Is There Such a Thing as Passive Income?

The answer is, of course, there’s such a thing as passive income.

Just go to the bank open a savings account, put $1,000 and at the end of the year you’ll have $1,010 or some small number like that and it will be very very passive.

Not much research and no activity required on your part. But you also have a very limited amount of income and that’s the first point in this idea of passive income is that return on investment is correlated to activity to a great degree. So, in that example, we had very little activity, very passive income but our return was very small. So, generally speaking, as you find higher ROI projects there are going to require more activity. That being said, there’s definitely a continuum and a scale that we’re talking about.

The second thing you should consider when you’re thinking about passive income is that there are a lot of business models particularly online where the activity is front-end loaded. You do a lot of work at the very beginning perhaps after you’ve bought a website or certainly, if you’re building a website and then many business models allow you to back off significantly at some point, in the end, the income becomes more passive after that. And that’s true online it’s also true offline in some cases where you’re building a team we building automation processes that kind of take over for you to make things more passive for you as a leader.

Let’s talk about required activity versus growth-oriented activity.

When we talk about passive income we’re thinking about what are kind of the minimum activities that you have to do to keep the online business rolling and that that I’m calling “Required Activity”.

Now, any kind of passive model we’ll talk about business models in just a minute but like let’s say content website you can develop a content website and it can be pretty passive ongoing but you’re not going to be growing it passively very easily. The more growth that you want the more activity that’s going to be required.

So when we talk about passive income usually it doesn’t accommodate growth so much so we’re just talking about what is the kind of the minimum required level of activity and effort. Let’s talk about business models for a second. And I’m just going to cover sort of 3 categories right now. Content websites, e-commerce websites, and SaaS websites (Software as a Service ).

In the content realm, a lot of times the activity level can be front-loaded, as I mentioned before, or delegated where you build the process for publishing new content maybe you’ve hired/outsourced the writing, the editing, the publishing and so on in which case it actually can be a fairly passive model. As I said before if you want to grow things and you’re going to be doing a lot of analysis and tweaking of the methodology. E-commerce, for example, is rarely passive. There’s a lot of just real important required activity going on there’s customer service actions, there’s inventory related actions, new product development actions, addressing competition, bad reviews and all of those kinds of things.

It’s definitely a more active model and whereas that kind of thing can also be delegated and outsourced and automated and so on. There’s still a lot of ongoing activity associated with e-commerce.

SaaS (Software as a Service) can also be passive to some degree when you build the processes but there’s still an element of software that needs to be taken care of, customers whose problems and concerns need to be addressed and then always adding-in new functionality new technology. So I would say that that the SaaS business depending on how you do it kind of falls in between content and e-commerce and its level of passive income generation ability.

Let me address the final thing and that is the difference between sort of an outside investor and an inside entrepreneur.

Generally speaking, there are ways that an investor can have passive income and they relate to giving someone else the job of doing the work. So you may be investing in a stock or a real estate deal where there’s a management company or something like that where you’re kind of sitting on the outside but if you’re the entrepreneur if you’re the owner-operator the more you are to the inside than the outside the more effort you’re going to have to put into businesses. And of course, that effort varies. As I said earlier by business model but generally there’s kind of a dichotomy there between being on the inside being on the outside in terms of the passivity of your investment.

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