How To Create A Passive Income

Gone are the days of thirty year careers and an anti-climatic send-off with a gold watch.  Increased labor competition, an economy shifting away from manufacturing and towards service, and a basic impatience from Generations X and Y have just about done away with the idea of retiring on a pension from a working lifetime with one employer.  Add the Enron fiasco to the mix and most people have given up on the idea of “job security.”  With all the uncertainty, creating multiple streams of passive income is a great way to hedge against the risk of unemployment.

A Shift in Thinking About Earnings

To fully appreciate the idea of passive income, one must shift their previously held assumptions on earning income.  Most people, myself included, think of earning money as something we get in exchange for some amount of work.  In its most basic form that is a pretty good definition of “earnings.”  Some people refer to this as “dollars for hours” thinking.  However, the part about exchanging some amount of work, or life energy, is not necessarily a requirement in the income-earning equation.

Passive income refers to income that is generated without any (or very little) additional effort on our part.  Some effort may be put in up front, but the payoff from passive income can last for years.  A few examples of opportunities to earn a passive income are:

Royalties on books. Royalties represent passive income in that the author of the work puts in all the work up front, but does not have to do much work to continue to receive payment for his or her work (with the exception of self-promotion, etc.).

Real Estate.  Passive income from real estate can be derived in two ways, primarily.  Homeowners may choose to rent out their property in which case the rental income is mostly passive, although basic landlord duties do require time to manage.  The appreciation of real estate also has a networth increasing effect without requiring any additional work from the homeowner.

Interest.  Interest income is passive income in that it does not require any additional work on the part of the recipient.  The money invested may have been earned through work, but the residual interest and dividends received is passive income.

Why is Passive Income Important?

Every dollar you earn in passive income is a dollar you didn’t have to earn by working.  In this way, passive income puts you closer to financial independence, a stage of life where you no longer have to sell hours for dollars in order to earn an income. Of course, money parked in investments earning an even higher yield, such as CDs, would bring in even more monthly interest income.

At this rate, it wouldn’t take long to earn enough in interest alone to cover your basic life expenses, especially if these earnings are reinvested (or compounded) until income from the fund is required.

How are you creating a passive income?


  1. FD, you tweaked a nerve with me on the impatience of Gen X, and Y. I say that impatience (at least in the work place) comes from knowing there is no pension,(nothing to work towards) and bottom line driven business instead of any sense of loyalty. Companies have created the culture of “what have you done for me lately” so I don’t blame anyone for finding something better, when that is the culture the company created themselves.

    But as for the article, you are right on and people need multiple streams of income (my friend always said everyone needs a “side hustle”)

  2. @Matt: Thanks for your comments! No offense to Gen X and Y’ers. In fact, I’m a Gen X myself (well, I barely snuck in there at the end!). I didn’t mean to suggest those generations are the only impatient people–our entire society has become impatient. However, I have picked up on a growing impatience with younger generations, especially in the workplace, and even when a company avoids many of the problems you cited. Loyalty truly is a two-way street. I like your friend’s line, and agree we all need a “side hustle!”

  3. FD, No offense taken, I snuck in at the end too(X), and I work with boomers who where I get “the their gen is better than mine because…” You do have a point about lots of people are more impatient. I’m glad you have seen companies doing the right thing, and if our gen isn’t taking advantage of that, it’s sad. I work in the NE in a competative industry where I see lots of layoffs and plenty of consultants hired to do the exact same job. I really enjoyed the article because I need a new hustle and it’s about time I figure out what it is.

  4. I wouldn’t blame it on Gen X and Y, but more so on companies willingness to do whatever it takes to meet the Street’s expectation — this include cutting jobs after only one bad quarter. It would be foolish for Gen X/Y to be patient when *we* know that our company won’t be there for us.

  5. Being a late Gen X myself (as everyone is saying I “snuck in at the end”), it isn’t simply about company/employee loyalty. It is also more about having a challenging and exciting career. This usually means moving around to gain more experience and have a more well-rounded attitude toward new challenges. I really think that these sorts of people will become a better management type in that they will not be afraid of change and can better adapt to a change in workforce attitudes. Also keep in mind that there are far more “young” companies than there were 30 years ago. The small to medium business field has basically exploded quite recently. A good example of this is that I’ve had 6 jobs in the last 7 years and not one of the companies had been in business for over 21 years, with several having been in business less than 15 years.
    Anyway, I dislike being the one to quench the flame of the idea in your article but keep in mind that many politicians see these “other streams of income” as even better ways of getting more money. Many of those income streams (stocks, real estate, etc.) full under the capital gains tax umbrella. This means that unless you have better than a 15% return (soon to be 20% tax rate by 2010) over the life of the item, then you will have lost money when you go to cash out. Certain politicians that I will not name here (one of them wants to be President in 2008), want to bump this tax rate up to 35%-40% or even more. I will only say to anyone that wants to take advantage of these things as income streams or retirement investments had better keep an eye on what the politicians want to take from your pocket. Seriously.

  6. I agree with the comment above here about watching the tax that is taken from your passive interest and div. income. I also emphatically agree that the tides have shifted and there may not even be “careers” anymore – in the etymological sense of that word, a career is a “run” or a “racecourse” that moves ahead in a straight line. “Careers” now are multiple and move in many directions at once. Micro-careers. It makes sense for many of us to be moving online, too.

  7. The key is to get money working for you. But, it takes living on a budget and savings to get money built up so that it can work for you.

  8. I create an increasing stream of passive income by focusing my attention on solid dividend companies that tend to increase their dividend payments over time.
    That way I profit from those greeedy corporations that the commentators mentioned 🙂

  9. Great Article. I think so many are stuck in between two worlds, that we often are our own worst problem. Passive income is almost nessecary in today’s age. Being a Gen X’r myself I can relate to the impatience. It’s inherent but not unsuaual as we are all a product of the time we live.

  10. I think passive income is important, but I think the underlying idea, is to take control of financial well being. Don’t rely on your employer to keep you afloat through regular paychecks. Work to find ways that you can earn money for yourself because you’re the only person you can truly rely on.

  11. To Dave, the 15% tax on investments is only for capital gains, so you don’t have to clear at least 15% to come out ahead. If you invest $1000 and sell at $2000, you have a capital gain of $1000 and the tax would be $150.

    A great book touching on the topic of passive income, “Work Less, Live More.”

  12. The only person you can count on is yourself when it comes to your retirement funds…. I’m afraid to trust any one pathway exclusively. Therefore, the money eggs are scattered around, and not all in one basket.

    For retirement, I’ll be hoping that the following stay afloat for me: IRA’s, 401K, PERS, a small pension of $48/month (it more than pays the electric bill), stock dividends, CD’s, Treasury Notes, property sales contracts, interest on investments, and Social Security. If any one thing falls into obscurity (like SS) then hopefully the rest won’t all fall out at the same time. My House, car, and truck, are all free and clear. All one can do is prepare as best one can, and hope for the best. And keep growing a good garden 🙂

  13. Do I win something if I find a typo in your article, my friend?

    I’m sure you probably don’t realize this, but I and the OED both think you meant to say “anti-climactic” (as in climax), meaning “disappointing”, rather than “anti-climatic”. Your point would seem to have nothing to do with the climate, even if the picture so nicely suggests otherwise.

    Good article and good comments as well.

  14. Thank you for the post. My 2 cents: I worked in condo management for 5 years, and would never be a landlord. I have seen many horror stories of bad tenants: they trash the place; move out in the middle of the night; break the rules and the owner is responsible; do not pay the rent; and the eviction process is long and frustrating. Good tenants are hard to come by. You do not just sit by and watch the cash roll in. You have to advertise; show the apartment; do credit and sometimes background checks; call former landlords; verify that tenants have a job; keep up the property; get calls in the middle of the night for burst pipes, lock-outs, etc. Also, unfortunately, I have seen tenants lie about everything. Then there are the taxes on the property and/or the assessments if it is a condo. I have seen landlords unable to rent for months, and still be stuck with above taxes and assessments. Sorry to rain on the parade, but that has been my experience.

  15. Frugal Dad,

    Good post. I LOVE the idea of passive income. I’m curious if you think that Blogging qualifies. I’ve seen a bit of debate on just how active successful bloggers have to be to generate an income from it….

  16. To answer your question how I’m creating passive income, I sell links from my blogs which give me some residual income. Adsense also help. I plan to make 10 blogs within the year and hopefully, these will give me enough passive income to quit job.

    Fix My Personal Finance

  17. well described, salary and a one way source of income does not help these days, passive income is a must source. Same going with me as well as i have other sources for passive income with one way source of income.

  18. Passive income was also a need I was looking for to augment my real estate profession in 1999. In 1999 I purchased my first ATM machine and funded my first site with my own cash. Proceeds from this one machine / site bought a second machine for a second site. These two sites paid for a third and so on. I now have close to 3 dozen sites, and it’s still a part time business, with a strong monthly mid five figure income. I have been fortunate not to have to touch the income made from this part time business for personal use yet, so these funds have been used for other income streams. The time needed to address my sites is personal, by this I mean each site can be visited once per week, twice per month, once per month etcetera. It’s really up to me on how often I want to visit each site. Returns on investment per site vary from approximately 24% to as high as approximately 110%, after the hard costs have been repaid. I know this avenue may not truly be a passive income stream but it’s an income stream I’ve found where I can control the investment returns. My ATM sites are not effected by comments made by a company, country or an industry sector like stocks, bonds etcetera are affected on the exchange. People need access to their money and they are comfortable accessing their money from these machines. You may want to consider looking into this idea where you live.

    I have continued my real estate profession but with the “comfort” in knowing that if money is ever needed to cover a bad month or slow industry time, I have cash coming in every month via these machines. And if money is not needed, I reinvest the monthly cash into other income streams or into more ATM sites for more income.

    Besides the peace of mind the monthly income brings me I am also able to view many business sectors first hand and gain first hand knowledge on how a business sector is truly performaning during these times, which might be good if one is investing in stocks. And lastly, many friendships are created by meeting business owners and staff at the locations an ATM is placed.

  19. By the way this is a pretty good blog! I thought that I might share with your readers about a new homepage called wazzub and it is free forever, just use the internet as you normaly would and just share with others! Profits are split %50-%50

  20. If you’re a creative then you’ve got loads of different ways of earning money in your sleep. All those digital assets for projects that clients didn’t choose that you own? Sell them via a whole swathe of online sites. Then write a book on how you did it and sell that. It’s what I do.

  21. I agree with Duncan, as ebay, etsy, and deviantart ar all good places to start. Also, websites/twitter are all good ways to go.

    Also, everyone here should try swagbucks and snapdollars!

  22. Great stuff! I agree, you need to start with reducing your debt and spending, and work towards building wealth through multiple income streams. I’ve been working on a website lately, hoping to monetize through adsense and affililiate sales. Good luck to all of you who’re trying to better yourself!