9 years ago investing131Jake

The Five Essential Elements Of Automated Income Generators

Do you know what is the wholly grail of investing and financial freedom? It’s the thing that everyone is seeking and very few are able to find and obtain. Well, except the owners of few million scam websites which offer you the secrets to it for only $97 (if they can be believed). The wholly grail is automated income of course. Who refuses to make money while lying on the beach? (Not me for sure).

Automated Income
Photo by Dan Pupek at Flickr

Unless you believe the $97-super-secret-wonder-e-books, creating something that brings an automated income is hard. It requires a lot of work, ideas and/or money. Most people never obtain an automated income generator in their life so I can not promise that you’ll do it either. But I have at least some good news – there are no hidden secrets of automated income (not even the ones that you get for 97 bucks). The essential elements of an automated income generator are well known and they are just five.

You Need A System

The key characteristic of any asset that brings automated income is that it is a system that you are not a part of. A system is something that runs on its own and requires (almost) no maintenance. If we get one grocery shop as an example, it is a system. It has key elements like selling, supplying with grocery, accounting etc. If you sell yourself in your shop, or you keep the accounting yourself, or you supply it yourself or even if you plan yourself what to do with the shop each and every month, you are a part of the system. You may own the shop, but you don’t own the system. Such a shop is not an automated income generator.

People often talk about making money online with blogs and websites as an automated income. I’ll also talk about websites because this is what I know best. The web based business can easier be turned into an automated income generator than other business because it runs on software. Each software essentially is a system and once created bug free it runs without any maintenance. The software does not amortize (at least not physically). It can work over and over again literally forever. If you own a site which generates residual income entirely through its software, you have a perfect system and a real automated income generator.

Sounds great but most websites are not real systems. This blog is not a system because I have to write in it if I want it to work. Even if you own a site that makes income directly from its software, you may still be a part of the system – because eventually you work on promoting the site all the time.

To own an automated income generator you need to own a real system which runs without you. This may mean you need to own machines, software, licenses, patents, buildings and have people who take care for everything.

Your Asset Must Bring Some Real Value To People

This rule is valid for all spheres of business. If you want to make money you must provide real value to people. Of course you can make money by lying and stealing or take it by force, but that rare leads to good long term outcome.

So, if you want to create an automated income generator, you need to provide some real value. If I get back to the websites example, a good programmer can easily create a fully automated system. For example he or she can code a web based website creator for other people to use. He could also write an automated script to spam emails, search engines and directories so his service gets automated promotion. This is a real system owned by the programmer, but it hardly is going to produce automated income. Spamming does not work well as a promotion method because it does not provide real value to the people who are spammed. The website creator probably will not sell well, because there are thousands of them.

However if you own a second home and let it out for rent, you are providing value to those who rent it, because they need a home. By the way your second home is also a system, because it doesn’t really require you to do almost anything. That’s why real estate investing can really bring an automated income (If you wonder why does it usually suck then, it’s because its profit ratio is usually too low).

Your Asset Must Be Unique Or Hard To Duplicate

If you own an automated income generator that everyone can build themselves in 5 minutes, your automated income will stop in 5 days or so. No one will pay you for something that they can do themselves easy and quick. Even if there are people who would pay for it, there will be even more who will do the same thing like you and give it out for lower price.

If you write a good book or e-book you can sell it many times. A good book and a contract with a publishing house is a good system because the book is sold over and over and brings you income. Once written you don’t need to do anything (assuming your publishing house does the promotion). But if writing a good book was easy, everyone would take your idea and write a similar book. Then your automated income would decrease and eventually stop.

You Need Timeless System Not Tied To Specific Events

Let’s talk about websites again. With some creativity or sense of humor you could create very successful blog post or website discussing Barak Obama’s latest speech (whichever it is). If your articles hit the front page of Digg and similar sites, you can eventually make good money by selling advertising. The problems is that Obama’s speech will be interesting topic just for a while. Few days later people will move to the next thing and your income will stop.

On the other hand take the article that you are reading right now. It will be useful one year later, 5 years later and probably even 25 years later. The ideas and concepts shared here are not related to any specific events – they will be valid as long as business exists and works in the way we know now. So if I was making money with this article now, I could make money with the same article 25 years later.

If you create a system solving the traffic jam in Paris today, you can make some good money. But if you create a system generic enough to solve the traffic in Paris in any day, you can have a real automated income generator.

An automated income generator should not depend on actual burning problems of the day. It should solve timeless problems.

You Need To Protect Your System

Finally, your system for automated income must be well protected. If someone steals it, you no longer will be able to use it. What does that mean in practice? If your system is based on software, you need to protect the source code so no one else can reproduce it. Fortunately there is a law protecting authorship all over the world which takes care for that in most cases. But you must protect your business system from easy duplication as there is no law to do it for you.

So, if you dream about receiving automated income, you’ll need to invest plenty of creativity, money, time and hard work. The ideal automated income generator is a system that you own but you are not a part of. This system must provide some real value to the other people – otherwise no one will give you money for what you offer. Your automated income generator must be unique or hard to duplicate, otherwise the market will get over saturated in short time. It has to produce timeless value not related to topical events. Finally, you need to protect your income generator well, so people can’t steal it from you.

All of this may sound like too much of a hassle, but the outcome is well worth it. And if you wonder if such automated income generators exists – yes, they do. The companies whose owners don’t work in them, many intellectual products, some web based businesses, unique properties are all automated income generators. Do you own or plan to develop/obtain one for yourself?

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Jake