Passive Income Defined: What Does It Really Mean?
Passive income is a huge buzzword in the online business space...but what does it mean? What qualifies as passive income? Is it even a real thing or just some catchphrase invented by bro marketers? In short, how is passive income defined?
The truth is that everyone seems to have a different definition of passive income. In conversations with other business owners, I’ve learned that passive income is a pretty divisive term. Many people associate it with hustle culture and shady marketing tactics. Others see it as a great way to earn money without the daily grind of client work.
I love the term passive income. I learned about it years ago when I discovered Pat Flynn’s Smart Passive Income blog. Pat is known for giving away tons of valuable free advice on his blog, podcast, and YouTube channel—pretty much the opposite of bro marketing.
I was puzzled why so many people (especially women) have such strong negative associations with the words “passive income.” Especially when most of those same people don’t have a problem with the idea of scaling your business, which usually involves generating passive income of some kind.
In this post, we’re going to unpack all of this. I’ll share:
How I define passive income
The truth about passive income
What passive income means to me
Passive Income Defined
There’s debate over what qualifies as passive income. Some people say that portfolio income like mutual funds, dividend stocks, and capital gains are the only true form of passive income. Even credit card rewards are sometimes mentioned because they don’t require you to do anything (except shop).
The Internal Revenue Service has a lot of “material participation” tests that decide what qualifies as “passive activity” income. (Leave it to the IRS to make this complicated.) Rental income is included even though maintaining a rental property requires a LOT of active participation.
Digital products, online courses, and affiliate income are the most common ways to earn passive income in the online business space. But some would argue that these methods don’t qualify because they still require a significant amount of work to create and promote.
I can’t say who’s right and who’s wrong but here’s my definition of passive income:
Passive income is anything that allows you to break free from trading your time for money.
In the online business space, passive income includes:
Online courses
Affiliate income
Digital products
Print on demand
Dropshipping
Advertising
Etc.
The Truth About Passive Income
The truth is that ALL methods of earning income require time and effort.
If you want to invest in index funds, you have to do research and open a brokerage account. If you want to earn affiliate income through your blog, you have to write great content. If you want to sell a digital product, you have to provide some kind of customer service. If you want to create a course, you’ll spend a lot of time filming lessons and planning the launch.
Passive income exists on a spectrum.
Some types of passive income require a lot of work, some require only a little. And your marketing strategy also determines how passive your passive income really is.
Here’s an example:
Let’s say you have an online course. Do you:
Do live launches a few times a year
Set up an evergreen sales funnel
All of the above
An evergreen funnel is the most passive way to sell your course, whereas live launches are the most time and energy-intensive.
How do you drive traffic to your live launches or evergreen funnel?
Google (SEO)
Pinterest
YouTube
Instagram
Facebook
Twitter
Search engine optimization, Pinterest, and YouTube) is more sustainable than social media marketing (Instagram, Facebook, and Twitter). All marketing requires hard work but search engine optimization is the more passive of the two if you take the long view.
Who does your marketing?
You
A subcontractor or employee
Outsourcing your marketing is a lot more passive than doing it yourself.
And finally, does your course include any of the following elements?
Live Q&A calls
Facebook group
Email support
All of these make your course more valuable...but they also make it less passive.
So you can see that income is more than just passive or active. Most of the time, it falls somewhere in the gray area. Anyone who says you’ll be able to quit your day job two months after developing your first passive revenue stream is selling something and setting realistic expectations is important.
How Passive Income Changed My Life
I’ve dabbled in various passive income streams for more than a decade but it wasn’t until 2020 that I realized the full potential of what passive income could do for me.
I started my Squarespace design business in 2019 and focused on client work with a tiny amount of affiliate revenue on the side. It...wasn’t great. I’m an introvert with a chronic illness who gets stressed out by deadlines and meetings. You can imagine how that went.
In the spring of 2020, I launched my first Squarespace template—a digital product I could sell over and over again. I spent a lot of time in 2019 building a sustainable SEO strategy, so I was able to slack off for most of 2020 and still have great sales. I also noticed a gradual uptick in affiliate sales from my blog.
My revenue grew substantially. Within two months of launching, I had my first $6k month. Even though I still worked with clients, it was liberating to know that I could turn down clients and still make ends meet.
In January 2021, I finally quit client work altogether and had my first $10k month. By then I was already working on my first course teaching Squarespace designers how to build their own successful template shops. I launched Scale with Templates in June and had a $30k month. I grossed over $130k in 2021 with three passive streams of revenue.
Did it require a lot of work? Yes, of course, but the startup effort (building the templates, creating the course, writing the affiliate posts) took the most time and effort. Everything after that is pretty manageable. A lot more manageable than being booked out with clients, I can tell you that!
Developing passive streams of revenue allowed me to take control of my personal finances, stop worrying about cash flow in my business, and take back my time. I typically work about 4 hours a day on average and I’m not beholden to anyone else’s schedule.
Passive income is still negatively associated with bro marketing and hustle culture but I would like to reclaim that. You do NOT need to use gross bro marketing tactics to generate passive income and the very nature of passive income is antithetical to hustle culture. The whole point is to make it possible for you to hustle less while earning more.
Ready to start generating passive income in your Squarespace design business? Join Scale with Templates and I’ll teach you how to build a successful Squarespace template shop!
