How to Build a Passive Income Strategy

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As you actively earn your income, you’ll want to put your money to work by building a residual passive income. Passive income is not entirely dependent on you to actively earn and can be created in two main ways:

  • As an owner, where you employ technology or others to work for you.
  • As an investor, where you employ your money to work for you.

With these strategies, the aim is to achieve total time freedom, where you don’t have to trade time for money.

Passive Income Strategies

To earn passive income, you’ll need to put in capital and time. Capital and time input will however vary by the type of method you employ to earn passive income. One form of passive income will require upfront capital investment, while another may require a lot of time to materialize.

Let’s dive into what it takes to build a passive income strategy:

I. Owner Generated Passive Income

In this form of residual passive income generation, you are leveraging technology or people’s time, knowledge and energy to make money for you. Therefore, you will need to build and own a system that will generate passive income for you. There is no limit to the owner generated passive income. You can do what you like and earn an income. However, in this form of income generation, the system you have created should be able to run smoothly for at least three months without you for it to qualify.

Since they are so easy to set up, here are some of the common owner generated passive income models leveraging technology:

Digital Business Models

The internet has provided new opportunities for passive income:

  • Content and affiliate marketing – earn commissions or advertising-free through affiliate marketing.
  • Creating a service website – you’ll probably need the skills to do this but it’s a great way to create an automatic service that humans don’t want to do.
  • Build a mobile app – create value using a mobile app and earn passively with occasional work for updates.
  • E-commerce – buying/selling products online is a great form of passive income with a lot of potential for exponential growth.
  • Digital products – sell ebooks, courses and other digital products.
  • Self-publishing – write your own books and self publish to earn royalties for each copy sold.

II. Investor Generated Passive Income

As an investor building passive income, you can leverage the money you have to generate additional residual income. Passive income can take many different forms. You can earn interest, dividend and/or rental income.

A standard passive income portfolio can safely pay dividends of 4% per annum. Therefore, if you want to generate Ksh 400,000 in annual dividends you will need to have a portfolio of at least Ksh 10M.

Understanding how much is needed is probably the most important first step, as this figure now becomes your financial goal to achieve financial independence.

The next thing you’ll need to do is figure out how much you need to invest today, in order to have Ksh 10M in your portfolio within the time you have set.

Learn More: How to Produce Income From Investing Forever

Here are some common investor generated passive income models:

Financial Asset Ownership

  • Bonds – earn interest income over time.
  • Mutual funds
  • Passive stock ownership – collecting dividends on promising stocks owned.
  • Annuities – plans sold my insurance and investment companies that involve customers putting up capital in return for a smaller sum of money which adds up over time.
  • Certificate of Deposits (CDs) – low-risk, low effort and relatively low payback streams of passive income.
  • Peer to Peer Lending – earn interest income by lending small amounts to multiple people using P2P lending platforms.

Property Ownership

  • Storage space ownership
  • Purchasing vending machines
  • Real Estate investment – the oldest and most popular way to earn passive income over long time periods.
  • Real Estate Investment Trust (REITs) – real estate alternative to traditional ownership.

How Much Time Do You Need?

To set up passive income streams you’ll need to put in hard work and a lot of perseverance to set up some of the above-mentioned models. This won’t be by no means overnight success but months, years of sweat and hard work. At the end of it all, you’ll certainly earn revenue eventually.

Hence, it’s essential to evaluate if you are willing to put in the effort now and a little later.

Takeaways

There is no single passive income strategy that is better than the other. Therefore, you should consider your scope of competence. Generating income is about creating value. Note that there are a lot of get-rich-quick schemes out there making false promises. Avoid those at all cost before they sidetrack yours rob you of your dreams. Making money takes effort. If it was easy, everyone would be rich.

Therefore, take the time to plan how you can grow your income streams to free up more of your time in the future. Passive income is the foundation and the fastest way to achieve financial freedom.

Happy Building!


Image credits: Top by Alex Fu from Pexels

Disclaimer: This information is provided to you as a resource for informational purposes only.

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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