Now that we’ve covered setting your passive income goal and a bit about the mindset of passive income — I hope you enjoyed the humor in the last post — let’s explore the details of how to actually create passive income streams. We’ll start out fairly high-level here and then drill down into the specifics in future posts.
Here are the 3 basic parts of an income generating method:
- Value creation
- Value delivery
Notice that these same 3 aspects can be applied to any basic income generation method. When you work at a regular job, for instance, you’re probably going to create and deliver something of value to your employer, and then you receive payment for it.
So what’s different about passive income? The difference stems mainly from the second aspect: how value is delivered.
When you generate active income such as with a regular job, your value delivery is usually done just once. Whatever work output you’ve created gets handed over to your employer.
The same goes for contract work. You do some work for a client (value creation), hand over that work (value delivery), and get paid.
With a passive income strategy, however, the idea is to deliver this value multiple times. Then you get paid multiple times, once for each delivery.
So the heart of a passive income strategy is found mainly in the approach to delivering value.
Passive Value Delivery
The words “passive income” suggest that it’s the third aspect (payment) that defines the difference between passive and active income, but the main differences are usually found in the value delivery methods.
With an active income method, you hand over your work product once and get paid for it once. With a passive income method, your work product is delivered multiple times, and you get paid multiple times.
The passive element means that this value is being delivered without your direct personal effort. So you’re using a method to get your work output into the hands of multiple customers, but you don’t have to be the one personally delivering it. For example, when I publish a new article to my blog, it gets delivered to people all over the world automatically, but I don’t have to personally send it to everyone. The value delivery is automated.
Why Just One Customer?
Now here’s a good question to ask yourself: Why do you only have one customer?
A person with a job is just a business owner who sells to only one customer. If you take a passive income strategy and apply it to just one customer at a time, you have an active income strategy. One boss. One employer. One client at a time.
A person who generates passive income usually prefers to deliver value to multiple customers simultaneously. Another option is to repeatedly deliver value to the same customers over and over, but without having to create that value anew each time. A good example of this would be renting out property that you own. You can generate passive income this way even with a single customer since that customer can keep paying you rent every month.
When people shift from an active income to a passive income mindset, they usually start thinking about how to deliver value to more people. Instead of having just one customer for your work output, why not have 10 customers… or 100… or 1000? Why not have 1,000,000 customers?
How many people are you capable of helping?
Note that with an active income strategy, income is a function of value creation. If you only have one employer, one client, or one customer for a particular work product, then in order to increase your income, you have to work harder, or you have to charge more for your creations.
But with a passive income strategy, you have an additional leverage point. You can deliver the same value more than once and get paid for each delivery. As it turns out, this is a powerful leverage point.
When you start thinking about how to scale your work, you’ll often find that you could do the same core work but also serve more people than you do now. You’d simply need a different way to deliver your value.
For example, you could write software for one company and get a paycheck from them, but you could also develop and release your own software that lots of people can download and use.
You could work as an attorney and see one client at a time, or you could create and sell books with your best legal advice, thereby helping many more people.
Think about the work you do right now. How could you modify your work so that you can provide your value to many more people?
Chances are that your employer is already taking your active labor and applying a passive incomes strategy to it. You do the work one time, and they leverage it to generate long-term streams of income. Or you may be working to support the system your company developed to deliver passive income and capital gains to its investors and founders.
Sales are the lifeblood of any business. If you sell to only one customer, that isn’t much blood, so you don’t have much of a flow going there.
To enter the realm of passive income, start questioning the wisdom of running a business that sells to only one customer. And start thinking about how you could scale up the work you do, so you can deliver the value you’re already capable of creating to more than one customer simultaneously.
Generally speaking, the way to create streams of passive income is to deliver your value to multiple customers simultaneously and to get paid multiple times. If you’re going to work anyway, then you’re already creating value for someone. Why sell to only one customer? Broaden your horizons, and realize that if one employer is willing to pay you for the value you’re producing, chances are that someone else would be willing to pay you too — if only you weren’t so clingy with your one and only customer.
Stop Being So Selfish With Your Value
I tend to regard people who use active income strategies as being more selfish and self-centered than those who use passive income strategies. That may sound harsh, but the truth is that active income earners aren’t very good at sharing. They share their value with just one customer at a time, which in a world with billions of people is rather limiting, wouldn’t you say?
People often refer to this as loyalty, but it’s really just limited thinking. Besides, your employer may already be using this limited thinking against you as it generates passive income for others based on your active work output.
Passive income earners are constantly looking for ways to put more value into the hands of more people. They want to be as generous as possible. They love to share. And so society rewards them with streams of passive income, so they get paid even when they aren’t working.
Society doesn’t care how hard you work. It doesn’t care how creative you are. It only cares about the value you’re actually getting into people’s hands. That’s what you get paid for — for value delivery — not for your ideas, or your long work days, or your intrinsic value as a human being.
We’ll cover the details of how to do this in future posts. For now, your homework is to start thinking about the value you’re already delivering to people, and consider how you could scale it up to deliver this value to multiple people at the same time. It doesn’t matter whether you have a job or not. What value do you deliver to your friends and family? Why do people bother spending time with you? What other forms of value could you provide if you made an effort? Hint: you don’t actually have to be the one personally delivering this value. You just have to ensure that the delivery occurs.
Begin to step into the mindset of becoming a more generous provider of value to others. This is ultimately what passive income is all about.