I do not particularly like to write too much about money, but it does seem to be the topic to float around the internet the most. Erin and I have had a theory for a while about ‘The Income Snowball’ and how separating ourselves from our income has been the most rewarding way of doing it. Mainly to keep our minds free and to keep us sane, but it also actually proved to be the most effective when we started to have numerous incomes coming in from different places.
First off I am a little afraid of using the words ‘passive income’. Lets face it, passive income has a really bad name about the internet. Mainly due to all the money grabbers in the early 2000s that earnt their money by selling the idea of freedom to people in the form of ebooks/online training/self help websites.
As the phrase ‘passive income’ became tarnished with the association of dodgy schemes and get rich power salesman, I get the feeling people are now just dismissing it and not contemplating creating a passive income for themselves.
This is a shame because, in many ways, it can be the key to freedom. A passive income, no matter how small can help you a lot, especially when you decide to take round-the-world trips and don’t plan on working anytime soon. It can be a great stepping stone to giving yourself the time to achieve the things you really want to.
Let’s look at a few common examples that we consider passive income.
- Self publish ebooks on Amazon
- Affiliate Marketing
- Renting out a property to tenants and paying an agency to replace the tenants when necessary
For each one of these, you will always have the people that disagree (mainly because they have tried it, missed the point and therefore now consider it useless). Here are some of the comments I regularly hear…
Self publish ebooks on Amazon
“It is not passive because you have to constantly work at promoting your ebook. Also, most people’s ebooks are not a success.”
Firstly, no you don’t. You are creating a passive income here, not a best selling book. The idea is NOT to write a love story and then work night and day trying to get 1000s of people to buy it. Simply do your research, find out something that people need, write an informative book that caters to that need and then put it on Amazon for $2.99-$4.99. Now every time somebody buys your ebook, you can buy four meals in Thailand. Hooray! Do a great job and you will be surprised how many people will buy your book every single day! Amazon get A LOT of traffic and their visitors are online looking for new books to buy.
“It’s a scam, you have to keep constantly promoting your website to get people to click the links”
Again, no you don’t. When creating a passive income, you cannot be greedy. Greed takes ongoing work – the opposite of passive. For our affiliate websites, we simply found a small niche in a market that we saw nobody was competing in and created websites full of information about that niche. The only work we put in was in writing the content at the beginning and making sure our website contained the relevant keywords so people would find us naturally through a Google search. Once we were getting more than 100 people per day to the website, we would add affiliate links to the products we were giving information about and now we receive a monthly payment from those companies. We could do more work to promote and try to get more people to our sites which could earn us more money, but then it wouldn’t be passive, would it?
Renting Out a Property to Tenants
“It’s risky because you might not fill the rooms and will lose money”
There are agencies you can pay that will do the work for you. They will sort the contracts, find new tenants when necessary and basically take over your entire involvement. Like I said before, greed is the reason most people will not succeed at creating a passive income for themselves. If you are reading this thinking “But I wouldn’t want to pay an agency as I wouldn’t be earning the maximum amount of money”, then maybe passive income is not for you. You are putting money before time and this is where people go wrong.
Think about it this way..
Would you rather earn $300 per month profit from renting out your apartment, where you have to find the tenants yourself and maintain the apartment?
Or would you rather earn only $200 per month from allowing somebody else to rent out your apartment and you having to do nothing?
I can still see you edging towards number one. This is where most people fail. I too would have originally gone for option one. It seems absurd losing almost half your income just for having to maintain it yourself doesn’t it? Almost seems like the lazy option?
A Simplified Example with ebooks
To explain further why option 1 is the wrong answer, let’s follow two people as examples of each decision.. John and Paul
John and Paul have just both released their first ebooks on Amazon. It didn’t take them long to write the books but they are proud of their writing and the information in the book is genuinely valuable to people who follow that interest. They both charge $4.99 per download. They are excited about starting their first online income streams and cannot wait for the extra money to come in per month.
John earns $300 per month from his ebook on Amazon. It is not enough money to live off, so he just considers it as something that will pay for his holiday once per year. He continues with his full-time job as his main income. To maintain the income at $300, he promotes his book on social networks daily and is regularly on forums leaving comments about his book. He tells everybody he knows about his book and even mentions it on facebook with his friends (more often than they enjoy hearing about it).
John went on holiday for one week. In this week he did not promote his book. His sales dropped by a third. He took this as a sign not to give up and now continues to promote his book to get the maximum sales, even when he is on his holidays.
A year later, if John is ever asked how the passive income is going, he always answers the same;
“It’s going alright. It isn’t exactly passive though. I wouldn’t want a to release a second ebook. It would be a lot of work keeping up with the promotion and making sure people know about it all the time, I thought passive income meant I could spend my spare time doing as I pleased, but I have to work really hard to maintain the income.”
MISSED THE POINT
What did John do wrong? He is happy enough doing the small amount of work needed to maintain his extra income, but he feels that having two ebooks would be too much work. How will he ever be in a situation to live off any passive income alone?
Answer: He won’t. He will never go further.
I see this all the time. By putting so much time and effort into trying to maintain his new income, he is stopping himself from being able to create more in the future. He has put himself into a position where he feels that he would have to work twice as hard to double his new income. This is not how passive income works.
Paul had also been on his weeks holiday and his sales had also dropped by a third – down to $200. He took a different view of this and decided that this was ok. No input from him meant he walked away with $200 instead of $300 each month, but it would come automatically to him.
He realised $200 isn’t much and will not afford him to increase his lifestyle really in any way. As the process is completely automated, he hardly puts any thought now into his old ebook. He decided he wanted to do the same again. With his spare time he managed to write a second ebook. He followed the same process of creating something of value and uploading it onto Amazon to sell for the same price as his first. Again, he puts no work into promoting and now walks away with a further $200 a month going into his account.
A year later, if Paul is ever asked how the passive income is going, his answer is quite different to Johns;
“It’s going really well. I have released four ebooks over this past year and now I’m working on a new project. The extra income has allowed me to drop my full time hours down to part time so I can spend enough time concentrating on my new project.”
This oversimplified example is the best way I can explain the income snowball.
Every time that Paul now puts work into something new, it is always going to be towards adding to the already rolling income snowball. With every new project, he frees himself more and more and is constantly giving himself more time to work on new things without any worry of failure.
In John’s case, by being greedy and going for the extra money that is costing him time, he can never be free. He is caught in the trap that many people get caught in by trying to exchange time for money. By doing this he is spending more time working than Paul and is earning less.
Greed With The Snowball
There are going to be some people that take greed to the next level. There is a second level of greed with the snowball that goes beyond just opting for option 1.
The next level of greed is those who are addicted to increasing the size of their snowball.
Remember the income snowball is a method used to provide freedom for people who do not want to spend their time working for other people and who prefer to create things of value and to offer these things to people who will benefit from them for a reasonable price. Don’t be greedy! Don’t spend your life chasing more and more money, it will make you a bad person!