Don McLean, the writer of the hugely popular and mildly confusing song American Pie, was once asked, “But what does it mean?” His reply: “It means I don’t have to work any more.”
Ah, isn’t that the Internet dream!
The Internet holds out hope – and hype – for unlimited passive income. You just find a hot market, create a product, get traffic flowing to the site, make lots of sales, and sit back in a deck chair on a beach in Bali, occasionally checking your bank account to see the numbers ticking over. That’s true passive income.
You know, for some people, that is the reality. It is possible. And I do know of people who are living exactly that lifestyle.
But the other thing that’s common with every one of those people is that they worked pretty hard to get to that stage.
And that’s where I see many others go wrong. That passive income stream is possible, but it doesn’t happen immediately.
In fact, let’s break this down into four separate cash flow streams:
- Active income: This is where you put in some personal effort, and generate some income. Most businesses start out that way, and some never get past this point.
- Bundled income: You still put in the effort, but now you get more money for that effort. For example, if you’re a professional speaker, you’re still making presentations but you also sell books and CDs at each presentation. If you’re a retailer, you bundle products and services together, so you make more money from each sale.
- Recurring income: You still put in the effort to get new clients and customers, but you now sell them something that brings you regular income – such as a membership site, a retainer agreement, a “wine of the month” subscription, and so on. In other words, you still have to put in an initial effort, but that results in ongoing income.
- Passive income: This is the truly passive income that we all dream about. You might still have to put in a lot of marketing effort, but you generate income passively from sales (online or offline).
All four income streams are possible. The trouble is, many business owners who are currently earning mostly active income think they can just flick a switch, buy a software product, hire a consultant, or make one change to transform their business into a passive income business. It just doesn’t work that way. In fact, generating passive income is like running a completely new business.
If you already have active income, it’s far easier to add bundled income and recurring income. You might never get to passive income, but that doesn’t matter, because the other income streams might give you everything you would ever need.