Over the past few years, passive income has become one of the most frequently discussed personal finance terms on the internet.

Some of the most popular searches in Google include:

How Do I Generate Passive Income? How Important is Passive Income? What are Examples of Passive Income?

As someone who likes to investigate crooked internet marketers, yet also has an entrepreneurial spirit, I decided to look into these methods to determine whether passive income was an achievable goal or a concept used by predatory marketers to get consumers to buy self help material.

While there was plenty of evidence of sellers hawking questionable products that mentioned passive income, but did not appear to actually teach anything about the subject, there were also many legitimate opportunities to make money through passive income. This article will focus on these legitimate passive income ideas.

This overview is based on my 10+ years of trial and error, exploring virtually every method of achieving passive income.

This article is broken down into five parts:

Part 1 — An examination of what the term “passive income” means.

— An examination of what the term “passive income” means. Part 2 — An explanation why passive income matters, and how it is integral to financial independence.

— An explanation why passive income matters, and how it is integral to financial independence. Part 3 — A quick overview of business ideas that other lists erroneously list as passive income.

— A quick overview of business ideas that other lists erroneously list as passive income. Part 4 — A look at the criteria used to classify a business, product, or service as passive income, for the purposes of this list.

— A look at the criteria used to classify a business, product, or service as passive income, for the purposes of this list. Part 5 — An overview of virtually all ideas for developing streams of passive income.

So while your results may vary, this is a good article for those looking for new passive income ideas.

In my quest to develop passive income sources over the past 10+ years, one of the only consistent patterns that has emerged is that everyone succeeds utilizing different (and often times unexpected) methods of achieving passive income.

Someone who can quickly write eBooks and make millions of dollars on Amazon, may struggle making a single penny from affiliate marketing or never sell a single stock photo.

Best of luck in your search for financial independence! Be sure to leave a comment at the bottom of the article and tell me which methods I am missing and which methods worked for you.

Part 1. What is Passive Income?

Passive Income is generally defined as a stream of income earned with little or no ongoing effort needed from the individual receiving the passive income in order to grow the stream of income. Passive income is income that is not proportional to the time you physically put into acquiring it. Active income (typically one’s regular job or additional part time jobs) is a direct exchange of your time and skills for money.

Examples of passive income include royalties earned from stock photography or from a digital course you create. In both cases, the content, whether self hosted or on a larger website, generally require little or no maintenance or additional financial investment to maintain the source of income.

The intriguing thing about passive income is that it can be generated literally while you are sleeping, freeing up additional time for hobbies or allowing you to increase your earnings by performing some other form of work while still generating previously established streams of passive income.

An example of this would be a person working a 9–5 office job where they are paid a fixed salary. This same person also receives regular passive income from an eBook that he wrote on gardening over two years ago. The office job requires direct effort to produce the agreed upon amount of income. The employee, whether hourly or W2, is trading their time for money.

The eBook is different. Regardless of what is going on in the office employee’s life, the book is listed for sale in its digital form on Amazon and the author does not have to perform any work (beyond the initial creation of the content) to maintain this stream of income. The employee can literally never check on that book and they will still receive their royalties, every month.

Part 2. Why is Passive Income Important

There are many articles dedicated to exploring the various ways to make passive income. But many fail to consider the underlying question — why is passive income (as opposed to active income) important?

The answer is actually a fairly simple relationship between time and money. Time is the most valuable commodity. There are only 24 hours in a day. Time is the greatest equalizer because not a single person can have more of it. It can never be recreated or re-spent. It exists once, then it’s gone. And that’s precisely why passive income is so important — because time is more valuable than money.

Unlike money, which can be earned, saved, spent, invested, squandered and lost, we can’t tuck away minutes on a clock. We can’t expect dividends on seconds or hours in the bank, or invest the time that we didn’t use on something else. Considering that most of the free world needs to work for a living, consuming much of the time they do have, this precious commodity needs to be prioritized.

Passive income is one of the most important strategies that that the rich utilize to get richer. It’s how you detach your ability to earn from the limited time that you have in a day. With passive income, you make money while you sleep. You also make money while you’re awake. It’s automatic and simply keeps coming in.

“If you don’t find a way to make money while you sleep, you will work until you die.” — Warren Buffett

However, creating a passive income stream is far from easy. It takes an enormous amount of effort and investment of your time with very little return in the beginning. It involves an overall sense of frustration and an enormous learning curve. Still, it’s one of the most worthwhile investments of your time that you could possibly engage in.

As the chart below illustrates, any amount of passive income earned is exponentially more valuable than the equivalent amount of money earned through traditional work (trading time for money).

$100 in passive income per month may not sound like a lot. However, to generate the equivalent of $100 in monthly passive income, you would need to have $30,000 invested earning 4%. This 4% return is fairly conservative when compared to the historical average annual return of the S&P 500, which is around 7% (after inflation).

Monthly Passive Income and the Annual Investment Equivalent

While passive income might not be the answer to all of your immediate financial problems, it is a pathway to success and most certainly the foundation for wealth and financial independence.

When you’re not stressed out focusing on just making enough money to pay the bills and you’re no longer living from paycheck-to-paycheck, there’s a mental clarity and an emotional catharsis that sets in.

You become free to spend your time doing things you actually care about. You can spend more time with your family, focus on improving your health, have the freedom to escape a job you hate, or pursue a creative passion that you otherwise would relegate to the few hours of your free time on the weekend.

Part 3. What is NOT Passive Income

Some ideas commonly touted by financial “gurus” as passive income which are not actually passive income. I hate to see these ideas misrepresented as I have been involved with many of these businesses myself, and know that they are time and capital intensive.

Vending Machines /Laundromat — I had a contract to provide food and vending services to Accenture. I purchased, managed, and restocked a number of vending machines. I can assure you that vending machines are far from passive income. You either need to spend enormous amounts of time fixing and restocking the vending machines or you need to pay someone to perform this function on a regular basis. Just because something is automatically dispensed to consumers does not mean it is passive income.

— I had a contract to provide food and vending services to Accenture. I purchased, managed, and restocked a number of vending machines. I can assure you that vending machines are far from passive income. You either need to spend enormous amounts of time fixing and restocking the vending machines or you need to pay someone to perform this function on a regular basis. Just because something is automatically dispensed to consumers does not mean it is passive income. Real Estate/Rental Properties — Real estate development, speculation, or even renting out property is not passive income. Unless you pay someone to manage your properties every month, you will be responsible for a wide range of tenant issues. And if you’re paying a person or company to mage your property, this is no different than any other traditional business.

— Real estate development, speculation, or even renting out property is not passive income. Unless you pay someone to manage your properties every month, you will be responsible for a wide range of tenant issues. And if you’re paying a person or company to mage your property, this is no different than any other traditional business. Paying off Debt — While it is a good idea to pay off high interest debt, this is often falsely classified as passive income. Paying off debt offers little in the way of systematization, scalability, and unlimited income potential.

— While it is a good idea to pay off high interest debt, this is often falsely classified as passive income. Paying off debt offers little in the way of systematization, scalability, and unlimited income potential. Raw Land Flipping — I am still shocked when I see other authors include this on their list of passive income ideas. Raw land flipping (or renting) is not only extremely difficult, but it requires a ton of active effort on the part of the owner.

— I am still shocked when I see other authors include this on their list of passive income ideas. Raw land flipping (or renting) is not only extremely difficult, but it requires a ton of active effort on the part of the owner. Refinancing Mortgage — Like paying off debt, this is potentially a good idea (depending upon interest rates, market conditions, and your opportunities to invest in certain ventures). However, this is by no means passive income. It cannot even be classified as income, let alone passive income!

— Like paying off debt, this is potentially a good idea (depending upon interest rates, market conditions, and your opportunities to invest in certain ventures). However, this is by no means passive income. It cannot even be classified as income, let alone passive income! AirBNB/Rideshare — While renting out unused space in your house or driving your car for Uber can be profitable, both of these ventures require active effort. Uber is especially time intensive and requires drivers to work 60+ hours per week to scrape by in many cities. There is also the additional maintenance and depreciation that occurs when you drive your car more than you normally would. While some of these costs may be fixed (car payment, insurance, etc.) the additional wear and tear on your car can be devastating to people who rely upon their car for day to day transportation.

Part 4. What is Considered Passive Income?

So if the ideas above are not considered passive income, what are some examples of true passive income streams?

For the purposes of this list, passive income ideas must meet the following criteria:

Recurring Payments — Passive income is income that requires no effort to generate on a recurring basis.

Systematization — Passive income streams must be derived from a systematic process. The ability to develop and perfect these processes is a key element of passive income.

Automation — The ability to outsource or rely upon automated systems allows passive income streams to remain truly passive.

Scale and leverage — After establishing a system that successfully generates income, this system must be able to be grow quickly, through the introduction of automation and other methods that allow you to scale a process.

Income Potential — Passive income cannot be constrained by the total potential income it generates. This is one of the basic qualities that separates passive income from a traditional salaried job.

Part 5. A Comprehensive List of Passive Income Ideas

1. Stock Photography