How does a country generate income

Five Ways To Build A Passive Income

Valeria Nickel, April 30, 2021

It sounds like a dream: Earn money without working. This is supposed to be thanks passive income to be possible. This is the term used to describe income streams that regularly come into the account - even if you do nothing for it.

Passive Income: A Definition

Passive income, also called residual income, is the dream of financial freedom. It means building something up once that will produce a steady stream of income over a longer period of time.

Passive income is defined by 3 criteria:

1 | Independence from work

With active income, you swap time investment for money. Anyone who manages to build up a passive flow of money receives it regardless of the time invested.

2 | Scalability

In order to generate passive income, one has to choose a business model that is scalable. This means that you can increase sales without having to continuously invest in production, infrastructure and fixed costs. Business models with a high level of scalability, for example, are often very highly automated.

3 | uncertainty

An employee can be sure that at the end of the day they will receive a salary for the time invested. Someone who wants to receive passive income must first make an advance payment without any guarantee that they will actually earn money in the end.

There are many opportunities for passive cash flow

There is no shortage of suggestions on how to achieve financial freedom. A number of new income opportunities have arisen as a result of the advancing digitization:

Source of incomeShort explanation
Digital goodsWhether it is a book or an e-book, information products, music, stock photos, apps or online courses - anyone who has certain talents or is very familiar with a subject area can produce a (digital) good and sell it. Once created, it can be used to generate a flow of money again and again when new buyers arrive. However, the competition is high.
Niche Sites, Blogs & Affiliate MarketingNiche sites are special small websites that advertise. The idea of ​​passive income through your own niche page is to place it as high up as possible in the search engines and then to get money through advertising on the page. This is also done through affiliate or recommendation marketing, whereby you receive a commission for products or services advertised on the site.
DropshippingWith dropshipping, an online shop is opened where products from other manufacturers are sold. The sales processes are automated to such an extent that the online shop functions independently in the long term. The manufacturer personally takes care of the shipping.
Amazon FBAWith Amazon FBA, anyone can sell products through the Amazon online shop and earn money with them.
InfluencerInfluencers have social media profiles (for example on YouTube or Instagram) with a particularly large number of followers. Businesses and advertisers pay them to promote products through their channel.
CryptocurrenciesCryptocurrencies are digital means of payment that can be used to earn money online. You can read more about cryptocurrencies here: Cryptocurrencies
Lending of propertyFor example, private living space (Airbnb) or cars (Drivy) can be rented out for money via online platforms.
CashbackCashback programs give you refunds when you shop online with your credit card.

These paths do not lead to passive income for everyone

The dream of passive income can be deceptive. Because the earning opportunities mentioned here require work and knowledge such as web programming. Let's take the example of the book author for e-books: In order to write a successful book, you usually have to invest years or at least months of working time. Even then, few people can make a living on the post-release earnings. You have to have special knowledge and skills to be successful.

The next problem is not long in coming: A book doesn't sell forever. Authors have to keep bringing out new works. This means that they have to invest working time again after a few years at the latest. A “passive income” is generated here - if at all! - only for a short period of time.

For affiliates, too, there are no longer as many gaps as there were a few years ago, because the competition is much greater and the Google algorithm has become more complex. In addition, many companies are now also professionally positioned.

Earning money is not “easy, quick and without effort”. Gaining actual financial freedom through writing, affiliate marketing, blogging, or the like takes a lot of work, time, and nerves. In addition, the type of earnings you choose must also suit your individual lifestyle and personality. So these paths to passive income do not suit everyone.

Five ways to build a passive income

Investments are an alternative way to passive income: By using money instead of labor, you can actually generate passive income. Finding the right investment is time consuming at first. But once the portfolio is set up, passive portfolio income can be generated in the long term. The following 5 investment opportunities are available to build up a portfolio income:

Source of incomeShort explanation
Benefit from rental incomeReal assets such as real estate are not only a popular investment in financially insecure phases. Because they represent a real asset, "something you can touch" - regardless of whether the value moves up or down over time. In addition, a passive income can be built up through regular rental income.

Anyone who invests in a regional real estate market with growth potential can also earn an amount by reselling a single apartment that others work for a whole year.

On the other hand, administration and maintenance costs quickly eat up the property's profit. It is not enough to simply buy any apartment and wait two years and then sell it on at a profit - this type of investment property means work.

Receive interest on real estate investmentsAnother way to invest in real estate is through real estate funds and real estate crowd investing. A passive income stream can also be built up through returns and interest payments.

With crowdinvesting, small investors come together on an Internet platform and raise larger amounts together. Together, they invest in asset classes with high returns that were previously only available to large professional investors.

With real estate crowdinvesting, investors benefit from the stable value of a property as an asset, but do not have to worry about management after the investment and receive fixed, high interest. The interest rate for investment opportunities that BERGFÜRST brokers, for example, is between 5.0% and 7.0% p.a. Unless otherwise stated, the interest due is paid out on an annual or semi-annual basis so that investors can build up a passive income.

Rake in dividends with stocksIn the search for new sources of income in times of low interest rates, stocks and bonds are moving more and more into the focus of investors. Companies that issue stocks and bonds regularly distribute their profits to investors as dividends.

Those who hold so-called “dividend aristocrats”, that is, shares in particularly successful companies with rising profits, in their portfolio can expect high, steadily growing streams of income.

Exchange-traded index funds - called Exchange Traded Funds (ETFs) - also offer a flexible and cost-effective way of adding such stocks to your portfolio.

Interest on bond purchasesHolders of government or corporate bonds receive regular interest payments. With bond ETFs and bond funds, risks can be easily spread.
Lend money & receive interest like a bank“Peer-to-peer loans”, ie loans that are given from one individual to another, have recently become increasingly popular. There are various crowdlending platforms on the Internet on which borrowers and lenders can easily find each other. You can lend money yourself, receive interest on it and thus generate income with personal loans.

Tips for building a passive income

If you want to build a passive income by investing capital and increasing it over the years, you should consider the following tips:

1 | Always be strategic

In order to build a portfolio, you need a well thought-out strategy that corresponds to your personal preferences and your individual life situation. You can read here how to find and design such a strategy: Investing money.

2 | First, pay off existing debts

Before you start investing and building a passive income, it is advisable to pay off existing debts. The interest you pay on a loan is usually higher than the interest you get on your investments.

3 | Use savings plans to build up a passive income even with low start-up capital

If you have little start-up capital, set up a savings plan. You pay a small amount into your investment every month and your capital grows over the years.

You can choose between different savings plans: There are classic bank savings plans, share, fund and ETF savings plans on the stock exchange, or you can choose the one Savings plan on BERGFÜRSTthat allows you to invest in real estate crowdfunding.

4 | Increase your passive income through high returns

Anyone who has enough money can get such high interest rates through their investment that they can live on it. Apart from an annual review and adjustment of the portfolio, the investor does not have to do anything to earn money.

However, due to the current low interest rate policy of the ECB, building up wealth on this scale is very difficult. You need enormous start-up capital for good returns.

On the other hand, you can use your existing assets by investing in special asset classes multiply faster with a high return. One should pay attention to a good risk diversification, because higher returns mean a higher risk.

Real estate crowdinvesting, for example, is one of the high-yield asset classes. Here interest rates can be between 5.0% and 7.0% p.a. generate. In order to maintain this regularly, no more labor is required after the investment. This means that portfolio income or an investment can actually be described as passive income. Try it out and find out about current investment opportunities.

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