If you’ve ever browsed around this site, you know that John is a huge fan of passive income. Every one of his actions is based on the idea of passive income: writing for eHow, hiring staff writers, CPC ads, niche websites, dividends; all of this work is performed so that he can earn an income that’s regenerative and takes care of itself. It just so happens that John and I are incredibly similar on this viewpoint – I’m a believer in passive income as well. But what is it that makes passive income so great in my eyes?
Passive Income vs. Earned Income
Do you understand the difference between passive income and earned income? A typical job is a great example of earned income. You head to a building, punch the clock, work for a certain amount of hours, punch the clock again, and then you head home. Your pay is not dependent on what you accomplished that day – you get paid based on the number of hours that you worked. In other words, if you show up and put forth a little bit of effort, you get paid. If you don’t show up, you won’t get paid. It’s a time for money exchange. And, what if you want to increase your income? Since promotions don’t happen too often, you’ll have to work more hours – either at your current job or you’ll need to get another one. The more time you put in, the more you get paid.
Passive income is radically different and most people do not understand it. In order to generate this type of income, you’ll typically put in quite a lot of time to develop the core of the business and get paid hardly anything to do it. In the beginning, those that work for earned income look at the pennies that you’re earning and they think you’re crazy. Why wouldn’t you just do what they do and make some decent money already? What they don’t understand is that your earnings could multiply many times over, which soon propels your income past theirs. Plus, it’s typically at this point where their income has peaked and they have no hope of earning more.
Michael Jordan vs. Bill Gates
Most often known as one of the best basketball players of all time, Michael Jordan was paid quite well for what he did on the court. He was also paid for endorsements and appearances, which I’m sure totaled a hefty sum, but guess what? Michael Jordan was an employee. If he decided that he wasn’t going to play basketball for a couple of weeks, his team would not pay him. He needed to show up and “punch the clock” to earn his paycheck, just like the rest of us.
Today, Michael is worth $500 million. Not too shabby huh? I’m sure he could survive for a while if he stopped earning his income. He has done quite well in the “earned income” category, but guess what? Passive income still takes the cake. Let’s read on….
Whenever I hear the phrase, “computer geek”, I think of Bill Gates. He is most definitely one of the better geeks of his day, but he’s also one of the most brilliant passive income earners I’ve ever seen. At a very young age, Bill decided to improve the usability of the computer and developed “Windows”, an operating system that made the computer simple. While he was developing the software, guess how much money Bill was making? Absolutely nothing! Who in their right mind is going to pay for a half-completed project that would most likely fail?
So, in order to write the software, Bill basically worked for free, but hoped that it would pay off once it was finished. Well, his time certainly wasn’t wasted. Soon, the software was complete and all Mr. Gates had to do was watch the money roll in as he sold disc after disc after disc. Today, Bill Gates is worth $59 billion, which is more that 100 times the net worth of Michael Jordan.
Passive Income Wins
So why is it that creating a passive income can develop into a larger amount of money than earned income? It’s quite simple really. Let say that your friend works as an employee. He punches his clock every day and earns $40,000 for the year.
With passive income, you might not make an income at all in your first month because your project is not yet complete, but let’s say that you finish it in the second month. Sales start out slow, but then they grow at an exponential rate. $200 in February, $400 in March, $800 in April, $1,600, $3,200, $6,400, $12,800, $25,600, $51,200, $102,400, and $204,800 in December. The income started slow, but once it picked up it shot off like a rocket! Instead of your friend’s $40,000, you earned $409,400!! That is why passive income wins.
Are you making an effort to develop passive income? And, do your friends think you’re nuts!?
This post was written by staff writer Derek.
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- Passive Income and the 80/20 Rule
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I don’t know if I agree that Bill Gates empire was created through passive income. I agree that his basic Windows code was the basis for his software empire, but he also released a new version of this software every few years, in addition to changing the entire scope of modern computing. He worked hard up front to put the pieces into play, but I would almost guarantee that he never actually stopped working. To me, passive income would be something that is developed and put into play, and then infrequently tweaked and upgraded over time. Like rental property, or an affiliate sales landing page. But I could be way off base…
I understand your point, but it’s everyone’s choice to work continuously or not. His Windows Coding was sold as passive income for sure and he could have just sat back and watched the dollars come it, but since it was his passion, he decided to do more and get better (and make more money). If he would have stopped in the initial stages, I agree that he wouldn’t be worth near what he is today, but he’d probably still be in the billions…..
Creating wealth through passive income takes a lot of discipline and dedication to a vision that others around you might not see. Not to mention the risk that comes along with it. On the other hand earned income gives you some kind of structure.
Sandy,
Passive income is tough work, and earned income does provide a consistant paycheck; however, I would still enjoy passive income over earned income. It would not only provide me an income, but it would allow me the time to do other things. I could work to earn more money, or I could volunteer for the rest of my life, or, I could simply do nothing!
Some passive income businesses are more passive than others. The licensing of software that can be resold over and over, is somewhat passive.
Software sales are actually quite passive. All you have to do is find someone to take care of the sales, and then they’ll pay you a portion of each sale. You could sit back and eat bons bons all day if you want – your software will still sell.
I think that passive income is a necessity to survive really. With the current market, declining incomes, rising costs of everything from food to fuel, without some sort of passive income in place you are bound to start losing ground on the adjusted income figures. Even if it’s $300 a month it’s worth pursuing.
That’s a great way to look at it! Passive income is a great source of extra cash, especially if things look bleak in the future (which is the case for most of us….potentially).
Passive income always wins in the end because there are only so many hours in the day but there’s a theoretically infinite amount of money to be earned!
Additionally, having a stream of passive income adds stability to your finances. Just like diversification in your stock portfolio creates stability, diversifying your income has the same effect.
That is the great thing about passive income. Since you don’t need to work long hours for the income, you have the time to create more!