouldn’t be a barrier to progress. You don’t have to get venture capital funding to pursue your passive income ideas.  So where do you get it from then?  You can choose to either make some extra money, I’d recommend selling on eBay, or spending less and saving some of what you earn in your day job.

Enjoying Your Time
There is definitely work that goes into generating passive income. Jonathon offers a formula that helps determine just how “passive” income actually is.  Despite the work up front, once you have your system in place you’ll hopefully be able to spend more time doing the things you enjoy and less time working for money.

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Ben

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Ben
Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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5 Responses to Six Ingredients for Generating Passive Income

  • Ben

    Meg, you’re right there is something to be said about not re-inventing the wheel. That’s why one options is to find “a great way to package and distribute an existing idea that hasn’t reached its potential”. Leveraging a proven business model is great but it also means more competition.

    I agree rental property, dividends, and interest do require less work and ingenuity, however, it seems to me the amount you can earn from these methods is largely based on the amount of capital you have to start out with. I was driving more towards the scenario where you don’t have much money to start with and you can leverage your creativity and observation skills to turn a little startup money into a large return.

  • Meg

    I agree that you need an idea, courage, time, a system, and relationships to create passive income streams. But I would argue that you don’t need a new or unique idea in order to do so. In fact, you don’t even need that in order to start a business–which seems to be the primary passive income source you are discussing. Many successful companies don’t improve upon any idea; they simply replicate (or attempt to replicate) a proven business model.

    Besides, there are many types of passive income which require much less work and ingenuity (arguably) than starting and maintaining a business: rental real estate, dividends, interest, royalties…

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