Passive Income Goal: $500/Month in the Next Year

Passive income has been a long-time interest for me, but like many others I’ve concluded that a lot of the stories aren’t realistic. After reading a bunch of sales pitches from internet marketers a few years ago, I realized I could earn a lot more by just focusing on the business I already had. I did focus and I did earn, but it’s clear that it could be 5-10 years away from really being able to run without me. That’s ok because I turn down work that doesn’t help me grow and do interesting things.

However in the last year I’ve seen some new ideas for passive income and marketing that I’m burning to try. And my main business is exposed to some relatively big risks. It currently only takes a couple of people making big mistakes to have a really bad year and I’m working on making that better. I guess it’s better than a job where one person can have a bad day and really make your life hard. An interesting series by Steve Pavlina provided the final push to make written goals. So to learn more and increase my diversification, I want to play with some more passive businesses. This is how I will reach the goal.

The Goal

If I can get passive income high enough to cover our basic monthly expenses, which we can currently keep around $3,300/month including the mortgage, that provides some extra security knowing that I can cover those even if we lose all other sources of income. We would then have 3 main sources of income with 2 that could cover all expenses on their own and one that could cover 2/3. It would also be a nice level of success to reach with side businesses.

In the past I’ve set a lot of overwhelming goals, so for this I want to start small. Between the start of August 2012 and the end of June 2013, I will increase our passive income to $500/month. For this first step I ignore taxes because if this was our only source of income it would have no tax.

This was a great demonstration of goal setting. After reading Steve Pavlina’s posts, the number $500 just came to me. Then I thought “that’s impossible, it’s just too much work for that time since I don’t know much yet”. The next day I decided to break it down just for fun… and I realized how I could do even better than that goal. So now it’s official that I will aim for that 🙂

$500 a month isn’t a lot. Even for a minimalist you need quite a bit more than that to support a family. But if I can build a passive income of $500/month I can keep doing that again and again until it adds up to more, and I can find better ways to build bigger income streams. It’s certainly not a fast process. As Steve Pavlina points out he has been doing this for 15-20 years.

What is Passive Income?

There are many people out there pitching different ideas of passive income. For the purposes of this goal, I define it as something where each additional sale / payment can be made without me spending any additional time. It still requires a lot of work to set up or to increase the income stream, and will probably be a lower hourly rate than I get in my main business.

I think of most online passive income as a temporary thing. Imagine that you find a cool phone accessory on Alibaba selling for $5 a piece, and you notice it’s going for $25 on ebay. You set up a website to sell them, hire your teenage niece to manage inventory (she’s even responsible enough to make orders and manage payments). You’re soon selling 200 units a month, so you sit back and collect your $4000 (minus fees and a payment of $1000 for the help). That’s it, right? Not quite, because next year another company starts making their own better version and selling it for $10. Within a month your income has crashed.

This story is completely fictional but business is like that. As they say in the investment world the only real passive income is federal government bonds from a highly stable country. You can stick your money in and just collect the interest for the rest of your life. Anything else requires some time to set it up and keep it going so it isn’t really passive.

For this reason my main business will never be truly passive. I can’t hire any combination of people that will let me earn a large profit while never requiring me to help them out. Or to put it differently, I could step back but by spending a bit of time helping the business I would still be able to earn 2 – 10x as much from it so it would be worth working a bit.

In our personal system, our investment portfolio of stocks and bonds is the most passive part. It can be managed with 30 minutes a year (and we can skip that for a few years if we really need to), which is acceptable as the minimal amount of work to do. Everything else ultimately has to feed into that portfolio for us to be able to pay our bills without working.

Why Passive Income?

If you ask most people why they want to earn money without working, their answer would be something like “work sucks man!!1!11”. I don’t take that view at all. My main business and these projects all require some work, but it is interesting and rewarding. For me the goal is more of an incremental improvement. It’s a bit of a stretch to call most of this passive income, but it’s a convenient label to separate it from other income.

If I can pay the bills in the unlikely event that my main business has trouble, and I have a bit more flexibility in how I use my time (I’m already doing well at this), then that’s a worthwhile goal. Following Steve Pavlina’s advice I am already taking time to do some of the things that more passive income would allow me to do. So hitting the goal will mostly be a formality but it will be nice all the same.

The Vehicles

Based on some projects I had started before I’m planning to use a few things to build this passive income:

  • Our investment portfolio. We are building this for long-term income, so I consider the passive income to be 5% of the current market value. We are currently re-investing everything and not withdrawing anything but I will include that estimated amount in the goal. There are a lot of conditions to this and I know people like to debate the withdrawal rate, but know that it works here 🙂 This is truly passive income. If we forget about it for a year, or 10 years, it will continue to deliver the same (maybe growing) income. This category also includes a fistful of dollars we get each month from our ING Direct account since we maintain a pretty stable balance there just in case. To reach the goal, I expect this to deliver income of $300 – 350/month.
  • A blog I started several years ago. I published a few articles then lost interest. I recently noticed that 2 good articles were doing a good amount of traffic (1000 views / month). I’m now reviving this with new branding, some twitter marketing, basic monetization, and regular updates. I just put on AdSense 3 weeks ago and so far it’s earned about $0.20 with one click $0.23 with two clicks As a sub-goal I want this to get to $10/month after 3 months. To reach the goal, I expect this to deliver income of $20 – 50/month.
  • A product I’m launching in partnership with a well-known blogger. This is a perfect combination of our strengths, and lets me get more into the software products market. There’s even time to launch 1 or 2 follow-on products before next summer. This product is a one-time sale with support, but with the right audience it can create a good income. To reach the goal, I expect this partnership to deliver income net of expenses of $100 – 200/month.
  • An online software service for small businesses. I’ve been developing it on and off for about 18 months now and have let it go a bit (at least a year was unproductive). It hasn’t launched but I still think there is potential in this. It has a monthly fee so as long as I keep signing up new customers I can grow the income. I’m starting small to get lots of good customer contact and create something they really need. To reach the goal I expect this to deliver income net of expenses of $50 – 100/month.

Altogether these income sources will add up to $470 – 700/month. As of today we can count passive income of $223/month so there is some work to do. If I hit something close to the goal, I will aim for $1000/month by the end of 2013. If I go over early, I will increase that 🙂

These projects don’t require a lot of capital other than the investment portfolio so all the proceeds will go directly to that portfolio to help make the overall income stream even more passive.

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