Do you want to be able to take time off whenever you want to, without worrying about what’s going to happen to your business? Of you do, but before you think this is going to be another post about how simple it is to create a passive income, think again. There is much more to it than many people will lead you to believe.
There’s a saying in the corporate world: “Don’t make yourself irreplaceable. If you can’t be replaced, you can’t be promoted.” As an entrepreneur, this is still true in its own way. Let’s think of “being promoted” as earning more and working less. You can raise your prices, but until you can remove yourself from being directly involved in doing the work which generates the income, there’s always going to be a limit to how much you can earn, and the growth rate is linear and increases slowly.
Passive income, on the other hand, is income that does not require your direct involvement. Some kinds of passive income you may be familiar with include owning a rental property, royalties on an invention or creative work, and network marketing. If you want to earn more, work less, and have a decent retirement, you’re going to have to start creating income streams that do not require your direct involvement. Whether you’re just starting your business, or you’ve been running it a while, the sooner you start thinking about how you are going to shift your business model to create a more passive income, the sooner you can achieve personal and financial freedom.
Forms of Passive Income
Let’s look at two basic types of passive income, and a third type of income that, while technically not passive, is a key strategy for earning more and working less.
- Residual income is revenue that occurs over time from work done one time. Some examples include:
- An insurance agent who gets a commission every year when a customer renews his policy
- A network marketing or direct sales rep’s income from her direct customers when they reorder product every month
- An aerobics instructor who produces a video and sells it at the gyms where she teaches
- A marketing consultant who creates a workbook and sells it in e-book format on the Internet
- A photographer who makes his photos available through a stock photography clearinghouse and gets paid a royalty whenever someone buys one of his images
- A restaurant or retail owner who has grown to the point of hiring a trustworthy manager
As you can see, there are many different ways to generate residual income across a wide variety of businesses. It may be recurring income from the same customers or the sales of a product to new customers. It may require no personal involvement whatsoever, such as an e-book sold on a web site, or it may require some personal interaction, such as the insurance agent calling the customer to remind them about their renewal and ask them if they want to change any of their coverage. Often, it’s something that you can delegate to an assistant.
Note that this is different from merely recurring income. Recurring income may still require your involvement to earn the income, e.g., a coach or mentor on a monthly retainer, or a caterer who delivers lunch every Monday to the local school board. While this “active recurring income” offers welcome stability, it also tends to tie you down, and you still have limits on your earning capacity based on your own personal production capacity.
Leveraged income leverages the work of other people to create income for you. Some examples of leveraged income include:
- An e-book author selling her e-book through affiliates who promote the product
- A network marketer who builds a downline and receives commissions on the sales made by people in his downline
- A general contractor who makes a profit margin on the work done by sub-contractors
- Franchising your business model to other entrepreneurs (the ultimate leveraged income)
Again, there are many different models in many different businesses. The key is that you are making money off of other people’s labour, rather than primarily your own. Note that leveraged income may or may not also be residual income. When you combine them, that’s even better.
Active Leveraged Income
This is a term I use to describe income that requires your direct participation, but that you can make more money by having more people involved. This generally involves a one-time event, such as:
- A seminar or class
- A conference or convention
- Concerts and dance recitals
- Raves and other parties
Although these require your direct participation, your earning potential is much higher than if someone were just paying you a direct hourly rate. Fill a room with 1,000 people paying $50 each and you can cover your facility cost, promotional cost, and staffing fees and still have a nice chunk of change left over.
Now is the time to think about how to apply this in your business. Can you create a product that people will buy over and over again? Can you engage others to sell your product? How could you make money off the work of others?
The sooner you answer these questions, the sooner you’ll have personal freedom.
* Engineered Lifestyles does not guarantee any level of success or income from the NHT Global Business opportunity or any other money-making opportunity. Every independent distributor’s income depends on his or her own efforts, diligence, and skill. Please see our full Earnings Disclaimer here.