So, these have to be the most common question asked of me, out of many. Can you define passive income? Can you explain what passive income means?
How do I define what Passive Income means?
First of all the Passive Income Wizz definition of passive income is that it requires little or no effort to earn and maintain ONCE initial setup of a system has been done correctly
- Rental income from a property may be considered passive, and this may be completely true from month to month. However, there will inevitably be times when you do need some involvement , e.g when a tenant leaves and you need to arrange redecoration and a new tenant. (Of course if you own as much property as someone like Robert Kiyosaki you will have a team managing the properties for you!).
- You could have trading or other business activities in which you are not active throughout the year.
- Income from bank deposit interest, or bonds is extremely passive.
There are other caveats about what passive income means to me. I accept that many of the forms of passive income that I have both tried, and written about, are not so black or white as being totally passive or not. It is not that simple. Many of the forms of passive income that I like do require time and work, but often that time or work is required at the outset. Time to learn and understand and new concept or skillset required. Time to test something, without investing if possible, to make an educated decision about whether this is something that fits my investment criteria.
What Criteria can you use to judge an opportunity?
As such what passive income means to me is very different to others. But there are a number of factors I do look for consistently. Not all vehicles that I invest in have all of these qualities, but many will exhibit a number of them.
- The ability to realise a multiple Return of Investment over time. Of course not all the systems I invest in will work, and in fact over the years the majority have either made a loss or broken even. However, if about 30-40% of my investments make a 10-fold return on investment then the losses are inconsequential. So, the risk:reward ratio is very important.
- I do not mind spending quite a lot of time learning, understanding and setting up a new investment. However, I like to keep the ongoing management of these as minimal as possible. Less than one hour per month is very good. Less than one hour per week is fair, especially if the returns are good.
- Initial outlay required. You have to be very, very certain of something if you are going to invest heavily from the outset. Most of my initial investments are between £100 to £1000. You are not going to get wealthy from a tiny investment. However, there is certainly one system I have seen that has the ability to take an initial £100 investment and take it to £1 million in just two years!
- How long before I see a return? If I can start to see an almost instant return within a week that is brilliant! If I have to wait more than a year to see any ROI that is poor.
- Do I need to sell to others? Surely selling to others cannot be a source of passive
Warren Buffett knows what passive income means to him
income you ask? Well, affiliate marketing is essentially selling to others. But, affiliate marketing done well is consultative selling, i.e you are providing a service and making others aware of a particular product or service and getting rewarded for that sale if it occurs. It is hardly like knocking on someone’s door with a hard sell! However, you may need to write articles, make videos or post on social media to make something like that work. Some will love doing that, others would hate the idea of having to produce content like that….. it’s totally horses for courses!
What passive income means to one person will be totally different to the next. If you want extremely low risk, low involvement then buy government bonds and sit back, enjoying the security and low rates of interest. It’s great if you have loads of money though. Warren Buffet has about 70%+ of his portfolio in bonds, but he has billions of dollars to invest! I like to create a portfolio of investments that may give me the chance to see a great return from some of them.
