In this post (and possibly the next couple as well) I want to take a look at the reality of making money online and discuss how it’s different from what most people think. We’ll also talk about what you should know if you are interested in making money online, and what you should look into before you start.

Why Make Money Online?

To start off, let’s talk about why the Internet is such a great opportunity for people who are interested in making some money on their own. I can sum it up in four points.

Little to no money required – You can start up a website for under $20, or even for free if you want to. If you wanted to start up a traditional business, you’re going to have a significant amount of expenses before you can really get going – start up costs, legal fees, office space, employees, advertising, etc. But you can start putting up a website right after breakfast and be done by lunch.

Easy access – Just about everyone has access to the Internet. All you need is a computer and a phone line, and if you can’t get those on your own, your public library will probably let you use theirs for free.

Huge audience – According to the latest data, there are now more than 1.7 billion people online across the world. That is a staggeringly huge potential audience for your website. If you could get your product, service or ad in front of one-half of one percent of those people, you could be extremely wealthy.

And lastly, the number one reason that the Internet is so great is that it make it easy to establish passive income systems. If you set up a website and then go eat a sandwich, the website doesn’t stop working while you’re eating. No matter what you’re doing – sleeping, playing, working, whatever – your website is still working to generate traffic. That’s an incredibly powerful tool for your business that you should not pass up.

So How Do You Make Money Online?

There are several ways to go about making money online (far too many to sum up in one article) but let’s talk today about the most popular method. It’s actually fairly simple in theory, and it goes a little something like this: You make a website, people come visit your website, and then you sell them something. In this regard, having a website really isn’t that much different than running a traditional, brick and mortar business. Not everyone that comes by will buy your product or services, but if you get enough people coming in you’re going to start making sales. Let’s take a look at each of those three steps in greater detail.

Make a website – This step is really much easier than people usually think it’s going to be. You can set up a simple website using free tools available online in just a few hours. If you want to own your website, you’ll need to purchase a domain, get a hosting plan and then get some content up on it (use WordPress for getting content on your site). You can also go the free route and get a website up with Blogger or another similar service, but you won’t own your site. It’s probably better to spend $10 or $20 and get your own site set up.

Get traffic – There are several options for getting traffic to your website. You can pay for it (using Adwords or another ad network), you can use social media (such as Stumbleupon or Digg) or you can to try increase your visibility in Google and other search engines. If you are trying to make money from your website, the best traffic generating method, by far, is to rank as high in the search engines as you possibly can for your niche.

Sell them something – As with generating traffic, you have several options for monetizing your website. The quickest and easiest solution is to use Google Adsense on your site. You can also sell someone else’s product (called affiliate sales) or sell your own product directly. Adsense is a popular choice for many webmasters, but it may not provide the best long-term solution for monetization.

There’s a quick intro to making money online. I think I’ll explore this topic more fully in my next few posts.

Earned vs. Passive Income

Most people make money by trading their time for a salary. You work 40 hours a week, and your employer gives you a paycheck a couple of times each month. It’s a pretty simple deal. You come in and work, and you get paid. Stop coming into work, and you stop getting paid. This is called earned income. The amount you get paid is directly related to the amount that you work. (There are always some exceptions to this rule. For instance, vacation and paid leave allow you to not work and still get paid, but the rule still stands. If you stop going into work, you will stop getting paid.)

Passive income (or its cousin, residual income) is different from earned income in that it doesn’t require you to trade your time directly for money. Passive income is generated by systems that earn money constantly, regardless of whether you are working on that system or not.

When most people first hear about passive income, a lot of these terms don’t really make sense. “What exactly do you mean by a “system”? “How does it earn me money when I’m not working on it?” Let’s take a deeper look at some passive income systems and exactly how they generate income.

Passive Income Systems

A passive income system is simply any business, job, or property (physical, intellectual or otherwise) that continues to produce income for you even when you are not working on it. Here are some examples.

Investments – Probably the most “pure” example of passive income is having a large amount of money invested in the stock market, and living off of the interest generated by your investments. This leaves the principal free to be reinvested, generate more income, and the cycle repeats itself. Unfortunately, this option needs large sums of money to make it work, so unless you are already independently wealthy this is not really an option.

Owning a Business – Owning a business can be a great source of passive income. Hire a manager to take care of the day-to-day operations, and your business will generate income even when you’re not there to run it. You can even start a franchise – such as a fast food restaurant, shipping store or janitorial service – and you won’t have to come up with the basic idea or business plan by yourself.

Rental Properties – Have you ever rented a house or apartment? Did you notice how your rent was due every month, regardless of how often you saw the landlord? That sounds suspiciously like passive income. If you own the property, your tenants pay their rent on a regular basis, whether you are there working on the house or not.

Running a Website – Running/owning a website or blog is another great source of passive income. Once you have a decent amount of traffic coming in, there are several methods of monetizing the site: putting up advertisements, charging for content, selling a product, etc. The point being, readers/users are still coming to the site even when you’re asleep, thereby helping you make money.

The common factor in all of these systems is that your time is not tied together with the amount you get paid. This is unfortunate at the beginning because you’ll be working long hours for very little pay. But after while, if you keep at it, your income will start to increase. At some point your income will be roughly approximate to what you would expect to get paid in a similar salaried position. At that time you can decide whether to invest more of your time into your business to increase your salary even higher, or whether you want to lower your hours to spend time on other projects.

Maintenance

There’s one other thing to mention on this topic and that is the maintenance you’ll need to do on these systems. No matter what sort of system you set up or how well it’s done, you’ll always have to spend some amount of time maintaining the system to keep it going. If you have several million dollars in the stock market, you (or your financial advisor) will have to keep an eye on how your investments are doing to make sure you’re still making money. If you own rental houses and you never maintain them, before too long the roofs are going to be full of holes, the gardens will be full of weeds and you won’t be able to find anyone to rent them from you.

Don’t confuse maintenance with being tied to the clock like a real job. You still get to choose when to work on your business(es), you get to choose whether to do the work yourself or pay someone else to do it, you get to decide what needs to be done about problems that arise, etc. You’re still in charge.

So what other passive income systems are there? I always love hearing about how other people are using some creativity to make money. Let me know in the comments if I’ve missed any.

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This is Part Two 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

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

Let’s take a look at what he has to say in the book and see which side is right.

Rich Dad, Poor Dad

The idea behind the Rich Dad, Poor Dad title is that Kiyosaki says when he was growing up in Hawaii, he essentially had two dads: his biological father (Poor Dad) and the father of his best friend (Rich Dad). Poor Dad was a superintendent in the Hawaii school system, and followed a very traditional career path: work at the same company for many years, and slowly work your way up the ladder. He wasn’t poor exactly – his family lived comfortably – but he was definitely a wage slave who did not like to take much risk.

Kiyosaki’s Rich Dad, on the other hand, was an entrepreneur and business owner. Among other things, he owned several mini-marts in Hawaii as well as a good bit of rental property. He encouraged people (including his son and a young Kiyosaki) to question their beliefs about money and see if there was a better way to go about generating income.

Kiyosaki lays out the differences in his two dads in this way:

One dad recommended, “Study hard so you can find a good company to work for.” The other recommended, “Study hard so you can find a good company to buy.”

One dad said, “The reason I’m not rich is because I have you kids.” The other said, “The reason I must be rich is because I have you kids.”

One encouraged talking about money and business at the dinner table. The other forbade the subject of money to be discussed over a meal.

One said, “When it comes to money, play it safe, don’t take risks.” The other said, “Learn to manage risk.”

Kiyosaki says that he took a job from his Rich Dad when he was 9 years old, and his Rich Dad began to teach him important financial principles and the “rich mindset”.

Rich Mindset

Kiyosaki said says the most important difference between his two dads (and between the rich and poor/middle class) is how they think about money. The poor, he says, spend all of their money on expenses and liabilities. The middle class spend their money on things they think are assets, but are really liabilities. The rich, on the other hand, know the difference between assets and liabilities, and spend their money on assets. These assets then generate enough cash flow to pay for their liabilities.

The second thing that Rich Dad taught was the need for financial literacy. Too many people, especially among the poor and middle class, have very little idea how money, business, investing or real estate actually work. Think about all of the “experts” out there who want to help you with those very things. Then think about this: Have you ever met a poor stockbroker? How bout a poor real estate agent? I bet you haven’t, and a large part of that is because those people know how money actually works.

The responsibility for teaching financial literacy, Kiyosaki says, lies largely with parents, as it is generally not taught in schools. If parents can ensure that their children have a solid financial knowledge base before they leave the house, then they will be way ahead of the game, and will hopefully avoid the traps that so many young adults fall into.

Another point that Kiyosaki makes is the importance of knowing exactly what business you’re in. He shares a humorous story of being interviewed by a writer for a newspaper who complained to him that her career didn’t seem to be going anywhere. Kiyosaki suggested that she attend a class his friend taught on how to sell. She got offended, saying that she had a Masters in literature and didn’t need to know how to sell. As she began to pack up her bags, ending the interview, Kiyosaki pointed at her notes where she had written “Robert Kiyosaki – best selling author.” He pointed out to her that being a best writing author doesn’t guarantee anything, but if you can manage to become a best selling author, success is much more likely.

What To Expect from Rich Dad, Poor Dad

As I mentioned above, there is a bit of controversy surrounding Kiyosaki and his books. Excluding the ad hominem attacks and complaints that Kiyosaki’s Rich Dad may not have actually existed, much of the criticism of Rich Dad, Poor Dad centers around the fact that Kiyosaki doesn’t provide much specific detail in this book. For example, he tells you to start up a business, but doesn’t provide any specific business ideas. He suggests investing in stocks, but doesn’t say which specific stocks are good investments and which ones you should avoid.

While I agree with this criticism – the book does indeed lack specific, detail-level advice – I don’t think that this is necessarily a strike against the book. Rich Dad, Poor Dad is not meant to be a detailed guide to starting your own business or investing in the stock market. Instead, it is a big-picture overview of the things you need to know in order to become rich. If you don’t have the big picture, then knowing the little details is only going to be of so much benefit. So much of  making money is identifying the beliefs that you have about money that have brought you to where you are, and then choosing which beliefs you need to change (and which ones you can keep) in order to get to where you want to go.

For example, if you don’t understand why having a job is ultimately a bad thing – and it is – then why would you need to start your own business? If you think that buying a house is the best investment you can make, then you’ll never see the benefit in investing in something smaller that will actually put money in your pocket. So much of what we think we know about money and becoming wealthy is actually wrong, but unless you get the big picture first, you’ll never learn why changing the way you think is so important.

Overall, Rich Dad, Poor Dad is a great book. It’s possible that if you are already highly financially literate, then you won’t find too much value in this book, but the chances of that are small. The vast majority of people will find tremendous value in this book and the knowledge gained from it will be well worth your time. If you are stuck in a job that you don’t like, or if you are tired of working each month just to barely be able to pay your bills, or if you are simply considering ways to make more money, this book will certainly help you meet your goals. Highly recommended.