Woman relaxing on a holiday while making money through passive income

Written by 9:28 am Investing, Money & Lifestyle

Passive income: making your money work for you

About 7 minutes to read

Most of us work hard for our money. 

We’re in our (home / kitchen table / sofa) offices or in (Zoom / Teams / Hangouts) meetings five days out of seven. We crack through our 50+ hour weeks and consider anything less to be pretty chilled out. In a pre-Covid world, we may then have gone out with clients or colleagues, networking and entertaining and blurring the line between work and play. And then after a couple days off for the weekend, in which a fair few of us will likely be checking in on emails or prepping for the week ahead, we then do it all again. 

It’s a routine that we don’t question. And it’s one most of us assume we’ll be doing for the next few decades of our lives at least. Our nine-to-five is our main source of income, after all, and in order to maintain our lifestyles and reach our goals, we need to keep working hard. 

When we talk about financial health, we always ask: how do you acquire money and how much are you bringing in? The short answer is your income. Whether you’re a lawyer, an up-and-coming creative, a banker or a technologist – you need to know and understand your income in order to work towards being financially resilient and ensure you have a positive relationship with your money. 

However, not all income is created equally. 

And no, I don’t just mean in the literal sense of a salary band. 

Most of us automatically look to our jobs when we talk about income, although some may have secondary sources or more complex streams, as in the case of entrepreneurs, film directors, company partners, or people working in private equity.


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But what about the dividends that come from a successful investment? Or the interest we receive on a savings account? What about the rent you receive on your spare bedroom or the little bit extra you make for affiliate marketing on your blog or ads on your Instagram? 

These are all forms of income too. The difference is they require far less of the daily do than your day job. They’re forms of passive income and according to writers like Tim Ferris, they’re the key to a wealthier life. 

What is passive income? 

Active income is salaries, tips, fees – all the things you’re paid for by an employer for full-time, part-time, freelance or contracted work.

Passive income is money that comes into your account without you actively or directly working to earn it. Unlike your nine-to-five or a side hustle, passive income continues to flow into your accounts no matter what you’re doing – even if you’re retired, sick, or taking a holiday. Often, passive income is also seen as the ‘extra’ you earn on top of your active income.

If you look at the definitions, then passive income is different from your active income because it’s working for you even when you’re not working for it. This comes with some great advantages, not least that it makes you less reliant on your salary, giving you more security and freedom when it comes to your money. Moreover, like a rainy day fund or savings account, having passive income streams can help you feel more in control of your finances, bolster your resilience and help you live the life you want, no matter your ambitions.

“Things like royalties, dividend income, affiliate income and rental income are all examples of passive income. You often have to do some work upfront but then it continues to be passive from that point forward,” says Nicola Richardson, founder of finance blog The Frugal Cottage, in Glamour. “Active employment has a ceiling in terms of income as there is an amount that it probably won’t pass. With passive income this can be limitless, if you are willing to work at it.”

Wait… I need to ‘work at it’? Doesn’t that defeat the definition of passive income? 

In many ways, the ‘passive’ part of passive income is a bit of a misnomer. 

Almost all passive income concepts require some pretty heavy lifting before they can be left to do the hard work for you. To make it work, you need to invest time and / or money into an asset that will pay you back. 

In fact, on Success Resources, Keith Cunningham suggested that ‘passive income’ in the way we’re talking about it would really be better described as ‘income momentum’

“Remember when you were young and you had merry-go-rounds in the playground?” Cunningham writes. “Remember how much effort it took to get it going? A lot! But once the merry-go-round was moving, the amount of effort it took to keep it going was a mere occasional push with your hand. It required some effort, but significantly less; momentum did most of the work. In the same way, you cannot sit idly by and expect the merry-go-round to keep going. If you ever decide to be completely hands-off, the merry-go-round will come to a stop.”

It makes sense. Google passive income and almost every article that comes up will say “monetise your blog” for extra income. Now, that’s a great shout if you’ve been steadily working on your blog for the last few years, have a strong group of followers, and can add affiliate links to your posts or are willing to put ads all over your content. But – as I can attest from personal experience – starting a blog isn’t simple. Creating regular content isn’t light work. Growing your following so that those ads and links can gain revenue isn’t an insignificant task. The same goes for recommendations like ‘create an online course’, ‘make YouTube videos’ or ‘monetise your Instagram’. 

The truth is that you need to spend a lot of time doing extra work to build a platform in any of these examples. This is what gets that merry-go-round moving, creating the momentum that you’ll then have to keep the money coming in. 

Similarly, when it comes to renting out a spare room, you need to have first bought a property with enough additional space that you can rent. No small feat in itself given housing prices. And then there’s the effort of being a landlord.  

“I bought my first property about seven years ago and decided I wanted to get a bigger place than I needed so I could rent out the second bedroom and make money on it,” says Ellis, 35, from Sevenoaks. “It covers 75% of my mortgage so I’m in pretty good shape with my money. There’s always issues as the live-in landlord or moments like when a housemate moves out and you have the panic of trying to find a new one. Now I’m older, I want to share less but I like the income, even if I don’t need it. It’s a trade-off.” 

None of this undermines the principles of passive income or ‘income momentum’. Nor does it make having secondary income streams that require little or minimal work any less valuable. 

As Richardson says, you can make a lot of money through these secondary sources – there are people who earn a full-time income from just what they earn as passive streams. But it’s not a cockamamie ‘get rich quick’ solution. In the interest of building a financial life that suits you and your lifestyle, it’s worth really considering the myriad options out there and how feasible they are for you right now in terms of investment, time, and commitment.  

So how can I start to build income momentum? 

There are a bunch of ways to give your income a push and start earning more through secondary means. 

Many of the options do involve monetising an asset that you already own – such as a blog or a social media channel, a spare room or a parking space. Others are recommendations to create new assets that you can sell – like an ebook or an online course or an app. There are some great articles with different suggestions, including from sources like City AM

Historically, earning interest on your savings could also contribute a small amount to your income each year. However, the crazy low interest rates now on offer on savings accounts means it’s no longer feasible to really earn interest on these – in fact, as we’ve discussed previously, you could even be losing money by holding it in a savings account thanks to inflation. 

Investing offers opportunities too. 

Investing in anything means that your capital is at risk, but at the same time there are benefits to investing that can help you achieve your financial goals sooner and some can even generate a passive income. 

For example, if you invest in certain stocks or funds, you can earn a dividend income. These are amongst the easiest ways to earn a passive income as a beginner, often requiring you to simply set up a brokerage account. There are still considerations – they’re never guaranteed, and rates may go up, down or even be cancelled. Likewise, yields can vary from a fraction of a per cent to more than 10% with dividends, but these are usually clearly stated on the asset for investment. 

To make dividend income a more reliable source of income, you need to think strategically though – doing the research and making sure you diversify your portfolio too. 

The same goes with other kinds of investing too. While the act of investing in things like stocks and shares is relatively passive, the research that goes into it is active. In many cases, it requires reading annual reports each day, to better understand whether or not a business is performing well, and whether it’s a good investment or not. You can, of course, set up a fully-managed portfolio with wealth management providers, like us at ikigai, allowing you to invest without having to do as much of the research and heavy-lifting yourself. This method not only saves a lot of time, but the portfolios are pre-built meaning they are often diversified and can be matched to your risk appetite too. 

Again, even with investing, it’s all about doing the work to create momentum. After all, this is the entire premise of compound interest – which helps make your money grow by adding back into the market the interest you have already earned from investing. You read more on compound interest and find out our tips on how to get started investing here.

Ultimately, a passive income is at its most powerful when it makes your money or assets work as hard for you as you do in your job. 

The trick is simply to find the method that best suits your life and goals, so that you can make the most of what you have and grow your wealth without compromising your financial health.

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We built ikigai specifically for those who want to bring their lifestyle to the next level, by taking better care of their finances.

ikigai beautifully combines wealth management and everyday banking in one single app. And by doing so, it creates a whole new world of opportunities.

Visit https://ikigai.money to find out more.

Maurizio & Edgar, Co-Founders, ikigai

When investing, your capital is at risk.

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Tags: , Last modified: 9 April 2021
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