Make sure to listen to the most recent episode of my Woahpreneur podcast — How to Create Financial Freedom with Passive Income (ft. Angela Wills). Click the player below!
Additionally, you can scroll down the bottom to read the transcription of the episode.
How to Create Financial Freedom with Passive Income
If you listened to the episode, you’ll have noticed that Angela and I talked about a few different types of income.
With an online business, there are basically two choices: you can either make money passively or actively. Most businesses are a combination of the two. This is a good way to diversify your income.
It’s really important to diversify your business’ income. If something unexpected happens to one aspect of your income, you still have other ways to make money that will hopefully make up for it or at least reduce your losses.
Diversifying your income is also a great way to create more financial freedom. Introducing additional types of income into your business will usually allow you to increase your total revenue.
Let’s talk a little bit more about what passive and active income actually mean.
What is Passive Income?
Passive income is one way to make money one. It typically involves doing a bunch of work upfront, then reaping the rewards for a long time afterwards. There are three main types of passive income:
- Infoproducts (like an ebook or an e-course)
- Affiliate commissions (selling other people’s products/services)
- SaaS (this stands for “software as a service” — usually monthly subscription apps like ActiveCampaign or ClickFunnels)
We also talked briefly about recurring passive income in the podcast episode. Recurring passive income can actually apply to all three of these categories. Non-recurring (regular) passive income is when someone buys something once and you receive one payment in return.
Recurring passive income is when you receive multiple payments for the same customer. Recurring passive income is often preferable, because you can ultimately make a lot more money. It also can mean that you have to put in more work upfront, depending on what you’re selling.
For example, a recurring passive income infoproduct could be a monthly membership program like my Client Vault. I make recurring passive income on that every month. But I do have to put in a few hours of work each month in order to add new material, in addition to the upfront work I put in to launch the program originally.
An example of a recurring affiliate commission would be like if you belong to the affiliate program for ConvertKit. When someone signs up for a ConvertKit membership using your link, you get an affiliate commission fee every single month that person stays a member.
An example of recurring SaaS would be ActiveCampaign, where a person signs up to use your software and they are charged a monthly fee to continue using it. Most SaaS companies have a recurring model, or will most likely switch to it in the future (like how Adobe switched their products from a one-time fee to a monthly subscription model), but some SaaS companies still use the one-time fee model, like Thrive (they make my favorite WordPress plugins, Thrive Leads and Thrive Quiz Builder!).
Passive Income: The Pros
The main two benefits of any type of passive income is that they tend to (a) be infinitely scalable, and (b) have awesome ROI (return on investment).
By infinitely scalable what I mean is that regardless of how many people you sell something to, whether it’s 1 person or 1,000 people, the amount of work you have to put in is relatively the same. So there’s tons of potential for the amount of money you could possibly make.
This leads directly into the idea of awesome ROI, which means that you will likely get paid a lot more for your time than you would with active income.
The plus sides of passive income make it really appealing to people who are looking for more financial freedom in their business.
Passive Income: The Cons
The downside of passive income is that, in my experience, it takes a lot more “trial and error” than with passive income, and there’s also a lot more risk involved.
This is often why so many businesses like lifestyle blogs fail. There’s a lot of backend work involved (probably more than you are expecting). Plus, it often takes multiple tries to get something to stick. Passive income requires a lot of persistence and determination.
With all of this trial and error, there is obviously going to be a lot of risk involved, too. If you are desperate for money, spending 10 hours working on a new affiliate marketing campaign only to have it be a huge flop is not cool. You may not be able to afford that kind of risk right now. Plus, it can get disheartening to work so hard on something and have it completely tank….and that could happen over and over again — be prepared! It can still be a great idea if you are looking for financial freedom. Just be aware that financial freedom could be several years down the road…it’s not going to happen tomorrow.
I remember that when I tried to launch my very first infoproduct, I put about 40 hours of work into it and got like 2 sales. It was not fun! This is a big part of the reason why I love service-based businesses so much.
What is Active Income?
Alright, I have to admit that I kind of made up this word. I’ve never actually heard it being referred to as “active” income…but I figured that if it’s the opposite of passive, what else would it be called?
Active income is probably what a lot of you guys are currently doing — and it’s my own bread and butter, too! Active income is anything that falls underneath the description of “trading hours for dollars.” Basically, it’s anything you offer that’s a service. You do x,y,z for someone and they pay you a certain dollar amount for your time.
Examples of active income would include people like:
- virtual assistants
- freelance writers
- graphic designers
- social media managers
Related Post: 13 Ways You Can Make Money Online
Active Income: The Pros
Similar to passive income, active income also has some benefits and disadvantages.
The biggest advantage to active income is that you can charge a LOT more money. With passive income, it’s (almost) never customized or personalized for the person buying it. But services are virtually always customized for the client. Because of how much direct attention and work you are giving your clients, you can charge a ton more.
A great example of this is Fabi Paolini. She charges a steep price to work one-on-one with her (right now, the prices of her services range from $1,500 to $10,000). But if you scroll all the way down on her Work With Me page, you’ll notice that she also offers a DIY version of her services in the form of an e-course, which is priced significantly less, at $450. When you hire Fabi, what you are really paying for is her dedicated attention, customized strategies, and a bunch of her precious time spent on just you. When you buy her course, you get a great deal, but you can only imitate that process. You would obviously get much better results working with her directly.
With active income, I also find that my income is a lot more consistent. Oftentimes with passive income, unless it’s recurring, there will be huge highs and lows depending on what month it is and what launches are happening, etc.
It’s also a lot more predictable, in that I know I will consistently have clients. Sometimes I try new marketing methods to see if this will help me get more clients. But usually it’s a straight shot from “I offer [service]” to “client buys [service].” I’m not going to end up in a position where I’ve spent a million hours doing something only to have no profit in the end. You will always be profitable in a service-based business because the hours happen consistently and slowly.
Similar to passive income, active income can be awesome if you’re looking for financial freedom. It’s predictability and consistency works really well for a freedom-based business.
Active Income: The Cons
But there are still some disadvantages of an active income. Your income is 100% reliant on your clients and how much time you have to (a) market yourself for new clients, and (b) complete the work for your current clients. The downside of trading hours for dollars is that…well, eventually, you run out of hours.
There are ways to circumvent this, like hiring subcontractors or raising your prices, but it’s certainly not “infinitely scalable” like passive income is, so you have to be aware of that going in.
This is why it’s so important to diversify your income. Ideally, your business should have a mix of active and passive income sources. It’s the best of both worlds!