Passive income is generated while you’re lounging on the beach, playing with your kids, enjoying a good night’s sleep, or doing anything under the sky besides working.
Pretty sexy, huh?
Now contrast passive income with its clumsy, pigeon toed cousin: active income. When you earn your money this way, you’re either working for a business or working in a business.
Stop working, and you stop earning money.
Unfortunately, many of us try to save money the same way we earn it – actively.
Think of some of the most popular expense cutting tricks:
- Cook at home.
- Make your own coffee.
- Grow your own herbs.
- Borrow books from the library.
- Unplug appliances when not in use.
Don’t get me wrong, these are great ideas. I, personally, use many of them to free up cash.
But, like many savings strategies, you’re continually required to snap into action mode.
If you want to reduce your food bill, you have to shop for groceries and *gasp* cook them.
If you want to lower your electricity bill, remember to unplug appliances as soon as you’re done with them.
If you want to save money on your morning cup of Joe, fire up the coffee maker.
Ugh! So much work!
Of course, these actions aren’t terribly difficult, but if you don’t perform them repeatedly, your savings disappear. Whether pickling cucumbers or courageously cutting your own hair, you’re actively earning your savings.
If passive income sounds appealing to you, then so should passive saving.
Before I walk you through the passive savings process, for comparison’s sake, I think it’s helpful to share how I earn passive income.
In late 2010, I decided to rent my apartment out on Airbnb.com. Prior to listing my unit, I knew I had my work cut out for me.
My place was okay, but there were a lot of changes I needed to make in order to be competitive with other hosts in my area. I spent many evenings and weekends buying and assembling furniture, cleaning out closets, hauling crap to the thrift store, posting items on Freecycle, shopping for extra linen, and organizing closets.
All told, I put in over 100 hours making my apartment suitable for guests and at least $500 making it pretty BEFORE earning a cent of income. It was a lot of work. (There’s that word again). But when I finally filed my 2011 income tax returns this year, I happily reported about $5,000 of rental (passive) income.
The good thing is now all I have to do is clean my place before guests arrive, accept and decline reservation requests, and answer a few emails here and there. The hard stuff was done over a year ago.
Earning money doesn’t need to involve grueling, endless labor and neither does saving money.
Here’s the simple, 3-step process for quickly finding savings that will pay off again and again.
Step #1 – Write down all fixed expenses
This is simple enough. If an expense has a set/contractual price, it should be captured in this step. We’re talking about rent/house payment, car note, day care, insurance premiums, tuition, cable, internet service, banking fees. You get the idea.
Step #2 – Eliminate what you don’t use
Ax recurring services that don’t provide any value to you such as online newspaper subscriptions you don’t read, a home phone you never answer, or *clears throat* a gym membership you haven’t used in months and won’t use for the foreseeable future.
Get rid of these expenses first because they, generally, don’t require much effort. You don’t need to negotiate with anyone. You don’t have to find a substitute for the service. None of that.
If you don’t use it, you won’t miss it.
Step #3 – Cut what you can
For every other fixed expense, ask yourself, “What actions do I need to take to cut this expense indefinitely ?” It could take 15 minutes or 15 hours to reduce an expense.
Obviously, the more time you put into an activity the greater you’ll want the payoff to be.
For instance, relocating is a relatively time intensive way to save money. You’ll spend tens of hours house hunting, packing, moving, unpacking, etc. But if you can reduce your rent by $300 a month for years to come, the decision could save you thousands of dollars. In which case, the time investment is worth it. Likewise, switching cellular service providers shouldn’t take more than an hour or so, but may result in you saving $20 a month.
Keep in mind, like any investment, the passive savings strategy doesn’t always work. I could’ve spent 100 plus hours readying my apartment for guests only to discover that I really hate having people in my private space and discontinued the whole project.
Likewise, you could interview multiple day care providers and discover you already have the best deal in town. You could thumb through hundreds of pages of heath insurance plans and decide you can’t stomach the risk of changing insurers.
But you won’t know how much money you could be saving until you put in the work.
What ways can you passively save more money?