Passive Income

What is passive income?

The fundamental aim of any business system is to produce profits. Most businesses strive for maximum return for the available resources. So long as the returns outweigh the costs, incremental sales are profitable and therefore desirable.

If you sell cars, for example, normally you'll receive one payment for each car that you sell, and you are likely to be directly involved in the sales process at some stage. Alternatively, you can employ the services of a professional salesperson to sell the car for you. In this way, you can remove yourself from the process (saving yourself effort and time), but in most circumstances this comes at the cost of salary or commission given to the salesperson.

The aim of a passive income system is to generate profits for zero or minimal reciprocal effort, based on the principle that time is your most valuable asset

Return on investment

If the savings in time and effort are of greater value than the costs of employing the salesperson, it's obviously beneficial to do so. It would free you to sell cars to someone else, for starters. Alternatively, if you can completely remove yourself from the whole process of sourcing and selling the cars, and the costs incurred are lower than the income received, you have a profitable passive income business. Why wouldn't you do it? You can set up the system and then spend your time developing the next opportunity (helicopters?) whilst your car business makes money for you.

In reality, selling cars is more tricky, not least of all because cars cost money to acquire in the first place, require storage whilst they're being sold, and then (potentially) must be delivered once sold. Selling to individual customers face-to-face like this is about as 'active' as it gets, and car sales is a large, well-established and highly competitive market, with potentially substantial overheads, so making a profit is difficult.

Write a book

Let's consider another example. What if you're an author and write books for a living? You write the book once, which requires a siginificant one-time effort. Once the book is written, however, you can sell the same book over and over again. Of course, the books need printing and distribution, but, once written, each sale represents incremental income for no additional effort - that's passive income. Once you've reached the break-even point (recovered the costs of the time and effort to write the book) the system becomes profitable.

Old problems

Some of the key problems related to both selling cars and writing books is the reliance on the production and distribution of a physical product. Unless you own a printing press or car plant, you're also sharing your profits with many intermediaries, and are at the end of a long chain, at each stage of which your potential profits are reduced.

Benefits of the information age

But we live in exciting times. We've had the stone age, the iron age, the dark ages...etc, etc, and we're now living in what many people are referring to as the information age. Information is the most precious resource of our time, and the internet presents a medium for the distribution of information that has never been available before.

Consider our book-writing example. The main limitations of the system were the physical creation (printing, binding, etc) of the book, and its distribution. You are now able to write that same book but, using the internet, distribute it digitally. This has a two key benefits:

• No printing costs
• Minimal distribution costs

That portion of the profits that were previously being used to create a physical product can now be used to more effectively reach a larger market, or to line your pockets!

More opportunities

The internet has created opportunities for passive income in other ways, too. This site is itself an example of a popular passive income system. By providing (hopefully) valuable, original information, this site will be rewarded with a good ranking in the internet search engines. If you reading this, I guess I can take that for granted. Good search engine ranking generates traffic to the website - the higher the rank, the more traffic the site will receive.

There are businesses and individuals that have products and services to sell to you if you're interested in passive income, and this traffic is valuable to them. So valuable, in fact, that they're willing to pay to be listed on the site.

Keep it passive

We could sell advertising directly to interested parties, but that sounds very much like 'active' income. Alternatively, we can use an automated system to display adverts relevant to our content. That is what Google AdSense (the green box on the right) does for us. Any click on those ads will generate income for this site and they should all be related to passive income systems.

Take a look. They are all likely to be employing some form of passive income system themselves. Are they offering books, videos or subscriptions to other services? The beauty of these systems is that most are likely to be of high quality, too, so you'll be receiving value for money.

Passive income economy

In the next article, I'll discuss what drives the passive income economy and how you can join in (it's easier than you think!). In the meantime, if you'd like more information, please complete the request form below.

Thanks for reading.