Warren Buffett famously said, “If you don’t find a way to make money while you sleep, you will work until you die”.
To be fair, there is nothing wrong with working until you die – if you are doing it out of love for your work and not necessarily sustenance. The Berkshire Hathaway CEO himself seems hell-bent on working until he dies. He not only loves his job, but he is also obsessive about it.
So, how exactly can you make money in your sleep? By dream working for a money printer of course!
Seriously though, the idea here is passive income. Passive income is income that requires little to no effort to earn and maintain. If you can grow it while expending minimal effort, it’s called progressive passive income. It’s a beautiful concept, isn’t it?
Vanilla examples of passive income include rental income, business income (where you are not actively involved), interest income, dividend income, bond coupons and royalties.
The internet has led to the birth of other variations of passive income and an entirely new career, “social media influencing”. Examples of these newfangled variations include referral fees, affiliate marketing income, subscription income, advertisement placement income and so forth. Of course, you must acknowledge that “influencing” takes a whole lot of effort. But once the material has been posted, a YouTube vlog, for instance, it has the potential to continue earning income into the future, with little further effort on that particular video by the owner.
If you are like most people and have no desire (or guts) being in front of a camera “shooting content”, then you might have to stick with the more traditional means of passive income. You have my company. Regardless, as part of our personal struggles for financial freedom, passive income is a weapon whose potency cannot be overemphasized. It is the trump card.
One mistake that we make while thinking about passive income and money, in general, is that it has to be a lot to matter. Otherwise, we are not interested. This is a big reason why people hesitate to invest in stocks and in interest-bearing investments. They don’t think much could come out of 10% per year return. To debunk this perception, think of how long it would take to get your salary doubled if you remained in the same position at your job, doing the same kind of work. It would possibly take decades, if ever. By contrast, a shilling put into a passive investment bearing 10% compounded annually, doubles in approximately seven years.
Another mistake we make is thinking that passive income must be high stakes, sophisticated, white collar stuff. Sure, it can be, but it doesn’t have to be. Think of rental income for instance. You don’t have to build a skyscraper or even a residential complex. If you have an extra room in your apartment, you could register as a host on Airbnb and start collecting rent. I have seen someone move out of their house and rent cheaper quarters because Airbnb was proving too lucrative. I have also seen people buy shipping containers for several tens of thousands of shillings, turn them into temporary kiosks and rent them out. How to make money from Airbnb
If you are not into hosting strangers, that’s okay. Other income opportunities abound and the investments need not run into millions of shillings either. Someone is collecting rental income from your mama mboga stand. That makeshift “plot” in your rural shopping centre, someone is collecting rental income from the mabati structures. It doesn’t hurt that cash on cash returns are often much higher in these dustier places.
Subject to having access to trustworthy people who could work for you, the opportunities for passive income are virtually endless, from letting your car to someone for Uber, buying a boda boda, a tuk tuk,or a photocopy shop. Basically, any kind of business that will not involve you being physically or even mentally involved. These and more are all opportunities for passive income.
You don’t have to settle just for the plain old passive income streams like dividends and interest income. Obviously, it’s advisable to take everything bite by bite. Don’t try to do anything magical.
To conclude, let us reflect on why passive income is superior to labour income as a means of building sustainable wealth.
Firstly, passive income is – well, passive. What determines whether you get paid is simply the passage of time. As long as time passes, you are getting paid. Each second the clock moves means an additional tiny fraction of income accrued. With labour income, if you are in no position to work, too bad. You don’t get paid.
Secondly, passive income is less likely to cause lifestyle inflation than labour income. If you get a promotion at work and as a result achieve higher compensation, this compensation often comes with “status”. And along come overt or covert demands to look and act the part. Hence, you might get your salary going up by a factor of 1.2, but your lifestyle adjusts by a factor of 1.5. This is not a concern with passive income – unless you intend to go around telling people how well your passive income trick is doing.
Thirdly, passive income is generally is taxed at lower rates than labour income. Interest and dividend income, for example, are currently charged a withholding tax of 15%. By comparison, labour income is charged God knows what!
Finally, but most importantly, passive income growth is exponential while labour income growth is additive. You can theoretically have infinite sources of passive income with returns compounding infinitely into the future. On the other hand, you can only work a certain maximum number of hours per month and your skills are certainly limited. Hence, labour income can only expand to a certain maximum level at any point in time.
Make this year the year of passive income. For while a 9-5 may make you rich, it will not make you wealthy.