Building Passive Income: Lessons from a Friend's Journey

The Quest for Passive Income

A few months ago, I was on holiday with some friends when one of them, let's call him Harry, expressed a strong desire to build streams of passive income. As a former doctor turned entrepreneur, I've been pursuing passive income since I was 13. After years of trying and failing, I eventually succeeded in making enough money to quit my day job. People often ask me for advice on how to make money, get rich, achieve financial freedom, and generate passive income. In this article, I'll share the conversation I had with Harry and some frameworks for thinking about passive income that might help you if you're on a similar journey.

Understanding Passive Income

When people talk about passive income, they generally don't mean making money without doing anything at all. What they usually want is income that is decoupled from their own time. For example, at the end of 2023, I published a book called "Effortless Productivity." This book now sells on its own, generating passive income for me. I put in significant work over four years to create the book, but now it sells independently, providing royalty checks every quarter.

The Motivation Behind Passive Income

When I asked Harry why he wanted passive income, his answer boiled down to one word: freedom. Harry doesn't hate his job; he's comfortable enough in it. However, he loves the idea of freedom - the ability to do what he wants on his own terms, at his own schedule, doing work he loves with people he loves, and serving people in the way he wants to, rather than feeling chained to an employer.

Harry had a specific number in mind: £10,000 a month or $112,000 a year. He felt that this amount of passive income would replace his salary as a lawyer and give him the freedom to travel, start his own business, and pursue writing interests.

The Fundamental Resources: Time and Money

In our capitalist society, there are two fundamental resources: time and money. You put these resources into a "box" (often called a business), and money comes out on the other end. This box could be someone else's business or your own.

To illustrate this concept, let's use a mental model of a ship. To make money, you could be a crew member on someone else's ship, or you could build, own, and captain your own ship.

Being a Crew Member: The Traditional Career Path

Most of us start our working lives as crew members on someone else's ship, which is often known as a career or job. In Harry's case, he's a lawyer working in-house at a company. He's contributing his time to someone else's ship but not his money.

This approach is not particularly passive because you're essentially trading time for money. However, there are ways to generate passive income within this context:

1. Savings Account: You lend money to your bank by putting it into a savings account. The bank invests that money and pays you interest.

2. Investment Account: You can open an investment account and contribute money to other businesses. For example, investing in the S&P 500 means your money is split among the top 500 companies in the US.

The 4% Rule and Long-Term Investing

Many finance gurus use the 4% rule, considered the safe withdrawal rate. This means you can generally safely withdraw 4% of the money in your investment account each year without affecting the principal.

For Harry to generate his desired £120,000 a year at the 4% withdrawal rate, he would need £3 million in his investment account. This approach to building passive income is often called "get rich slow." It involves working within a stable, relatively high-paying career, saving more money than you spend, and investing the savings.

Building Your Own Ship: Starting a Business

The faster but higher-risk method of generating passive income is to build, own, or captain your own ship - often regarded as starting your own business. This could also include investing in real estate.

However, this transition from being a crew member on someone else's ship to starting your own comes with many challenges, both external and internal. About 80% of these challenges are likely internal, such as thoughts like "I don't have the right business idea" or "I don't have the right skills."

The Now, Not How Challenge

For those stuck without a business idea, Noah Kagan's book "Million Dollar Weekend" offers a quick challenge: Ask one person you respect for a business idea. This simple act can create your first spark towards your dream life.

Knowledge and Skills for Running a Successful Business

To run a successful business, you need knowledge and skills in two main areas:

1. Making something people want
2. Selling it to them

Most jobs teach you how to do the work, but not how to win the work (i.e., sales and marketing). Developing skills in winning work is crucial for entrepreneurial success.

Harry's Business Idea: Emotional Intelligence for Professionals

After brainstorming, we came up with an idea for Harry based on his interests, skills, and potential market:

1. What Harry enjoys: Writing
2. What Harry is good at: Emotional intelligence
3. Useful to others: Emotional intelligence is valuable for lawyers and men in general
4. Monetization potential: Corporate workshops and online courses

Choosing a Business Model: Audience Growth vs. Service-Based

Harry had to choose between three options:

1. Build an audience around emotional intelligence
2. Build a product around emotional intelligence
3. Build a service around emotional intelligence

Generally, I don't recommend starting with a product, as it's an advanced strategy. The choice was narrowed down to audience growth or service-based business models.

Audience Growth Business Model

This follows a J-curve, where you're in the negative for a while before seeing returns. It involves creating free content on public platforms to build an audience before monetizing through products, services, brand deals, or affiliates.

Pros:

• Easy to start
• Low barrier to entry

Cons:

• Monetization happens later
• Requires consistent effort without immediate payoff

Service-Based Business Model

This involves selling services, ideally for at least $2,000 per client.

Pros:

• Make money from day one
• Non-J-curve business

Cons:

• High-friction sales process
• Less scalable initially

Harry's Choice and Outcome

Harry decided to go down the audience-building route, planning to write on LinkedIn and start a Substack newsletter about emotional intelligence for professionals, particularly aimed at men.

Unfortunately, after making one or two posts, Harry struggled to maintain consistency. Despite making an accountability pact, he failed to publish regularly. This highlights a common challenge in building passive income: the difficulty of staying disciplined and motivated when not seeing immediate results.

The Challenge of Building Passive Income

Passive income is hard because it requires creating assets that generate value while you're not there. This often involves a period of not making money and the project seeming unsuccessful for a long time. It's like a flywheel that takes a lot of energy to start moving but, once going, spins more or less on its own.

Key Takeaways for Aspiring Entrepreneurs

1. Consistency is crucial: Find ways to stay consistent even when not seeing immediate results.
2. Enjoy the process: The easiest way to stay consistent is to find enjoyment in the process itself.
3. Be prepared for the long haul: Building passive income often takes years of effort before seeing significant returns.
4. Understand your motivations: Know why you want passive income and what freedom means to you.
5. Choose the right business model: Consider your skills, interests, and tolerance for risk when deciding between audience-building and service-based models.
6. Develop both "doing the work" and "winning the work" skills: Success in business requires not just expertise in your field but also sales and marketing abilities.
7. Start small and build momentum: Even small steps, like writing one post a week, can lead to significant results over time.
8. Be realistic about your goals: Earning substantial passive income is challenging and requires extraordinary effort and consistency.
9. Learn from setbacks: Use failures and challenges as learning opportunities to refine your approach.
10. Stay flexible: Be willing to adjust your strategy as you learn more about your market and your own strengths.

Building passive income streams is a challenging but potentially rewarding journey. It requires patience, persistence, and a willingness to learn and adapt. While the path may not be easy, the potential for financial freedom and the ability to pursue your passions make it a worthwhile endeavor for many aspiring entrepreneurs.

Article created from: https://www.youtube.com/watch?v=GgSNvCY-AcY