What is passive income?
Passive income is money that a person earns not by trading their time for it directly, as with a job where you earn a salary or wage, but rather by trading value.
Time is valuable. In fact, it’s the only 100% non-renewable resource in existence. Once spent, wisely or otherwise, time is gone forever. Time is so incredibly precious that I don’t want to trade it for something as unfulfilling as wealth.
The highest-paying job I ever had paid me around $45,000 per year, after bonuses and taxes, but I worked sixty or more hours per week as assistant manager at a chain restaurant (no, not McDonald’s). The position was one that you’d take to get access to higher paying jobs in the company, which is the only reason I can see for someone to work so much for relatively little. With this job, as with most, if I didn’t work, I didn’t get paid. Even highly-paid lawyers or doctors get paid primarily when they have “billable hours” with clients or patients.
With this system, you work to live and live to work. The goal is to work enough that you have the necessary resources to enjoy the few hours you have left between work and sleep. (Everybody really is working for the weekend.) After 40 or 50 years, you retire and hope you have enough money to live on until you die, possibly of boredom.
Early on in my life, a light bulb went off and I resolved to learn how to beat that death-spiral of a system. It’s taken a while, but I’m breaking the code and I’d like to take you along for the ride.
In a traditional job, we get paid by using our time (and skills, personality, and other intangibles) to produce value that an employer or client is willing to pay for. The employer, though, needs to be profitable in order to stay in business. Thus, the value you get paid for is necessarily less than the value you actually provide.
With a passive income business, the goal is to build a system for delivering real value to real people and (here’s the “passive” part) use smart structuring and systems to automate the exchange of value for money. That’s a bit abstract, and I’ll explain more about that in a second, but let me first share a little “ah-ha” moment I had years ago.
I worked as a PC repair tech in a small mom ‘n pop computer store just after high school. It was a lot of fun, but I quickly noticed a severe and disturbing disparity. The customers paid the store $60 per hour to have me fix computers. The store paid me $10 per hour to fix them.
I was providing $60 of value per hour to the customers, but being paid only $10. (Plus, I only got paid when I was in the shop.) The other $50 went into upkeep for the store, other business expenses, and to pay the owners.
Combining that value disparity, and the per-hour model of earning income, it’s easy to see that the employee gets the short end of the stick. Always has, always will. Wouldn’t it be nice if the guy or gal who is providing the value (in this case, a not-broken computer) could reap more than just 17% of what a customer is willing to pay? Thus, with a minimalist passive income business (I’ve got to come up with a shorter name for it!), the goals are simple:
- Build a business that pays you whether you show up to work or not, and
- Eliminate unnecessary business costs to ensure that as much of the customer’s value (their money) is transferred to the person creating that value (me, in the form of a product).
Here’s one (poorly-drawn) model:
This example is taken from a current project I’m building. The customer pays a small monthly subscription and gains access to business administration tools that help them run a specific type of small business – scheduling, payment processing, things like that.
Look over the diagram. Where am I? I’m just there to ensure the cogs keep moving and get paid.
What are the costs in this model?
- Domain: $11/year
- Web Hosting: $5/month
- Site design (one-time): $1,000 (estimated – I’ll show the actual amount in a later post once the site is fully up and running)
- Advertising: free, for now.
About the free advertising: I made a decision to use only free marketing to help bootstrap the business. Word-of-mouth (I’ve designed a kick-butt referral program), local social connections, blogging, and forums all provide highly targeted exposure to the service. The exposure is limited, though, so growth will be slower in the beginning. This is also intentional. I want to keep the service small at first so I can more easily react to customer feedback and add features at a pace that lets me focus on quality.
So, what qualifies this as a passive income business? Well, looking at the diagram above, what would happen if I took off for India for 4 months? The business doesn’t care where I’m located, so I still get paid. What if I can only check my email once each week? The business doesn’t need me to pull levers, make phone calls, or cover sheets on TPS reports, so I still get paid. There’s no time-card to punch, yet I still get paid.
Granted, it takes a lot of work up front to build the site, find the initial customers, etc., but after that, the profit margins just grow and grow. I’ll be there like a good mechanic to keep the gears oiled, but this requires only a few hours each month.
That’s passive income.
I’ll be spilling the beans for this specific project and many others in the coming months. I want to show you exactly how I’m building these business, including any setbacks and failures, to give you a real understanding of how you can do the same for yourself.
Coming up next:
I’m putting together a terrific essay about parkour, a seriously dangerous addiction, and global domination. I suggest subscribing so you don’t miss it!