There are two main types of income passive and earned. I am not a financial advisor nor a tax advisor. I urge you to seek advice from both before you make your final decision. Before you consult your advisors, it is a good idea to know a little more about these two types of income.
Passive income is income that continues to come in without any direct work on your part. Earned income is the money you earn performing a task or providing a service. You can earn both types of income in online business. I will discuss which is better after we take a closer look at both of them.
WHAT IS EARNED INCOME
Earned income is what you are paid for doing some sort of work. If you are an employee then that is often a direct exchange of time for money. You work for X number of hours and you get paid a specific amount per hour. Taxes aside, it is easy to project what you will get paid as soon as you finish working the hours. This is the worst way to earn a living.
Salaried employees earn a set amount for a given time period. This is usually an annual amount that is divided into monthly or biweekly payments. Depending on the type of work you may be able to earn bonuses or commissions on top of your salary. Getting paid this way allows you to budget exactly how much you will receive each payday. You are still trading your work and time for money. You earn your income.
Moving out of the employee realm and into small businesses, most income is still earned income. Small business owners work more than most people. They are dependent on their business for their livelihood. If business is good they earn more. If the business is in a slump, they may not get paid at all. Can the average small business owner walk away from their business and still expect to earn an income? No. They are trading their work and time for money, with a little more self-direction.
Self-employed folks are also trading time and effort for money. These are doctors, lawyers, freelancers, farmers, and independent anything. They work for themselves but they are trading time and work for money. They earn money by providing a product or service. If a self-employed person stops working, their income stops coming in.
All these are types of earned income. The amount of income is rarely proportional to the value of the work performed. To decide if income is earned or passive ask what happens if you stop working. If the income continues then it is passive. If the income disappears then it is earned.
EXAMPLES OF EARNING INCOME ONLINE
The world of online freelancing is exploding. If you have a skill that can be outsourced then you are in demand. Virtual assistants and those with design skills are in huge demand. This is very much hands-on work. You will need to have skills and be able to set yourself apart from your competition. Sites like FlexJobs, UpWork, and Freelancer are popping up everywhere. These online marketplaces for skills make getting started a lot easier. If you have some skills and you want an active earned income online then this is the place to start.
Life coaching is a new concept for me. This seems to be a rapidly growing field. I know several people who are earning a full-time living doing this. You will need to have the skills to counsel and coach your clients. There are currently no licensing or certification requirements. There are certifications available to help you learn more and authenticate your skills.
This is earned income. You are paid for the time and attention you give your clients. This is not for everyone but it is a viable online business field.
This is not passive income! Drop shipping is selling products online. You find a supplier who has products to sell. They will ship them to your customers with your invoice and shipping label. You do not need to buy any inventory up front. You may need to pay a fee to become a member of the drop shipping platform you want to use.
You create a website or an eBay store or something similar to sell the products. Once you have a sale you place the order through the drop shipper. They send the item to your customer. Everyone is happy. Most of the time.
I tried drop shipping myself for about a year and it didn’t work well for me. There are a lot of headaches to deal with. This also takes a lot of ongoing work. I do know a couple of people who make a modest income from this. It is a viable business but it is not passive income.
WHAT IS PASSIVE INCOME
Passive income is income that you get paid whether you work or not. Do not get confused, this is not free money. Passive income takes work just a different kind of work. Most passive income is created up front and continues to earn after the work is done. You will not get paid for your work right away, instead, you will continue to earn for years to come.
An example of this is a real estate investor. You need to do the work to find a good solid investment. You go through the process of buying the property. You may have to renovate the property after they buy it. Once all of that is done then you can rent the property out and receive the income from it. The work does not necessarily end here. There is maintenance and replacing tenants and such. You can opt to hire people to do this work for you. The income will be a little less but the work is almost completely eliminated.
Another example of this would be an investor. Someone who invests in stocks or companies that pay them dividends. You have to do the work to make sure you are making sound investments. Once the investments are made, there is little work to maintaining that income. You would need large investments to create a significant income but it is possible. The income can be ongoing as long as your investments are doing well. There is a small amount of work to track the companies you are invested in. You may need to change your portfolio from time to time. Not completely passive but about as passive as it gets if you have the money to invest.
Passive income is sometimes called front-loaded income. This is because you are doing all the work up front and not getting paid till later. The advantage of this is that the money will continue to come in even if you quit working. Mostly quit working.
I have not found a way to earn a truly passive income yet. It all requires some amount of maintenance or monitoring to ensure the money keeps flowing. I suggest evaluating passive income based on how much work is required to maintain it vs. the amount of expected income.
EXAMPLES OF ONLINE PASSIVE INCOME
Affiliate marketing is a great way to generate passive income online. You create a website or a blog and you use affiliate programs to earn income. There is a lot of work up front. Later it can be as passive as you want it to be. To learn more about affiliate marketing read this article: Affiliate Marketing, See What It Is And How It Works.
Most affiliate marketers don’t stop at one website. This ongoing work does not make the income any less passive. Expanding your website or creating additional ones, only creates more income. Once your business is earning money, you can walk away from it. It will continue to earn money for quite a long time.
Ideally, you would continue to update your site and expand your reach but it is not necessary. After a while, your site will get broken links and outdated content and the income will decline. These are not hard to deal with but they will take a small bit of time and work. I love affiliate marketing. It has the greatest potential income for the least amount of ongoing work.
CREATING ONLINE TRAINING
Teaching in the real world is anything but passive. Teaching online can be almost completely passive. Once you create a digital training course there is little left to do but market it. Starting out it will be up to you to do this marketing. Later this can be as passive or active as you want. By leveraging the power of affiliate marketing and other online training platforms, you can turn this into passive income.
To create a digital learning course you need to have a good bit of knowledge about your topic. You will need to create the course before you can earn anything. This may mean learning video production. You might need to learn to create a digital presentation or other new skills. Unless you already know all of this the front end workload for digital courses can be huge.
It is possible to create both passive and earned income in this space. You could offer tutoring to go along with your course. You could offer your new found skills to help other’s create a course. Online learning is growing by leaps and bounds. There are a lot of possibilities.
Creating digital art is another great way to create online passive income. If you are a visual artist or musician the possibilities are there for you. The digital world allows you to create a piece of art and resell it over and over again. This is what makes for great passive income.
Creative and original music is in high demand online. People who love music are constantly looking for something new and different to listen to. Video creators are always looking for background or theme music for their videos. Game and app makers want catchy and addictive soundtracks for their creations. The list is endless. To create passive income you will want to make some music and offer it for sale without any exclusivity. You will not make a lot of money per track but you can market as many tracks as you want.
I have met several graphic artists who make passive income from their art. I have paid for many artistic digital images that speak to me. Here again, there are other creatives looking for images to put into their creations. Once a digital image is created it can be sold both as digital and as a print. Graphic arts can involve more ongoing work than some of the other passive income types I bring up here.
Digital photography might be on it’s way out, I am not sure. The market is quite saturated and the demand seems to be falling off. I do know a few people who still earn a passive income from their photos. They tell me it is getting harder to do. If you want to start this type of passive income stream take a real good look at your skills and your market.
There are many potential pitfalls in making money from digital art. Take some time to learn how this market works and where your art fits best.
PASSIVE VS EARNED
WHICH EARNS SOONER
Earning any kind of income takes work. None of these businesses will earn you any money overnight. Earned income will start bringing in money a bit quicker than passive income. This is not always true but it is the way things usually work.
Both will require some amount of unpaid work to get started. They will also need some money to get started. Earned income ventures can start earning money in a matter of days. More often they will need a few months to start generating real income. Remember that earned income means you need to keep working or you stop earning money.
Passive income businesses take longer. Expect at least six to twelve months before you start seeing much income. This can be quite a bit longer. To learn more look at my post: Building A Successful Online Business Takes Time
WHICH EARNS MORE
This could go either way. How much you earn will depend more on your skills and how hard you work. I would say that the earning potential for passive income is greater. Why? Because once you create a passive income stream you have the time and resources to create more of them. This stacking effect is simply not an option when you trade your time for money.
DO YOU WANT TO KNOW A SECRET?
WHICH IS EASIER TO START
This will depend a bit on you. If you have skills that convert easily to online work, earned income will possibly be easier for you. If you have some business experience, you might feel more comfortable creating an earned income business. This type of business will take large chunks of time to get going. Earned income businesses can be more expensive to get started as well.
Passive income businesses can be built while you learn the skills you need. Because the work is front-loaded you have the time to learn and make mistakes. You can create passive income with smaller segments of time over a longer period. Because it takes longer to get started You can also spread out the costs over a longer period of time. This makes passive income easier for most of us.
CAN YOU COMBINE PASSIVE AND EARNED INCOME
Absolutely! Starting from either direction and building the other in later is quite common. Start with earned income if you feel that is the best fit then look for ways to add passive income into it. Start with passive income to get your feet wet then start looking for active ways to earn more money.
I don’t recommend trying to start both at the same time.
WHICH TYPE OF INCOME IS BEST FOR YOU
Only you can answer that. Your skills and personal situation will play a big part in that decision. Do you already have skills that you can market online? Do you enjoy what you do so much that working at it for the next 20 years excites you? Are you prepared to wait a while to get paid for your work?
For most people, I recommend starting businesses to create passive income. This gives you the most flexibility. It is also the easiest for people who still need to hone their skills. Be prepared to work first and earn later.
If you have the skills and you want to start earning income sooner, then look at starting an earned income business. You will be trading your time for money.
Discuss both options with your advisors and see what they recommend. I would also recommend that you discuss your options with your family and trusted friends. Having other perspectives may help you make the best decision.
Are ready to start building the type of successful online business that I know works? Check out my getting started tutorial. If you still have questions please ask in the comments section below or use my Contact Form. As always, I welcome your feedback and suggestions.