Passive income is those that are received without the need for your physical presence or direct action.
That is, they are income that requires you to start something (sell an info-product, rent a place, collect copyright…) and that once created generate income almost without the need for you to do anything.
In other words, passive income includes all income that does not require an active participation of the person (or rather a minimum participation), leaving aside the portfolio income (dividends, financial interests, etc.).
There are 3 types of income:
- Time income: You go to work, you do 8 hours. They pay you $10/ hour. This is how you charge. You trade your time for a fee.
- Income by result: In this model, the more you sell or produce, the more you earn. If you get it in 4 hours, because you are very good, while your colleagues need 8 hours, then better for you!
- Passive income: This income is the result of systems that you have put in place to generate money without having to get involved in the process. In many cases, passive income requires technology to automate operational processes. But the most common way to do this is to put people to work on your system. The owner of a business that does not appear in the operations, receives dividends every year that are passive.
For that reason, if what you want is to earn more money, work less and ensure a good retirement, then it is time for you to start creating income streams that do not require great dedication.
For example, in my case I generate passive income thanks to the sale of different products through my sales funnels, which work in a 100% automatic way with Facebook Ads and autoresponders.
If you are starting your business or if you already have one running, the sooner you start thinking about changing your business model to one that requires less time, the sooner you will reach the grail of financial freedom.
And all thanks to the generation of passive income.
The benefits of passive income
Well, what’s so good about passive income? Why are they so coveted and what are the reasons why they attract so much bloggers? Well, for three very simple reasons:
- You earn more by working less: no one wants to work 40 hours a week for their entire life. If there is a way to earn the same by working half, that will be the one we want. And that’s what you get with passive income: generate income even if you are sitting on the couch at home watching television.
- Opportunity to create your own lifestyle: whether you are an employee or a freelancer, if you offer services you will be “tied” to schedules, deadlines and clients. With passive income, if you’ve created it the right way, you can choose how to live, where to live, and what to do with your life. You are not tied to anything or anyone.
- Freedom: beyond creating your own lifestyle, passive income gives you the freedom of not having to answer to others except your own clients.
All three benefits are closely related to living “no strings attached” and living the life you really want. There’s no more. Although you will not be able to live sitting watching your bank account grow, you will be able to obtain a freedom that no employee can have.
Types of passive income
To better understand the model, we are going to review the two basic types of passive income, and also a third modality that, although not technically passive income, can become a key strategy to earn more by working less.
It is an income that occurs over time and that comes from work done only once. I give you some examples so that you understand it better:
- An insurance salesperson, who receives an annual commission when his client renews the previously acquired policy.
- A direct sales rep who gets paid a commission every time their direct customer orders a product again.
- A Fitness teacher who produces a video that is sold in different gyms. With every sale, you charge commissions.
- A marketing consultant who developed an ebook on sales techniques and receives a commission on each copy sold online.
- A photographer who puts his images in a digital catalog for sale online (iStockPhoto or similar). Every time a customer downloads their photos, they receive a commission for them.
- The owner of a restaurant or a business, who managed to grow enough to hire a manager who is in charge of taking it forward: he has created it, he has set it up, and now that it works, he places a manager and recovers his time to dedicate themselves to new projects. The owner can continue to receive a salary, such as consulting/advisory services, and thus have a source of residual income.
There are many and very diverse types of activity that can generate residual income . You may get money for new sales to the same customers as always; it may happen that new customers appear.
But in either case, it is not necessary to be behind the business, or you can simply demand a small personal contact, as could happen with the insurance salesperson, who once a year reminds his client about the renewal and asks him if you want to keep the same coverage.
Notice how different this modality of residual income is from that of recurring income, which defines what an active income would be.
Recurring income is what requires you to be permanently active, such as a consulting job, graphic design, writing, or any other type of service. You must dedicate hours and hours, day after day, week after week, to be able to charge your clients for your services.
Although this type of income offers you greater stability, since you can have a clear visibility of your income in the short/medium term, it has against demanding work hours.
You are selling hours for money, and this definitely limits your income to the personal production capacity that you have. Your business has a ceiling: that of your available hours per week. It also has another negative aspect, if you are sick or on vacation, you no longer generate income.
In both cases, the only way to leverage your business will be to hire more staff with the consequences that this has on the fixed expenses of your business and your personal peace of mind.
The income Leveraged will allow leverage the work of others who generate income for you. Here are some examples of leveraged income:
- The author of an ebook who sells his product through a network of affiliates who are responsible for promoting it.
- The manager of a sales team who receives commissions on the income generated by the people on his team.
- A contractor who earns on a small margin from work performed by subcontractors
- Launch a franchise of your business model, to allow other entrepreneurs to set it up in their city.
As you can see, here there are also different models for different types of businesses. And note that leveraged income can also be residual income . If you achieve the combination of both, you will be on the right track.
ACTIVE LEVERAGED INCOME
This is the third alternative I was talking about. Perhaps it is a bit out of the passive income scheme since it demands your participation directly. But it has the good that it will allow you to generate more income the more people you attract. In general, it is achieved with convening events such as:
- A training course or a specialization seminar
- A conference or a convention
- A recital or concert
- Night parties or events
Naturally, they all demand direct participation from you, and if you have never organized an event, you will discover in doing so that it is many hours of work. But your earning potential is much higher than if you worked for someone who pays you by the hour.
Just think of filling a convention room with a thousand people who pay you 20 euros to listen to a specialist, and you will see that you will have perfectly covered the costs of rent, promotion, security and others, and you still have a good margin.
Perhaps the simplest thing for a company to start with with active leveraged income is to set up a training course.
How to generate passive income?
Here are two possible cases depending on whether you have capital or not.
DO YOU HAVE CAPITAL?
If you already have a capital saved, everything is easier for you.
- With 1 million capital, you can get a return of 4% net, investing in the markets. They are $40,000 per year. For many people, earning $40k/year without having to work would be an almost perfect life. And this income is completely passive. You can work with bots that realign your investment portfolio without doing anything. Literally nothing.
- More of the same, with a real estate capital. If you have 3 apartments for rent in Madrid or Barcelona, it is likely that you will get $2000 clean per month. It is another source of passive income.
In both cases, it is easier to generate these passive income, because you already have these assets.
So… What to do if you don’t have capital, be it Cash or Real Estate, right now?
IF YOU DO NOT HAVE CAPITAL, YOU WILL HAVE TO CREATE ASSETS, WITHOUT MONEY
Well yeah, you don’t have a choice, sorry.
Entrepreneurship is the best way to create capital
There are 2 different paths:
- The traditional company, of a lifetime: you can set up a traditional company, go to the bank to ask for financing, rent and reform a premises and hire dozens of employees. In 20 years, if all goes well, you can become a passive income manager. It will take 20 years, because these types of traditional businesses operate with a reduced operating margin, and even smaller net profits.
- The online business: or you can decide to create a much smaller asset, with hardly any initial investment required. A business that is almost all profit, because you have no physical or personal structure, and automate it as much as you can.
And if we talk about the “technique” of generating passive income, the system is usually the following:
- Create or buy something that can be sold with little modification: you can create a course, book, guide, product or buy a house, invest in assets, etc. They are elements that, with a minimum of maintenance (periodic updates), independently generate income after an initial job.
- Create a funnel to attract public to your product: unless you are in a traditional model, to be able to passively generate income online you will need to attract people to your product. There you can use the blog, guest posting, Facebook Ads, Google Ads and a thousand other tools.
- Provide a minimum of customer service: even if it is passive, this does not mean that you do not have to serve your customers. Except for very specific products, from time to time you will have to talk to your client or automate that relationship with an autoresponder.
- Update your product: your product will expire sooner or later, regardless of the sector. It is up to you to update it and continue to occupy your market share or let it die.
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