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- A financial planner says it’s easier said than done.
- Building a solid investment portfolio is the most reliable source of passive income.
- You can also try to start a business or produce royalty-generating work.
Passive income is the ultimate financial dream. Unfortunately, it is often just that: a dream, not a reality.
As a financial planner, I have to be honest and say that passive income is a myth. If it were easy and realistic to generate truly passive income, where money flows into your accounts without any effort on your part, we would all do it!
That said, there are opportunities to generate passive income. There are some legitimate ideas you can put into practice, but it’s important to recognize that even these aren’t accessible to everyone.
Pretending otherwise is detrimental. It can distract you from doing what you should be doing: wisely managing the income you actively earn instead of spending time and money chasing the ghost of an idea.
With those caveats out of the way, let’s look at three legitimate paths to creating your own passive income stream.
1. Build a solid investment portfolio
The idea of investing during your working years is to build up a portfolio of assets that will eventually provide a decent income. The best online brokerages can make it easy for you to get started.
With a well-diversified and strategically managed portfolio, you buy assets now that will increase in value over time. In the future, you can convert those higher-value assets into cash without doing any additional work. You can also receive income from them directly, through dividends.
This is a realistic, attainable, and accessible way for most people to generate passive income. Still, it takes a lot of time and upfront effort to build the kind of investment portfolio that you can reliably turn into a high enough income to support your lifestyle.
You must first accumulate assets to a certain level before your portfolio can perform this function for you. That is why it is so important to have a high savings rate while you are actively working; this makes the flow of passive income possible in the future.
Another benefit of this passive income approach is that you have a great deal of control over the process. The more you save and the less you spend, the faster you will build up the necessary level of assets to turn into a passive income stream.
2. Start a business (or invest in one)
You can generate passive income if you can create a business that runs without you. Once you start a business, you need to hire employees to provide your service or create your product without you having to do the work to produce value. Instead, you retain ownership (and therefore part of the profits).
Your service or product business can fall into any industry or field and encompass any specialty or target market that you feel best suited for. That gives you a lot of freedom to create in a way that fits your skill set or experience.
Of course, not every business makes it. Even fewer grow to the point where the owner can earn truly passive income – that is, grow to a point where it is no longer necessary to play an active role in running the business and generating revenue.
Another way to earn passive income (without as much upfront work and risk) is to invest in an existing business. You get an equity stake in the company in exchange for a share of the revenue.
The advantage of this approach is that you could create a passive income stream right away. The disadvantage is that the investment is still risky and the business could fail.
You also need to have enough capital up front to be able to make that investment in the first place.
Most people don’t have tens or even hundreds of thousands of dollars of cash on hand to use to buy a stake in a business, so even this needs to be part of a long-term plan that takes into account the time it takes to save up enough cash to make a business investment.
3. Leverage your current work for future royalties
Selling the rights to a valuable asset can allow you to establish a passive income stream. This can range from intellectual property, such as a process or system that a company can implement, to something like a story or script that a producer can turn into a movie.
Publishing books (such as personal finance books), courses, or other resources that people want to purchase would also allow you to turn a project you created once in the present into future recurring income in the form of royalties.
However, this avenue for passive income is one of the most restricted to a small group of people. And some would reasonably argue that these earnings are not passive at all, but leveraged income, as they require a lot of time, effort, and work to initially generate.
But if your goal is to generate passive income, earning royalties gives you an avenue to achieve that in the future. It’s worth considering whether your skills and experience align with this monetization model.
This article was originally published in September 2023.
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