Understanding the Two Types of Passive Income & Why You Need Them

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One of the most important components to living the dot com lifestyle is the ability to leverage of the incredible power of passive income. So long as you are stuck trading hours for dollars, you’ll never be able to avoid the bottomless pit of the 9-to-5 rat race. You are far too integral to your actual earning ability.

To live the dot com lifestyle to the fullest, you need to remove yourself (at least in part) from how you earn your money. You need to figure out a way that you can continue to generate income even when you’re not sleeping. You need to keep making money even when you’re sleeping. That’s mission critical. It won’t happen right away, but it should be your end objective.

You’ve likely heard that the most common attribute among millionaires is that they have multiple sources of income. Some reports indicate that they typically have as many as seven income sources, if not more. This does not mean they have seven jobs. Instead, it means that they likely have several sources of passive income.

And while this is a broad, sweeping oversimplification that ignores possibilities like capital gains, we can break passive income down into one of two main types: residual income and leveraged income.

Residual Income

When many people say “passive income,” they’re probably thinking of residual income. This is when you continue to generate earnings based on work that you had completed some time in the past. You do the work once and then you get paid several times for it.

For example, I have authored three books to date. Writing and publishing those books was a lot of work, to be sure, but this is work that I completed up front. Now that they’re listed on Amazon, I earn a little royalty every time someone buys a copy. I did the work once and I get paid again and again.

Another good example of this, in the context of making money online, is how you can make money on YouTube. You put in the work of shooting, editing and uploading the video once, but that video will continue to get played (hopefully) for years to come. If the video is monetized through AdSense, you’ll continue to generate ad revenue. If you have Amazon affiliate links in there, you’ll continue to generate affiliate commissions, at least in theory.

That’s the fundamental concept behind residual income. It’s the same way that musicians might get paid every time their song plays on the radio (or is licensed for a project), how photographers keep getting paid each time someone buys their image on a stock photo site, and so on.

Leveraged Income

The other form of passive income that may interest you is called leveraged income. This is where you leverage the labor, efforts and activities of other people to generate income for yourself. If you’re the owner of a traditional business, you hire a number of staff to do the actual work (assuming you don’t put in the work yourself), and you get to reap the benefits of the bottom line.

Even though blogging isn’t passive income, you can see how John is utilizing the advantages of leveraged income to his advantage. He hired writers (like me) to help populate his blog with fresh content on a steady and reliable basis. He still writes his own posts, but this blog wouldn’t have nearly as much content on it without his team of writers.

And either directly or indirectly, he is profiting off the work of these writers. It’s passive in that he doesn’t have to do the actual writing himself. The same can be true for any number of possible endeavors where you choose to outsource your work. A great example is the agency model. A client comes to the agency for a project, but the agency simply outsources the work to freelancers at a lower rate and profits on the difference.

More Ways to Make Money Online

It’s not that residual income is necessarily superior or inferior to leveraged income. It’s that you should be considering both as part of your income mix, in addition to other possible sources of income you may have. After all, if you want to be rich, you’ll want to have several income sources working for you all the time. Even when you’re sleeping.

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