There are many ways to build passive income: writing a book, blogging, starting a business, or just investing. Investing works differently too. Dividend shares or ETFs can provide income.
So we quickly see that the possibilities are different. With various advantages and disadvantages. But how do you actually know if your own approach is right? Let’s look at three key characteristics that we can use for evaluation.
Passive Income: Good based on effort
Basically, effort is the deciding factor for me if I want to judge if passive income is good. We can define it differently. Sometimes it is about spending money. In order to achieve financial freedom, an amount of at least six figures is usually required.
But the time factor and your own work efficiency are also important. There can be significant differences between the ETF shares themselves and the dividends. Buying a broad market and analyzing multiple stocks leading to a wider portfolio work differently.
But there are still unlisted opportunities to build passive income. It takes a long time to write a book. On the other hand, a blog entry is written faster. Nevertheless, it takes some time before you get the coverage you need to monetize it. So we can see that measuring effort can be the first starting point.
Scalability and predictability
For me, one or two other features of passive income assessment are scalability and predictability. When it comes to stocks and ETFs, we can say that credible dividend stocks tend to have high levels of both. Therefore, we can say: if I invest X euros, I should receive Y euros in dividends. This does not work everywhere, even with an ETF itself, there can be cuts in the wider market.
But it’s harder to write a book or blog. Passive income cannot simply be scaled here. Writing a second book also takes a lot of effort. Moreover, it is not known how many of these possibilities are effective. The surprise effect can also be positive. Nevertheless, it should be taken into account that some paths are neither plannable nor scalable.
Passive income: sustainable development!
Finally, passive income is usually good when it is balanced. Talking about a blog or book right now, covering top-notch content, or even a topic you’re a professional in, can be a very stable way to generate income. Content is a superpower that can earn you big money. Especially if you have the knowledge you need.
This, in turn, also applies to stocks and ETFs. The broad market should function reliably. But what about a fix or a failure? Does your own approach and possible extraction still work here? We have to consistently evaluate how much room is up for dividends, and down when it comes to earnings and free cash flow for dividends.
Passive income can therefore not only take many approaches. No, but also the ways we judge it.
The article Assessing passive income: when is the approach “right”? he first appeared in The Motley Fool Germany.
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