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Why a little passive income from a side project is worth a lot more than you think

Even modest passive income streams will bear fruit (Image by Lindsay Haver)

Even a modest passive income stream will bear fruit     (Image by: Lindsay Haver)

You can easily 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. As this dawns on an eager new entrepreneur, she may 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. It took me many years to build up an income stream that matched what I’d have earned if I’d simply sold my articles to magazines or newspapers instead.

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 need to be making it!)

Elsewhere on the Internet though, I’ve a new 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 spring.

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 top five-year savings bond is paying a puny 2%. Interest on cash is the crown jewels of passive income though because your money is totally safe and you don’t have to do anything 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 £1,825 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 2%?

More than £90,000, according to a quick play with a compound interest calculator.

Small passive income streams are worth a lot

I don’t know about you, but I find the idea my passive income stream could soon be equivalent to the interest earned on £90,000 in cash pretty motivating.

Of course, it’s not worth £90,000 in cash. My side project is too dependent on Google and other Internet factors. In a few years it’ll doubtless be as relevant as a Geocities page about the Stone Temple Pilots.

Similarly, if you write a slow-selling textbook on frogs or geography, 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 require you to update and maintain 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!

Still, it does bring home how valuable it is getting £5 a day for doing nothing more.

The minimum wage in the UK is £6.70 an hour, so there are plenty of people working hard for three-quarters of an hour every day to make what my little project could soon turn out daily come rain or shine.

Crucially, a passive income of £5 is surely easier for most people to achieve in the short-term than £90,000 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 multiple tiny passive income streams, although many people over the years have done just that. But if you’ve got some spare weekends and fancy a project, it might be fun – and financially rewarding!

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{ 10 comments… add one }
  • 1 misanthropope November 26, 2009, 3:33 am

    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

  • 2 The Investor November 26, 2009, 8:39 am

    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!

  • 3 Warren Contreras November 26, 2009, 4:07 pm

    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.

  • 4 Monevator January 10, 2010, 2:40 am

    @Warren – Yes, many passive income schemes seem to survive only at the whim of Google, for a start…

  • 5 Pete Matthew July 8, 2010, 9:17 pm

    I found this post really exciting actually. £5 per day really doesn’t sound much but £1,825 per year? Damn, that’s a nice holiday! Makes me excited about a side project of my own.

  • 6 LifeAndMyFinances January 13, 2011, 6:28 pm

    I’m going through the same thing currently. My blogging
    income is maybe $10 a month, but I am just starting out. There are
    other perks to my site though. I am now a staff writer for an up
    and coming passive income website – this often times nets me over
    $100 a month. It’s a nice bit of cash that I didn’t have before.
    Also, I am starting to promote other people’s e-books and products.
    Not only do I make a 50% commission on the sales, but I also get
    the products for free! I hope my site takes off, but I think this
    one little step has really propelled me into all the opportunity
    that’s available online! I’m excited to learn about the next
    income-producing adventure! 🙂

  • 7 DeltaROI May 6, 2011, 6:54 pm

    The problem is when this “passive”source of income becomes an active source of outcome. It’s easy to get tempted by the zillion scammy tools out there offering you a way to promote your passive income source and boost its income.

  • 8 Paul Thomson May 10, 2011, 9:51 pm

    I second the comments of ‘mylifeandfinances’ and that from The Investor; a small residule income from 1 site may not be mega bucks, but should the skills learnt creating an online presence and setting up the business be replicated 2, 3 or even 4 fold you have the potential to triple your income for less work each time. The resulting factor, 3 more holiday’s per year, should you be able to take the time off from your full time job that is ;-).

    An excellent post that will always raised mixed issues on the subject. I support anyone who is willing to learn the skills needed to succeed online; It can be hard work, but like all things, the more you put into something the more you are going to get out of it.

    Good luck everyone with their ventures,

    Thanks,
    Paul

  • 9 Ben September 18, 2011, 9:06 am

    Great article and in the vein of Tim Ferris’ book “4 hour working week”, Yes, I think you are on the right track as the last post from Paul points out; if you end up starting several projects with similar income, and you reinvest this income in your web businesses, could easily be an alternative income before a few years have passed. You ability/skill etc in this area will grow and next venture may be much more successful. Making money while you sleep is a great plan. Good luck.

  • 10 Chris Lee March 15, 2012, 5:51 pm

    I just googled the term ‘passive income’ and found this site. You’ve written an interesting article and certainly provided ‘food for thought’

    A small passive income x several income streams could = a nice little earner.

    Back to work then……

    Regards

    Chris

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