About 15 years ago I heard of the concept of passive income and this idea intrigued me.  In fact I started looking at different ways to earn this type of income.  Well 15 years and thousands of dollars later I have learned a valuable lesson.  Passive income takes a lot more work to accomplish then people let on.  According to the IRS, passive income is income from “trade or business activities in which you do not materially participate.”  In my mind passive income is money I receive that should require lower amounts of sustained effort once the income stream is established.  My experience has taught me that there are 2 types of passive income.  I group them as passive-passive income and active-passive income.

Passive-Passive Income
I define this as income that is earned with little or almost no effort on your part.   Usually these are safe, secure ways to earn money and represent very little risk to you.  The best example of this is a savings account or CD.   Now savings accounts aren’t going to make you rich but since the interest  is earned consistently month after month it is like free money and since these are usually insured it is a safe place to keep your money.  If you do a search on bankrate you can find interest rates on checking and savings accounts in your area. I live in New York City and the average interest on a savings account was 1.061% and on a checking account it was .236%.  If you go online you can find better returns.  I have had an account with ING Direct since 2001 and at that time they had interest rates around 4.5%, now they are at 1.3% which is above the average in my area.  If you want a good comparison of online banks you can visit my money blog or get rich slowly.

One of the simplest and most overlooked passive-passive income opportunities is your company’s 401(k) match.  If your company offers a 401(k) match then you need to make sure you put at least that amount in your account.  That match is truly free money and requires no effort on your part at all.

Active-Passive Income
This is where passive income gets more exciting because with this type you can put in larger effort up  front and some continued effort throughout though not as much as at the beginning and earn significantly higher returns on your income.   The best example of active-passive is book and music royalties.  In fact some artists are still collecting money from work they did years ago.  Now if you can’t carry a tune in a bucket or your idea of writing is sending text messages than you may need to look at other options.  Another example is, owning rental property.  Again a good idea as long as you can get good tenants.  With good tenants this can actually be fun, but if you get bad ones and you live in a state like mine in NY it can be a huge headache.  Try evicting a tenant in NY who hasn’t paid rent you are looking at a 6 month process.

More and more people are turning to the internet and getting involved in things like affiliate marketing.  With affiliate marketing you are marketing other people’s products and earning a commission every time someone buys the product.  What is supposed to make this passive is theoretically once you set up your site and get traffic then all you have to do is sit back and collect the checks, ah if life were that simple.    I have personally been involved in affiliate and internet marketing and what I can tell you is there is nothing passive about it.  Once I set up my site I spent all my time tweaking and testing different marketing and traffic strategies.  Though I did make some money it truly was of the active-passive variety I had to put some quality effort in.

In theory passive income is an ideal goal, in reality you’ve got to work for it.  However if you can find the right strategy then you can be on the road to passive income.  Just be ready to stay on the road a little while before you can take a break.