Definition

“Passive income” is income that can be earned on a regular basis without a sustained time commitment. Holding an ‘asset’ that doesn’t require a lot of time to maintain creates passive income, e.g. rent, royalties, etc. The definition of ‘asset’ here is different from what most people know:

An asset is something that puts money in your pocket.

A liability is something that takes money out of your pocket.

Rich people buy assets.

Poor people only spend.

The middle class buys liabilities that they think are assets.

– Rich Dad, Poor Dad 1.

By the above definition, what most people identify as assets such as savings, homes, and cars are liabilities rather than ‘assets’ because they don’t generate cash flow, and even require constant consumption of cash flow to maintain.

How to create passive income

Let’s put “passive” aside for a moment and look at how “income” comes about. Society rewards those who bring value to it. Reward is proportional to value, and value is often proportional to influence, which depends on the ability to spread and expand.

Haidilao if only in a city to open a branch is very difficult to do listed, even if the national chain or even global chain, there is no perfect mechanism to manage and unify such a number of offline stores, it is difficult to continue to today.

The expansion of offline entities need a lot of time, economic costs, and after the expansion of the many entities distributed around the management, even if only to maintain the status quo is another huge problem. Small Impact Area is not only a problem for the offline industry, it is also one of the difficulties in creating sizable 2 passive income.

The second difficulty in creating passive income is the reliance on sustained time investment, that is, not being ‘passive’, which is a problem for office workers, businessmen, and even some entrepreneurs of all sizes - their financial rewards require them to constantly put in a lot of time to maintain themselves.

Suppose you open a coffee shop, you as the owner of the store, if you can not leave the store for a long time to make it operate on its own, then the income generated by the store can not be called ‘passive’, while holding a money fund, which requires almost no time investment, but can generate returns steadily 3 is a real ‘passive income’, compared to the ‘can not shake off the hands’ of the In contrast, the “hands-off” shopkeeper may not be any better than the office worker.

There are two major problems in creating “passive” income:

  1. small impact area (difficult to expand and spread)
  2. Dependent on continuous time investment

Sphere of influence

Efficiently expanding the sphere of influence requires leverage, the contribution to the value of society from one’s own strength alone is small, in order to expand the influence, leverage is essential Leverage comes in many forms, the common ones are as follows:

1. Wealth

An independent investor’s leverage can be his cash holdings 4.

2. People (e.g., teams, networks), human-organized systems (e.g., businesses)

A business owner’s value output to the society is reached by the enterprise as a whole, which is generally accomplished by all the employees of the enterprise. The employees accomplish the actual value output for the business owner, but the biggest beneficiary is the business owner5, in which case the business owner’s enterprise (employees, team) is its leverage.

3. Media (e.g. internet, publishing houses) + automated systems (e.g. software services, creative property rights)

For celebrities, internet celebrities and e-commerce sellers, it may seem that the platform is their lever, but in reality they are not dependent on a specific platform (e.g. a specific social network or e-commerce platform), any method that can kind of help them reach their end-audience can be used for them 6, and their common leverage is the internet that drives these methods, platforms.

Internet-related jobs are often labeled as “high-paying,” which most people attribute to skill thresholds, typically software engineers, but why are software engineers in Internet companies paid so much more than software engineers in traditional companies 7?

It’s not an exaggeration to say that in a traditional business, a software engineer’s results may bring value to one or more businesses, but in a business that utilizes the Internet as leverage, the engineer’s results are amplified by the Internet and serve people likely nationwide or even worldwide, which is why software engineers in Internet businesses are paid more - - They create more value8.

The advent of the Internet has made the amplification of value faster and cheaper than ever before, it has allowed one person’s voice to be heard globally, and it has also allowed one person to create enough to serve the globe, things that were only possible for a multinational corporation before the advent of the Internet can now be done by a single person.

The Internet is probably the most cost-effective (magnification ratio than cost) leverage available to the average person.

Time commitment

It is easy and difficult to solve the problem of ongoing time investment, easy in the sense that the goal is clear, just create an automated system that meets the definition of an ‘asset’ above, which can be automated for a longer period of time 9 to generate cash flow without the involvement of the builder, which can either be a business 10, or a suite of software (e.g. SaaS); Difficulty is to achieve the goal is not easy, to do this, the difficulty of the industry has been mentioned above, to build a set of software systems may be relatively easy, the difficulty lies in the comprehensive ability of the human requirements will be relatively high, in addition to the output of a complete product, but also need to grasp the ability of all aspects of the regular business such as marketing, sales, operations, finance, customer service, etc., but also have a solid software technology capabilities to integrate these and the product, and the product will be a good choice. The software technology ability to fully automate these and the product itself.

It is only after a sustained period of time has been invested in solving the problem that wealth begins to accumulate and economic problems really begin to be solved.

Summary

Contributing value to society is rewarded with value, leverage is necessary for larger returns, and automation can help realize the accumulation of ‘assets’ 11, thus creating a more substantial sum of passive income.

  1. Kiyosaki, and Richter. Rich Dad, Poor Dad. This article does not discuss the ideas in this book, but only borrows its definition of “asset”, which the reader can even replace with other words. ↩

  2. There are many ways to create a small amount of passive income quickly, such as buying money funds, but these methods can hardly be considered as a “sizable” income because of the small impact area (small amount of capital), and a little bit more investment may become “active income” or even not be enough to cover the expenses. ↩

  3. Inflation, returns and input-output ratio are beyond the scope of this article and will not be discussed. ↩

  4. ‘Assets’ in the traditional sense is more appropriate here, ‘cash’ is used to avoid confusion with the alternative definition of ‘asset’ proposed above. ↩

  5. This one is essentially the exploitation of employee surplus value (which is how businesses are run) - employees create less value for the business than they get back from it. ↩

  6. They may not even rely on any online platforms, relying only on email to reach users and distribute content. ↩

  7. The skill threshold for both can be comparable. ↩

  8. Without minimizing either, the amount of value created is more location-dependent. ↩

  9. At this point the system can be called a “passive income”, and a completely passive income probably does not exist, the degree of “passivity” depends on the length of time here. ↩

  10. For an investor who invests in a business and then infrequently participates in its operations the business is a system of automation. ↩

  11. Without automation, the amount of “assets” one has is limited by one’s energy and time, e.g. one cannot have multiple full-time jobs; with automation, one can have multiple smaller passive incomes at the same time, thus generating a larger sum of passive income. Automation can be seen as leverage of one’s time. ↩