What Is Passive Income?

Before we begin. I am not a financial advisor. I have been trained by wealthy people who have helped me become financially free. This is just my own opinion, but secrets leave clues.

Since I was very little, I was always interested in how things worked.  At the age of 11, I started programming and all the way up through my career in security I was still programming.  My job as a programmer was to my life easier and to make my colleagues life easier.  Automate as many repetitive manual entries or calculations to free up their time, so they can do other things or have a nice long break.

I remember programming somebody’s task where it took them 2 days of manual calculations and tasks, into 3 seconds.  16 hours of saving for the company? Not quite, it just means my colleague can focus on other things to do.

The point is, throughout my life it was a mantra how can I do things quicker, easier or better.

I remember one time I was stuck in a rut in a previous company. Here is my timetable.

Every weekday, rinse and repeat. No real life, no time for family, no time for myself. Ask yourself, can you relate to this diagram?

That moment…

I worked really hard and I wanted to be recognised with a higher salary. I wanted to get that nice white crisp envelope with that letter to congratulate me for a good job and here’s the increase in your salary.

That day came when I got a white crisp envelope and with a big grin I was thinking “This is it… this is it”. I opened the letter… “this isn’t it”. The letter said the company were making me redundant.

Boom! I was so disappointed and realised I was just a number. The question I asked myself was “who was in control of my life, me, or the company?”   I would encourage you to ask yourself that question right now.

If you want to change it and take back control of your life, you need passive income.

What is passive income?

In short, you have monthly expenses to pay and here are just some items as examples:

Liabilities Monthly Expenses Monthly cost
  Food  
  Clothing  
Residential House House Mortgage £600
  Fuel to travel  
  Presents  
  Council taxes £120
  Presents £20
Mobile Subscription Mobile Phone £40
Internet Subscription Internet  
 
 
    Total Expenses: £2,000

In this example, you will end up with a rough estimate of total expenses of £2,000.

Let’s say you only have your wage coming in: £3,750

Assets Monthly Income Monthly cost
None. Wage £3,750
 
 
    Total Income: £3,750

The difference between your income (£3,750) and expenses (£2000) is £1,750 that is your “leftover money” (also it is your “cashflow”, but not yet considered “passive cashflow”), but what do you with your leftover money? 

  • A lot of people spend it and it is gone. 
  • A lot of people save it in the bank account, but because of inflation the power of that £1 or 1$ if you prefer is going down over time (i.e. the costs of goods/services goes up over time, but that £1 or 1$ is just a pound or dollar so you cannot buy the same amount).

Either way, the money is losing value.  You have spent you hard-earned time for money.

Passive income is the other way where you use the money to work hard for you. Spend money for time.

Let’s say you get a rental property and this could make you an additional £250 per month, let’s see what this difference means. As it is something making you money, it goes into the asset column and we update the income it gives you.

Assets Monthly Income Monthly cost
  Wage £3,750
3-bed buy to let. Rental £250
 
    Total Income: £4,000

As your expenses may stay around the £2,000, your leftover money is now:

  • Income (£4,000) – Expenses (£2000) = £2,000 leftover (so the increase is £250 as we said earlier).

It’s not lifechanging, but it is a start. And also, that £250 is “passive” (which means it takes little or none of your time to manage). It is passive income.

But let’s assume you go above your monthly expenses. 

Now, let’s take it further so that you have enough income from your passive income investments. Let’s assume that you have passive income is just about covering your total monthly expenses (in this case, just your investments and without a wage you have £2,100 which is more than all expenses at £2,000).

Liabilities Monthly Expenses Monthly cost
  Food  
  Clothing  
Residential House House Mortgage £600
  Fuel to travel  
  Presents  
  Council taxes £120
  Presents £20
Mobile Subscription Mobile Phone £40
Internet Subscription Internet  
 
 
    Total Expenses: £2,000

Assets Monthly Income Monthly cost
  Wage £3,750
3-bed buy to let. Rental £250
3-bed buy to let. Rental £400
8-flats Rental £1,600
    Total Income: £2,100

This means that technically, you are “financially free”. In reality, you have gained “financial security”, so you can look after yourself if things turn bad in the short term.

Let’ say instead of £100 difference per month, you had £1,000, £2,000 or more in difference. You can have a more fruitful life. More time with family, more holidays, more time with hobbies etc.

For most people at my age, they will have to retire at 68. I would expect this to go up if the average life expectancy age keeps creeping up.  Do you want to retire and then start enjoying life at 68? I know I do not!

So how do I start?

I would encourage you to start looking at some passive income methods.  There are so many out there, it is difficult to really know what are truly passive (remember taking up little or none of your time). Here is a list that I feel are great right now:

Strategy Summary
Rent Property Rent property for a steady stream of monthly passive income.
Affiliate Marketing Refer people to products and services and you get a commission.
Dropping/Dropship Business You take money from your customer You pay a service provider to deliver the goods/service to the customer directly. You keep the difference between money from the customer and money you paid out to the service provider.
Create YouTube Channel Money from adverts.
Create royalties Money from people buying your goods, such as music, DVDs, books.

So, I hope that inspires you to get started. I’d really like to know how you get on. 

 

 

Tell me what you are doing about your passive income.  What do you need help with?  If you have any questions, feel free to leave a comment on our social media.

Help your friends and family. Share this with them.

And lastly, security is not a compromise!

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