Passive income is often defined as income that is continually earned with as minimal effort as possible from the person receiving the money. This is usually accomplished by creating a self-sustaining service or product that can be automatically distributed or maintained. For example:
• Monthly dividend checks from your stocks
• A rental property that earns you rental income each month
• An eBook that you sell online from a website
Do you see how each of these examples are different from your regular job? If you stopped going to your regular job everyday, what would happen?
• You’d be fired and your income would cease
In each of these examples, you don’t “have to go to them”. The dividend checks appear as long as the company has earnings and pays dividends. The rental check shows up as long as the tenant pays their rent. The profits from the eBook roll in as long as people are interested in your product. In each of these situations, money is made regardless of whether or not you go to your job.
Although this may sound like a buzz-word or trend, it is actually so significant that it is recognized by the US Internal Revenue Service (IRS). Because of the nature of the income, it has its own set of taxation rules and in some instances may be an advantage over your traditional job earnings.
A Push to Get Started:
Contrary to its name, passive income does require some effort. Especially in the beginning, each one of your passive income streams requires a “push” to get going. Taking our three examples from above:
• You’d need to research which stocks are most stable and pay the best dividends before you invest
• You’d have to purchase the home, possibly renovate it, and then find tenants; not to mention any upkeep or maintenance
• You’d have to actually write the eBook, publish it, create a website to sell it, and then promote it
The beauty of passive income, however, comes after the initial “push”. That’s when the product or service goes into a semi-state of auto-mode and starts to generate income without your involvement. In each of these examples, money could literally be made while you are at your normal job, relaxing, or even sleeping. Only slight or minimal maintenance would be necessary.
What is Passive Income – Not Your Job!
Passive income is not your regular job. With your regular job, you make a certain amount of money based on the number of hours you work or based upon your contractual salary.
Let’s look at the constraints of this setup. Suppose you wanted more money (who doesn’t?). It is highly unlikely that you can simply increase the amount of money you make. Until you get a raise or new job, this number is basically fixed. So logically your next best option would be to simply get a second job to try to increase how much money you make each month.
Although this may work, it will require you to give up a significant number of additional hours to devote to this other job. The problem then becomes that you unfortunately will soon have to deal with a physical constraint of there only being a maximum of 168 hours each week. Therefore:
• You will eventually max out how much money you can make due to the constraints of how much money you make and how many hours you have to work with.
Even if you somehow never slept or ate, you would still only be limited to 168 hours each week. And really, who wants to work EVERY HOUR OF THE DAY?
How Passive Income Works:
Let’s say you don’t get a second job but decide to start a passive income revenue stream using one of our examples above.
The great thing about passive revenue streams is that you can have as many as you can handle. Suppose now you get two of our examples from above going.
Ultimately, there is nothing stopping you from getting as many streams going as possible – so many in fact that passive income now replaces your job income entirely. This is often the goal for many people who seek passive income because it gives them the freedom to become their own boss and set their own schedule.
Are My Retirement Savings Considered Passive Income?
Not until you redeem them, and that probably won’t be until your late 50’s or 60’s (click here to read my post on that subject). Generally, the goal of passive income is to start generating monthly income NOW so that it can be used to supplement or replace your current income.
How to Increase My Income:
If all this sounds interesting and you’d like to learn more about how to increase your income, please see my complete list of passive income ideas.
Image courtesy of iBoaz Yiftach / FreeDigitalPhotos.net