One of the terms that is always circulating the personal finance area is the term “Passive Income”. What is passive income? Why do we keep talking about it? How do we get it?
What is Passive Income
Passive Income is income that you don’t have to actively work to attain. Residual income like royalties on a book, dividends on dividend stocks, and interest earned are all examples of different kinds of passive income. Some would argue that the work you have to put into all of those to write the book, purchase the stocks, or earn the money to make the interest make those less than passive, but in my definition, any income you earn that is new income, even if it is earned off of old income that wasn’t passive, is passive.
Why Passive Income
The reason that we all want passive income is pretty self-explanatory. It’s additional income that you don’t output any work for. You purchase the stocks, and the company just sends you a dividend check every quarter. You write a book, and then the publisher sends you a check based on it’s sales. You deposit your money, and it accrues interest. Beyond that initial setup, you do no work to continue the income stream.
How to Make Passive Income
The how of passive income is usually where people hit the brakes. You see, when people think passive income, they immediately think “easy money”. But, the truth of it is that there is nothing “easy” about it. You do have to put in the work to set it up. Some passive income ideas are easier to set up than others. If you’ve already got the money, you can pretty easily set up a passive income interest stream. Or a dividend stock income stream. But, unless you’ve already written several books, you’ll still have to write the book to set up the royalty stream.
The more passive income streams you have, the less work you have to do to maintain the level of income you have. With some hard work to set them up, you can stop thinking about side income jobs, and thinking about how you’ll spend your “passive” time building more passive income streams. It isn’t easy, but it can be very rewarding once you’ve got the streams all set up and working for you. And, even if you have to do a little bit of minimal maintenance once in a while, you’ll still be earning far more for your time than you would on any non-passive income stream.
photo credit: alancleaver_2000
I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.
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Passive income is an interesting thing. Most “passive incomes” get confused with things like blogging income and affiliate advertising, both of which require regular work and are not at all passive.
For true passive income, I think of things like stock and treasury dividends, real estate rentals, and money lending (like Lending Club). If I were to define it, I’d say that passive income is where you truly do nothing different in order to make the income.
So for example, if you have a blog and add an affiliate link, it’s not passive. Although it may be a product/service you legitimately support, if you are adding a link then you’ve changed behavior in order to make money. In contrast, if you own a stock that pays dividends, it drives no behavioral changes to increase profits.
I’m not sure that I agree with you @bravenewlife. I think that with any of them, there’s some amount of set up that needs to happen first. Things like stock/treasury dividends, real estate rentals, and money lending all require a certain amount of capital to begin. That money has to come from somewhere, plus there’s some amount of research involved with each. Same with blogging and affiliate advertising. All of them could be used to create passive income, I think, merely because once that initial setup is done, it can be put on “cruise control” and left to accrue income.
Passive income is a great source of money, but in my opinion it should only be part of your income stream. Or, if it is your main income stream you should have several varieties of passive income. Like anything else, diversification is the safest way to go!
I’ve been working on Passive Income streams for a few years now, some are more productive than others. It takes a lot of work, but if you find one that’s successful, it’s worth the effort. I have a few streams that are beginning to generate income, now if I can only increase the amount of those streams, I’d be golden.
My Mubby has book royalties, I have some blog ad revenue and we have capital gains and dividends. Yet, we are both working all of the time. It may be called “passive” yet we don’t feel very passive 🙂
I just started earning passive income and now my appetite is whetted for the fruits of blogging. This a bonus for doing something I enjoy doing. I think blogging and interacting with other people is leading me to a new career. Stay tuned to see how it evolves.
@Barbara It’s all about scale, Barb. Use the passive income to build upon the current sources and build new ones. Viola! More passive income! 😉
@krantcents You wouldn’t be the first to do that, Krant. And probably not the last!
It’s funny how aggressive you have to be in order to build passive income. Definitely should be part of the financial plan. It took me a while to realize I should stop asking what I could do to earn money (through my time and efforts) and start generating income that doesn’t rely on a direct trade off of my time.