We were pretty proud of cash flow that we had created, but our friend was clearly surprised that the amount was so low. Why be excited about something that makes you only $20 or $30 a month? The answer lies in the difference between earned and passive income. Let’s take a look at that difference, and see why even small amounts of passive income can be so great.

Income

Let’s say I got a job that paid me $1,000 a month. Is that a good or bad job? Most of you probably said it’s a bad job. However, the astute (and amazingly polite) among you said “I need more information before I can answer that question, please, sir.” And you’re right, you do need more information before you can answer.

As it happens, the job I just got pays me $1,000 a month in exchange for 40 hours of work each week. It’s a typical full time job. So is it a good job or a bad job? Well, it’s not too good. Work a full time job for an annual salary of $12,000? No, thanks.

But now let’s say that the job only requires 20 hours per week. The income has stayed the same, but now the job is a bit better. I could get two of these jobs, work 40 hours a week, and double my yearly income to $24,000. Things are looking up a bit, right?

Now let’s say that the job only requires 8 hours of work each week, and your time will be spent testing the comfort levels of various hammocks while on a beach in the Caribbean. Now, that’s a job! You could get 5 of those gigs, spend all your time on the beach, and make $60,000 a year. Not too shabby.

But as good as all of this sounds, there’s still one problem with each of these jobs. They all require you to trade your time for money. Your earnings potential is capped at the amount of time you have available to spend on the job. If you want to take some time off, if you want to scale back your hours to spend more time with your family, or if you leave for a new job, your income is going to decline. Ultimately, if you quit working altogether, your income will stop completely. I’ve yet to hear of a job where they’ll pay you to *not* work.

Talking about income and work in this way probably sounds a bit silly to most people. Of course you have to work to get paid! It’s as basic a fact as saying that the sky is blue or that sticking your finger in a light socket is bad. But the truth of the matter is, this is not the only way to make money. In fact, this is not even the best way to make money. To be perfectly honest, it’s just about the worst way to make money!

Passive Income

Just about anyone who has access to CNBC or the financial section of a newspaper has probably heard about passive income. But let’s take a minute to discuss exactly what it is.

Passive income (and I’m using a practical, working definition of it; not the official accounting definition) is simply income that you earn while you are not working. Or, to be more specific, it’s income from a system or project that is earned even when you are not working directly on that system or project. It is differentiated from earned income, which requires you to be working directly to generate money.

I’m not going to delve too deeply into passive income systems today, but I do want to talk about why passive income is so great. Remember the website up above? Let’s say that it makes $25 each month, with little to no attention from Mary. That means her website is earning her money when she’s watching TV, asleep, feeding the baby or whatever else she wants to do. It also means – and this is the important point – that her website will continue to plug along and make money even when Mary decides to start up a new website. And in a few months, that new website is making $25 a month. And so she starts up another one, and another one, and another one. Before long she’s got a couple hundred coming in each month (or more) and it’s all passive income.

Do you see why we were excited about making $20 from her website now? We’ve since gone on to start several new websites, and her gluten free site is still plugging along for us. That’s the power of creating passive income systems. Instead of being limited by the amount of time you want to spend actively working, you’re only limited by the number of systems you want to create. Right now, my goal is 20 different systems. When I hit that goal, I’ll probably shoot for 50. Why just have one job?

If all of this is too much to digest at once (or if it totally blows your mind), don’t worry. It’s a big paradigm shift, and it can take some time to sink in fully. In some future posts we’ll explore passive income and the systems that produce it more fully, but for now, just give some thought to the strength of passive income and what it could mean to you.

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This is Part One in my series on passive income. Check out the other parts below.

1) All Income Is Not Equal
2) Using Passive Income Systems To Make Money

While we could have covered the $800 from our emergency savings,  I decided to try to make up the difference with some freelance work. I went to Elance and found two jobs that met my criteria and I applied for them both. One month later I deposited $730 into my checking account. Here are the steps that I took to make money fast.

1. Determine your criteria for a freelance job.
I had several criteria in mind when I started looking for a freelance gig. First, I needed to to have a reasonable chance of winning the job with a $800 bid. Second, the timeline for the work needed to fit within my window of availability which was the month of May. Third, I wanted a fixed fee job rather than an hourly job. Oh, and most importantly, I wanted a job that was tax or accounting related since that is a type of work that I can do quickly and well.

2. Sort through the available jobs.
You can search Elance using some of your criteria to help narrow the possible jobs. I did a search for jobs in Finance & Management that are fixed fee jobs with a budget over $500.

Elance.com job search

Once I did this I looked at the details of each job to see if I had the necessary qualifications. Equally important to me was to figure out which jobs I would enjoy and which job providers  were actually willing to pay for quality work.

3.  Place your bids.
I considered several questions when was placing my bids. First, what did my gut tell me was a fair price for the work. Second, what would my employer have charged a client for doing this work. Third, what would my employer have paid me for doing this work.  And fourth, how much was my competition charging.

The project that I bid on was the preparation of two federal tax forms related to foreign businesses. This was specialty work that I had done before  and my gut told me that a fair price was somewhere between $750 and $1,000. I estimated that my employer would have charged around $1350 and would have paid me $ 375 to do the work. I was the first to bid on the project, but if you mouse over the number in the bid column (see above) you can see the  lowest, highest, and average bid amounts.

4. Do the work and get paid
After you’ve been hired for a job both parties will agree on the timeline and you’ll get to work. Once the work is completed, the other party will release your payment. (It’s been held in escrow until now). You have the choice of receiving your payment as a paper check, a direct deposit to your bank account, a direct deposit to your Paypal account, or a prepaid debit card.

Some other things to consider:

• If you need to net $800 from your freelance work, then you’ll need to earn $875. Elance deducts 6.75% to 8.75% of your earnings as their fee for hooking you up with work. Be sure to take this into consideration when you’re placing your bid.
• Elance is a great way to make money fast as long as you can wait a few weeks to get the cash.  The bidding process can take a couple of weeks, and then it may take you  a few days to do the work, and the employer a few days to approve the work and release the funds.
• If you’re not as choosy about the jobs, then you can probably speed up the money-making process. I was very particular about which jobs I would take and how much I was paid for my service, and as a result about 6 weeks elapsed from the moment that I realized I would need more money and the moment I actually received the money.
• Take some time to look at the types of freelance jobs on the site and how much competition there is for the jobs. You may be able to identify a niche area that pays well, has little competition, and for which you could learn to do relatively easily.

Please feel free to share your experiences as a freelancer in the comments, or ask any questions that you may have. John and I have both hired people through Elance so we have some perspective from the other side as well.