Types of Passive Income

You earn passive income when your income stream keeps flowing in even when you don’t spend time to manage this income generating activity.

There are two types of passive income. When you invest money into an income generating asset, and this asset provides you with a passive income, then this is called investment income. Some examples are real estate, stocks and bonds. When you invest your time to create a product or vehicle that can generate passive income, then this is called residual income.

Passive Income - Investment Income

* Interest income.
Interest income is probably the first passive income you come across in your life. You earn interest income when you save your money in interest bearing accounts. This is not an advisable way to manage your money to earn passive income because the interest rate you earn is usually lower than the inflation rate. As time goes by, inflation will erode your net worth. Keep only your emergency savings in interest bearing accounts. Invest the rest.

You also earn interest income if you loan your money to a borrower. However, this is more common for businesses. Examples are banks, financing houses and money lenders.

* Rental income.
You earn rental income when you loan your assets in exchange for money. Example you rent out your properties, equipment and advertising space. Usually you enter into a long term contract with the tenant or advertiser. Minimal effort required from you after you have negotiated and signed the contract.

* Dividend income.
When you own stocks or shares in a company, you are essentially owning part of the company. You are entitled to your portion of the profit of the company. This profit is distributed to you in the form of dividend.

Imagine if you own some stocks in several high performing companies. You just have to sit back, watch the value of your investment grows and wait for the dividend money to be deposited into your account.

When investing in the stock market, look for long term growth. In the short run, your stocks could rise or fall in value but in the long run the value of your stocks will rise.

Passive Income - Residual Income

* Royalties & patents.
Writers, inventors, singers and some other professions earns royalty income. Inventors also earn patent income from their inventions.

* Network referrals.
Create a network of people offering products or services related to your business. Everytime you refer someone, ask for a commission. For example, a real estate agent could refer his sellers and buyers to lawyers, financiers and contractors.

* Network marketing.
Many people have achieved financial freedom through network marketing. You leverage the time you have to earn money by tapping on the effort of your network.

Example, you have 50 people in your network and each of them takes an hour to market a product. Indirectly, you have marketed your product to 50 people in 1 hour. That is 400 potential buyers in 8 hours or one day. If half of these people buy, you get a portion of sales commission because the sales were generated by your network.

* Earn membership fee.
You can set up a place whereby you provide resources, knowledge and support. Then people pay a membership fee to use your resources, knowledge and support. An example is the fitness club. You can also extend this idea online. Examples are paid forums and directories.

* Join affiliate programs.
Thanks to the continued advancement of internet technology, more businesses are available online and more people are shopping online. You can become an affiliate with these businesses and help sell their services or products. When you make a sale, you earn commission or affiliate income.

* Sell information.
Everybody is good at something. If you have a skill or knowledge that will make lives easier or solve problems, then write a “How To...” ebook and sell it online. People are always hungry for information.

* Earn advertising income.
There are many ways to earn advertising income online as long as your website attracts high traffic. Google Adsense is one such program.