Passive income: What is it, how to get it.

Wouldn't it be great to get money on a regular basis while spending very little effort to maintain that stream? That's the magic of passive income, Hamm says. He walks readers through how they can establish a passive income stream.

Shohei Miyano/Reuters/File
The YouTube logo is pictured. One way readers can establish a passive income stream is by creating and promoting YouTube videos, which can accumulate ad revenue over time.

All of us have that dream of sitting back and just opening the mailbox to watch the checks come in. It would bewonderful to be in a position where those checks care of all of our day-to-day financial needs, freeing us to use our time in whatever way we saw fit without income as a requirement.

That’s the dream of passive income. Passive income is income received on a regular basis, with very little or no effort required to maintain it.

Obviously, achieving passive income is a tricky thing. From my personal experience, at least one of three things need to occur before passive income can begin to put significant money into your pocket.

The first option is that you need to be lucky. Being in the right place at the right time can sometimes set you up with a great passive income stream.

My favorite example of luck playing a big role in passive income is the story of Ozzie and Dan Silna, who owned a low-rent American Basketball Association franchise in the late 1970s. At that time, ABA franchises were worth about $2 million each, give or take. In 1976, when the NBA and the ABA merged (mostly with the NBA absorbing parts of the ABA), the Silnas agreed to fold their team and not sue the NBA in exchange for 2/7ths of an ordinary franchise’s share of television revenue. Currently, the Silnas each receive an annual check for $14.57 million from the NBA for their revenue share without having to lift a finger. That’s luck – there’s no two ways about it.

While I’ve written about tactics for improving one’s luck before, I wouldn’t use luck as my sole method for obtaining a passive income stream.

The second option for passive income is that you need to have a lot of money up front. A large initial investment can set you up with a great passive income stream.

There are a lot of options for this. You can buy a stock with a long history of paying dividends. You can buy a treasury note… probably not the best idea with the low interest rates at the moment, but it is an option. You can buy a rental property and put a management company in charge of it.

All of these – and many others – will generate income for you, but they all require a significant amount of cash up front in order to be able to pull it off and generate significant income.

The final option, of course, is that you need to have a lot of time. Given enough time, almost anyone can build up a passive income stream for little cost, and it doesn’t require a lot of luck. The catch here is that you have to invest alot of time to do this and there’s very little immediate return on that time.

Some examples of this: creating Youtube videos, writing e-books for the Kindle, writing books for a mainstream publisher, recording and selling music, and so on. All of these things take significant time, but don’t require a lot of money. All of these things can generate a revenue stream that’s often in proportion to the amount of time you invest.

I’ll give you an example of what I mean. Let’s say you create a Youtube video. It takes you ten hours to plan it, make it, edit it, upload it, and promote it a little. Once it’s up on the Youtube site, it generates, say, 1,000 views a month. That means it’ll earn you roughly a dollar a month.

So, you’ve spent ten hours and then after that, you’ll earn a dollar a month. You don’t get anything after those ten hours, of course. You just get a dollar a month thereafter.

(In truth, most Youtube videos earn less than a dollar a month, but most Youtube videos also take less than ten hours to create. I’m using both numbers as an approximate example for a good video.)

Now, over the course of ten years, that dollar per month adds up to $120. That ten hours you initially invested turns into an hourly rate of $12 per hour. If the train keeps rolling for another ten years, your total adds up to $240. That’s an hourly rate of $24 per hour. Not bad. The best part is that once the initial ten hours are spent, you don’t have to do a thing. You just sit there and watch the dollars plink into your account.

A dollar a month isn’t really liveable income, of course. You need to repeat that effort.

So, you spend ten hours a week making Youtube videos. At the end of the year, you’ve invested 520 hours, but you have 52 good videos up there. They each earn a dollar a month, so you’re bringing in $52 per month in revenue basically in perpetuity.

You can write a similar story about any of these kinds of revenue streams. You invest a ton of time up front and, depending on a number of factors, income starts dribbling in at a steady pace for a long while thereafter with no additional effort. You don’t have to keep adding time to keep that income stream going (though you can add more time to enlarge that stream).

As you can see, it takes a lot of time to build up a revenue stream worth shouting from the rooftops about. My experience has been that people who promote this kind of moneymaking usually underestimate drastically the amount of time it takes because they’re either trying to sell a product or they just simply enjoy the time they invest in doing it or they were combining time, luck, and money together in some combination.

Building passive income streams is a great way to spend extra time or invest extra money, but you should never expect it to immediately transform your life. It usually requires a large investment of either time or money or a sizeable amount of luck in order to build a big income stream. Still, it does make sense to spend your spare time trying to write a book or create something else that can make passive income for you.

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