First Federal Bank Blog

Warren Buffett, the billionaire businessman and philanthropist, once said: “If you don't find a way to make money while you sleep, you will work until you die.” Though it may sound like a somewhat grim indictment against the retirement prospects of the working person, it’s at its core a recommendation to look into the winning strategy that is passive income. With passive income, as Buffett suggests, you’ll find ways to make money while you relax, better enabling you to enjoy the golden years of your life at your leisure.

What is passive income?

In layman’s terms, passive income is ostensibly hands-off income. Whereas the money you make from your daily work or direct business activities requires the input of labor, passive income requires little or no effort. If you rent out property, you’ll collect money without having to involve yourself in the day-to-day upkeep of a home, though you will be responsible for handling maintenance issues (which can be outsourced to a property management company without eating into your profits too greatly). Other forms like lending and dividend stocks are even less involved — you’re often merely waiting for the money to clear.

The Internal Revenue Service categorizes activities from which you can draw passive income two ways: any trade or business activities in which you are not actively a part and any rental activities in which you may or may not participate so long as you are not a professional real estate agent. Investopedia expands on this definition, noting limited partnerships, the rental of property, peer-to-peer lending, dividend stocks and index funds as major means for earning passive income.

What are the available streams of passive income?

Renting property is by far the most widely recommended form of passive income, but it’s not without risk. Not only are you at the mercy of the market and your property value, but you’ll also have to hope that your tenants do not damage or diminish the value of your property or become delinquent with payment. Financial expert Dave Ramsey notes that a great strategy is to pay off your home and purchase your investment property with cash so that you have as much control over the situation as possible. Ramsey also strongly suggests that you should not put yourself into debt to purchase a rental property.

If renting property is too lofty for you at your current stage, you can think smaller and rent out a room in your home. Websites like Airbnb and HomeAway make it easier to reach potential renters without putting in time and effort to advertise. Ramsey also suggests using extra space in your garage, shed or basement to store goods so long as you are positive that you can keep the items safe. If you’re interested in passive income through real estate, James Royal of Bankrate suggests real estate investment trusts, which operate similarly to dividend stocks.

There is no shortage of other revenue streams available to you. Ramsey recommends starting a blog or YouTube channel and reaping the ad revenue from views and clicks. Along a similar line, Royal recommends leveraging your expertise and selling information through venues like Udemy and SkillShare — though the creation of videos or e-books will require work, the residuals can potentially continue to roll in long after the work has been done. If you have valuable tools or equipment that you don’t use often enough, you can also consider renting it out by posting in your local Facebook group or on Craigslist.

With passive income, you achieve Warren Buffet’s recommendation of earning money while you sleep. This helps ensure that your dreams of a well-earned, stress-free retirement are very much plausible and achievable when you awaken.