Even a modest passive income stream will bear fruit (Image by: Lindsay Haver)
It’s very easy to become disheartened when you first set up a side project with the aim of earning some passive income.
You might well only make a few pounds or dollars a day, even after weeks or months of work to get your passive income stream up-and-running. Most passive income projects fail to make even that.
But don’t be disheartened if you make only a small amount of cash. Passive income is the stuff of dreams, so it’s no surprise it’s hard to get hold of.
Even a little bit of passive income is worth a lot of money. Before I explain why, let’s remember how lousy it feels to be paid loose change for your efforts.
The little cheques that can crush your dreams
Reminder: Passive income is money you get without any extra work. Examples include interest on your cash savings, the income after costs on a property you rent out, or royalty fees on a book you wrote years ago.
Many of us have read articles online or heard stories from friends about how writing books, creating websites, licensing patents or any other route to passive income is the way to riches.
This idea that passive income will make you rich is… half-wrong.
Only the very lucky author, webmaster or inventor will make thousands overnight. And as this dawns on an eager new entrepreneur, he or she will often throw in the towel even before that first dispiriting $0.52 in passive income is earned.
I’ve already been through this with blogging, which I thought looked easy but as I’ve written turned out to be a truly terrible way to make money.
Blogging isn’t even properly passive; you need to continue writing to keep your audience entertained. (Luckily I blog about money because I love writing about it, not because I always love making it!)
Elsewhere on the Internet though, I’ve a project that is more ‘fire-and-forget’, and where the income is growing slowly from a small base. I could see it generating £5 a day by summer.
Now, you might think £5 a day is nothing to write home about.
So did I. But what I’ve come to realize is that even a trickle of income from a passive income stream is a rich thing to own, especially if you have more than one or two such income streams.
It’s all down to what you’d need to do to get that money elsewhere.
Comparing side project income to interest on cash
At the time of writing, the best cash savings account is paying about 3%.
Interest on cash is the crown jewels of passive income because your money is totally safe and you don’t have to do anything at all to earn it. (We’ll ignore for now inflation that makes dividends better long-term, and the remote risk of losing money in a bank run).
Returning to my little web project, let’s say it does make £5 a day.
£5 every day adds up to £1,865 a year, which already sounds a lot better. (Remember, this is a fire-and-forget project, requiring at most a few maintenance tweaks a year).
Now how much would I need in cash savings to get £1,865 a year with interest rates of 3%?
More than £60,000, according to a quick play with my favourite compound interest calculator.
Small passive income streams are worth a lot
I don’t know about you, but the idea my passive income stream could soon be equivalent to £60,000 in cash was an eye-opener.
Of course, it’s not worth £60,000 in cash. My side project is to some extent dependent on Google and other Internet factors.
Similarly, if you write a slow-selling textbook on frogs or geography, say, eventually it will go out-of-date and your income will dry up.
A passive income stream from an investment in property is better, but even that will eventually require you to update your premises at some considerable cost (though that may be covered by price rises).
Cash in contrast is the ultimate liquid asset. Give me cash over web projects, any day!
But still, it does bring home how valuable getting £5 a day for doing nothing more really is. The minimum wage in the UK is around £5 an hour, so there are plenty of people working hard for 60 minutes a day to make what my little project could soon turn out rain or shine.
Crucially, a passive income of £5 may be easier for most people to achieve in the short-term than £60,000 in savings. If you’re trying to replace your salary with passive income, adding a couple of alternative income streams to the mix could cut down the scale of the challenge.
I wouldn’t quit my job to set up tiny passive income streams. But if you’ve got some spare weekends and fancy a project, it might be fun and financially rewarding.
Filed under: 5 must read posts, Earning
{ 13 trackbacks }
{ 7 comments… read them below or add one }
if you want to produce a really useful article, why don’t you follow up, and track your time and capital commitments and returns. i’m really not trying to attack you, but the entire “micro-entrepreneurial” meme rings of unreasonable expectations, sort of a holdover of the dotcom era. most especially the people who think they are going to get rich working with google. your “teammate” is entirely professional, and holds an incalculable advantage in negotiating rates. you may make money- and i hope you do!- but the deck is thoroughly stacked against you.
if you’re going to make a decent return on your commitment, you have to have skills, capital, or sheer blockheaded stubbornness that others either don’t possess, or are unwilling to turn to the task. increasing returns to scale are almost invariably observed for us “little people” in our endeavors. if you want to financialize a small effort, your best bet is performing a service for yourself, that you would ordinarily pay to have done.
luck to ya
Hi Misanthrope,
Thanks for your comments, and I do know where you’re coming from. For instance, I wrote an article about how 99.99% of people delude themselves if they think they’ll make any money from blogging, and I’ve also written about the high opportunity cost of starting a business and the risks.
All that said I do think the urge to have some enterprise of one’s own – to test oneself in what is after all a very entrepreneurial world these days – is a strong one, and not a bad one. And I think such micro-enterprises are a good way to explore such possibilities, without taking on too much risk.
Most people spend their spare time watching TV, drinking, or playing World of Warcraft. If they instead spend it on a side business, that’s not such a bad thing?
The point of this article is that even a small amount of side income adds up. Make just £3/$5 a day, and you’ve got a holiday for two every year that maybe you couldn’t afford before, or an extra slug of pension contributions. Worth it, if you enjoy it – and who knows, it might just grow into something bigger.
Thanks again for your thoughtful comments!
I can tell you from experience you have the right idea, but it’s MUCH better than you think. My little side jobs online elevated my travel fund very quickly when I was getting $6,000 a month, but Internet income is fragile and it only lasted a few months. The good part is, the skill set I perfected during that time is duplicatable, so I am doing it again in a much shorter time and with less effort.
@Warren – Yes, many passive income schemes seem to survive only at the whim of Google, for a start…
Monevator´s last blog post is Weekend reading: Happiness is a ton of great blog links
There is always some level of risk involved with any kind of passive income producing opportunity either its time commitment or financial investment working out which one does more for you in terms of life quality and assurance are the passive opportunities to aim for.
shaz@HYIP profits on: Launch day at HYIP Profits & PTV Partner Mini-review
Very well thought out. I like how you compared the money per day from passive income to those working for a wage. And good passive income does not require a huge chunk of money in the bank to gain interest. You just get it through the time and effort spent to get to that point (assuming you didn’t spend a bunch of money to get to that point
).
I found this post really exciting actually. £5 per day really doesn’t sound much but £1,865 per year? Damn, that’s a nice holiday! Makes me excited about a side project of my own.
Pete Matthew on: MM No 23 – Risk