In the previous two tutorials we established what passive income is and the problems with active income, or trading time for money.
This tutorial is going to build off what we covered in them by showing you how to get started with your first passive income project, so let’s recap.
- What is Passive Income and How Does it Actually Work?Harry Guinness26 Dec 2021
- Passive Income: How to Stop Trading Your Time For MoneyHarry Guinness27 Dec 2021
Quick Recap: Active vs Passive Income
Before we dive into how to make passive income with your first project, let's review what passive income is, compared to active income—as well as the advantages and challenges of active income.
Active income is trading time for money. If you get paid $10 an hour to stack shelves, that’s active income. If you get paid $5000 a month to design websites, that’s active income too. If you get paid $100 to write an article for a website, guess what? That’s active income. It doesn’t matter the exact circumstances, but when you look into it you’ll find that in all these situations, the person getting paid is basically just selling their time to another person in return for cash.
The problem with active income is it tends not to be flexible. You’re beholden to another person to pay you for your time. If circumstances change, you could be out of a job. You also might be required to spend nine hours a day in an office when you only need to be there for three to get your work done, or to spend fourteen hours a day working when you’re only being paid for eight.
With passive income, rather than your time, you’re trading a product or service for money. The classic example of passive income is an eBook. You spend a few months or years writing the eBook and then it’s done. No one is paying you $50 an hour to sit there and type away. Once it’s written, you put it up on Amazon and hope it sells (or more realistically, promote it and market it so as to drive sales but that’s the subject of a later article). If your eBook is successful, you could make thousands of dollars each month in sales. All you (supposedly) have to do is sit passively by while raking in the cash.
In reality, passive income is a little more complicated than that. There is a time cost (well, more of a time investment) in creating the initial product or service, there is also an ongoing time cost to marketing and customer support. In theory though, with passive income projects you should be able to make more money from less work, than with active income gigs. Alternatively, your passive income project could be a total flop and you sink thousands of hours into earning only a few dollars.
How to Start to Make Passive Income
Alright, recap over. If you’ve reached this point, you obviously are at least considering investing some time in generating passive income, so let’s look at what you need to do to get started.
Assess: What Do You Have to Start With?
Despite what some charlatans will tell you online, creating passive income products that will bring you a steady revenue stream is difficult. You can’t just go out, pay writers in India to write a generic eBook, put it up on Amazon and expect to become a millionaire. You might get a few sales, but unless the product is good, you’re highly unlikely to be able to build a serious business out of it. This means that you need to assess where you’re starting from.
If you’ve never built an app or a website before, then grandly launching a supposed Facebook competitor hoping it will bring in riches might not be the best direction for you to go. Likewise, if you’ve never picked up a camera, you probably won’t make too much money selling photos through stock websites like PhotoDune.
So let’s look at some of the things you need to ask yourself before diving headfirst into passive income:
1. What Do You Want to Earn Passive Income For?
What's your goal?
- “Earn money while you sleep!”
- “Travel the world without ever having to work!”
- “Retire at 35!”
These are all the sorts of claims you see on the hard sell, “earn passive income now” sites that offer “money back guaranteed” products for a few hundred dollars. And while there is this fantasy of travelling the world off the back of a few simple passive income products, is it what you want?
If it is, awesome, we’re here to help. But there are plenty of other reasons you might want to earn passive income:
- Do you just need an extra few hundred bucks a month to give you a bit more breathing room, buy a Nintendo Switch, and make bills easier to pay?
- Do you want to get some extra cash you can sink into investments or retirement accounts so you can achieve financial independence and retire earlier?
- Do you just want to call yourself an author because you have a book for sale on Amazon?
- Or any of a thousand potential reasons.
What your end goals are will determine a lot of how you go about generating passive income. If you only want a few hundred dollars more a month, you can approach things in a different manner than if you want to create a $500,000 a year passive empire. You need to have a clear idea what you want to achieve before starting.
2. Do You Even Need Passive Income to Reach Your Goals?
Right now, I’m writing this article from a ski resort in the French Alps. I’ve spent the winter here skiing almost everyday. I’m not paying for it with my passive income, but with the active income I get from writing. One of my big goals is to travel the world and I’m doing it… with active income. Depending on what your goals are, you might be in the same situation.
If you have in demand skills, it might make a lot more sense for you to start a consulting business charging a few hundred dollars an hour rather than invest months in a passive income project that may never pay off.
If you’re looking to retire early, cutting costs aggressively, like Mr. Money Mustache, might be a quicker route to financial independence.
If you’re reading this article because you’re in a job you hate, your best bet might be to look for a job you’ll enjoy a lot more. Passive income projects take time; they’re definitely not a quick escape route out of a dead end job.
If a few hundred more dollars a month would make a big difference to your living situation, maybe ask your boss for a raise:
The truth is that passive income sounds awesome on paper, but it takes a lot of hard work and time to get anywhere and, even then, there’s no guaranteed pay off. There may be easier ways to achieve your ends.
This isn’t to tell you that passive income can’t or won’t work for you, it’s just to make sure that you know what you’re getting into. Passive income is held up as a mystical solution to many of life’s problems but that is far from the reality of the situation. If you’re going to spend months investing time into a passive income project, make sure it’s going to get you what you want.
3. Critically Consider Your Skills
Now that you’ve established what you want to achieve with passive income projects, and you’re certain that it’s the right way to go, it’s time to look at what you bring to the table.
To be successful with passive income, you need to leverage your time, skills and ideas. If you don’t have enough time or the right skills to bring an idea to fruition, then the project is going to fail.
Writing a book properly, for example, is a very time consuming task. Most professional authors spend at least a year on a single book; some spend a lot longer. It also helps a lot if you’ve got some aptitude for writing, creating coherent arguments, and so on. Trying to churn out a book in a few weeks will—unless you’re Sir Terry Pratchett’s reincarnation—result in a pretty bad product. And bad products get bad reviews and don’t sell.
You need to look at what you can do well with the time you have available to invest. In a later article in this series, we’ll look at some ideas to get you off the ground.
4. Set Realistic Expectations
When you’re starting a new passive income project, you need to go in with realistic expectations. It’s almost certainly going to take longer and be more difficult than you think at the start. You also need to have realistic expectations about how much income you’re going to see, and how soon you’re going to see it.
It’s far better to approach your first passive income projects with very cautious expectations and have things go well, than to go in expecting to net millions and get disheartened. There’s nothing wrong with spending a few years working on ten different projects that each end up bringing in a few hundred dollars a month. It’s a much more sustainable strategy than betting big on one idea. Expecting the world from your first attempt is just inviting disaster.
As an example, let’s look at one of my passive income projects. Through GraphicRiver I started selling a Photoshop action that makes your photos look like they’re stills from a Hollywood movie. In its first few months, it sold a total of four copies at $6. After Envato’s cut, my earnings were a whopping $12.48.
A resounding failure? Well, no. While the numbers are tiny, I actually consider it a success. I created the action using skills I already had—I’m a Photoshop instructor—in one intensive evening.
My main aim in doing it was to see what the opportunities were like on GraphicRiver and to find out how easy it was to put items up for sale.
The answer: the opportunities are good if you target the right things and selling items is super easy. The leading Photoshop Actions Author on GraphicRiver crossed the $1 million earnings mark on GraphicRiver, which gives an indication of how popular sales of these items can be on the high end.
Over the next few months, I might put more effort into building actions to sell and test it further. For the time being, however, I’m content to let a few dollars trickle in each month. When it reaches $50 or $100, I’ll probably withdraw it and go out for a nice meal.
A small aim, for sure, but a fun and achievable one. Also, one that could be built on over time.
How to Start Your First Passive Income Project
Now that you’ve established why you want to earn passive income, that it’s right for you, that you’ve got the skills you need for the project you want to do, and you’ve set realistic expectations, it’s time to get started. Let's look at how you can start to make passive income with your first project.
1. Look for a Market Opportunity
Take the advice from above, and harness the skills and passions that you possess, then look to tie them to a market opportunity that already exists.
Building a product that is within a popular, in-demand category gives you a chance to perform in the market. Avoid jumping into making a passive income product that doesn't have some signals of existing market interest.
Keep in mind, you don't need to spend a lot of time here. Just keep your market research basic at this early stage. Look to aim in a direction that looks like people are buying that type of product and that your product idea could be profitable as well.
2. Set Realistic Goals
Now set your production goals.
These goals should not be tied to income at this point, but instead to completing the project. It will most likely take months before you see any revenue so you need to build your goals off finishing the project instead.
Start by outlining what you need to accomplish to get your product produced and then set realistic goals that will help you achieve reach it. Here’s more information on good goal setting:
3. Dedicate Some Time
To make your goals easier to follow, you need to dedicate time to the project. If you just work on it when you feel like it, your interest will most likely wane after a few weeks.
Instead, dedicate set hours every day or week to achieving your goals. Many successful authors, like Steven King, worked full time jobs while they worked on their first books. To make sure they had time to write, they’d get up for a few hours early, before work, or stay up a few hours later at night when everyone else had gone to bed.
If you’re serious about generating passive income, do the same. Set aside a specific time and spend it working on your passive income projects.
4. Start Quickly
Don’t wait. Start now.
There will never be a perfect moment to start work on something. You can always do more research, read more how to guides, and spend more time planning. If you’ve got a decent idea, instead of procrastinating with seemingly productive activities, put your head down and start working now.
5. Keep it Rough
Following on from starting quickly, keep the first draft (or the beta version) rough. If you let perfectionism get in the way too early, you’ll end up wasting time tweaking things that don’t matter. It’s better to get a rough version of something out in the world so you can see what the response is, than to never launch a perfect version.
In this article, we've looked at how to start to make passive income.
Developing passive income can be a lot of work. If you go in expecting you’ll quickly create an earth shattering product that makes you a lot of money for almost no work, you’re going to be sorely disappointed.
Instead, if you approach it with the right mindset, clear goals and an idea you can execute on, you might just pull it off.
Have you already started to make passive income? Or, are you considering starting your first passive income project? Where are you at with developing your passive income projects?
Editorial Note: This content was originally published in 2017. We're sharing it again because our editors have determined that this information is still accurate and relevant.