I had a wise friend once tell me that no one really can become wealthy through their day job, and that people usually become wealthy through money that they put away from their day job, through passive income.
I think it was the same wise friend who recommended that I read The Wealthy Barber, so obviously this friend knew what he was talking about. Ever since he said those wise words to me, it had become my intention and goal to acquire money through passive income and become (one day) financially independent.
First off, it would be helpful to define the term passive income. Passive income, according to Wikipedia, means income acquired on a regular basis, with little effort to to maintain it.
Basically, with passive income, you earn more while working less.
So how does one acquire passive income?
There are a few common ways in which people can acquire passive income. Some of these involve a little effort to begin with and some of them require more capital (investment) to begin with. Some people may have the time to invest in creating passive income, and some people may have the money to invest in creating passive income. It’s usually one or the other. Depending on the resource you have (time versus money), your ideal passive income stream may differ (or it may be a combination of both, which is also nice).
The commonly known three passive income streams are:
Rental income (check out our article on Tax Deductions for Your Rental Income – Updated 2017) can definitely bring a large amount of steady income on a regular basis. However, with rental income, you will need both time (maintaining the property) and money (initial down payment and carrying costs of the property) to generate passive income. Although it may seem like “easy money”, maintaining rental property is a lot of work. You have to collect rent on the first of every month, there may be bounced cheques, dead beat tenants, or even tenants who (despite all the screening you did) will not be reliable to pay rent. Not to mention having to deal with broken refrigerators or toilets. In Canada, the rules between landlords and tenants usually favour tenants. Alternately, you could hire a property manager but this is an added cost, obviously.
Investment income like dividend income and interest income is purely passive income. There isn’t very much effort once you set up a discount brokerage account like Questrade or opt for one of the relatively new robo advisor options. (e.g. do your research on which dividend income producing stocks to buy or set up a dividend reinvestment plan) but it does take a lot of initial investment to generate a small percentage of gain. For example, even with a generous 3.5% annual dividend payout, that equivocates to an investment of $10,000 to make $350 on an annual basis. However, this doesn’t account for potential capital gains for the dividend-producing investment. Alternatively, even a decent online savings account like Tangerine can help you make a little bit of money, even if you’re not ready to take the plunge into investing in the stock market.
Internet/ Website Advertising Income
Finally, internet/website advertising income is generate through various means, be it direct advertising, Google Adsense advertisements, banners/ images, and affiliate income advertising. This is also technically purely passive in a sense because people visiting your website click on the ads. However, but as any blogger out there who is blogging to generate passive income can tell you, blogging and creating and maintaining a website is a lot of work. Studying how to create a website can take a ton of time, despite having easily accessible instructions on the Internet. So is maintaining the blog, by trying to generate traffic, write posts that are ideal for search engine optimization, or replying to comments take a lot of work (and time). Despite the amount of work, the good thing about Internet advertising income is that it does not require a big investment in the first place. You can start a website with a very small amount of money, but it just takes a lot of time to maintain. Once you do make it “big” though, it might not take as much work because you can outsource many tasks required to maintain a blog.
Each of these have their pros and cons and depending on the resource you have available to you, you may prefer to work on one or the other, or all three if you have the means to. Personally, I think that it’s more important than ever before to develop several sources of passive income given the new career realities for folks entering the job market in 2017. Gone are days of four-decade loyalty + a gold watch and in their place is a very dynamic labour market that will likely see you work many different jobs under many different arrangements (piece work, commission, part-time, full-time, hybrids of these approaches). The more sources of income that you have coming in, the better prepared your are for a minor shake up of your primary income source. It also makes it easier to save for retirement or other personal finance goals if you can simply say, “all my income X is going to straight to Y – I’m not touching it!”
Readers, what is your favourite passive income method?