The Do's and Don'ts of Generating Passive Income

Jackie Lam, January 2018

The Do's and Don'ts of Generating Passive Income

There are few golden paths to financial freedom as attractive as passive income. After all, it's been found that most millionaires have multiple streams of income. Generating passive income can be done by creating a mobile app, selling photos to stock image sites, writing a book or even renting out an empty room in your home. While building little money-making armies to generate passive income could be a tremendous boost to your bottom line, there are hazards. Here are some common pitfalls to generating passive income and how to avoid them so you can thrive:

Don't: Think Passive Income Equals No Work

Passive income is a bit of a misnomer. Any streams of passive income — whether it's from investing in real estate, using affiliate sales from a website or publishing an e-book — are key to realizing that every opportunity requires a significant investment of time and money upfront. It's only after you've carved out these revenue streams that they can begin to rake in revenue while you sleep.

So while the goal is to hit a point where the money should flow on its own, you'll need to put in a lot of work at first to get it going. Make sure you create a business plan to have an accurate picture of just how much time and resources you'll need to successfully generate revenue. This will help you gauge which endeavors are potentially worth it.

Do: Focus on One Income Stream at a Time

When you're starting to build out your passive streams of revenue, trying to launch too many at once will only be a drain on your time and money. It can also lower your chances for success.

Instead, focus on building one at a time. If you're having trouble figuring out which product or distribution channel to start with, go for something that you already have experience in or one that has a network of people that can help guide you. For instance, if you're a writer, you can look into writing an e-book or affiliate marketing on your blog. If you're a homeowner and have some equity and savings, you may want to look into purchasing properties solely for the purpose of generating income.

Don't: Rely on One Source

While you shouldn't spread yourself too thin when it comes to carving out one source or product, you also shouldn't solely rely on that one source. Having a lot of spinning plates will help you generate more income overall. So if one of your income streams isn't doing as well as it normally does one month, you can rely on the rest to make up the difference.

Do: Check Your Results Regularly

Ideally, passive streams of income should generate consistent income, while others may have more of an ebb and flow to them. For instance, book sales may be strong for the first few months after its release, but then take a dip. And if you're generating income from a property, you may find that you need to save more for repairs, maintenance or periods of time when you're in between tenants.

Keep an eye on your different income streams to see which are doing well, and when it's necessary to pivot your plans, tweak your goals or invest in a particular income stream to give it a boost. While it's not a cinch, generating passive income can help bolster your financial goals and free up more time for what matters most to you.

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