When I first started blogging, I was unaware of the term “passive income”. Since then, I have been reading articles about passive income on various blogs. Almost every blog has at least one article on passive income, so I didn’t want to miss the boat.
In the next few sections, you’ll learn about passive income, what can be considered passive income, and what cannot. I’ll also talk about a few passive income ideas at the end.
What is passive income?
According to Investopedia, “Earnings an individual derives from a rental property, limited partnership or another enterprise in which he or she is not actively involved. As with non-passive income, passive income is usually taxable; however it is often treated differently by the Internal Revenue Service (IRS).”
For some people, income from an investment portfolio is equivalent to passive income. It’s generally the accepted criteria in the blogging community to include interest and dividend income as passive income.
The definition of passive income I developed: “The money you earn with existing money, without additional work effort or dedicating any time.“
You need to put in a lot of work at the start to build up initial money. But once the money is available, it doesn’t require additional effort to earn more money. Additional effort helps to increase existing income/earnings, but it’s not required for passive income.
What passive income is not
|1. If a source of income requires a constant time commitment, it’s not passive income. Blogging, in its traditional form, is not passive income.
2. Your eBay/Craigslist sales are not passive income because you put a significant amount of time and resources into selling things.
3. Your part time job is not passive income since you have to work to earn the extra money.
Why we need passive income
First and foremost, our jobs are no longer secure. Gone are the days of working for a single employer for a lifetime and receiving a grand farewell at the end. The advent of technology made true globalization possible, where work is done in the place with the lowest costs and products are sold wherever the selling price is highest. At some point in time, many of us have accepted a pay cut to avoid a layoff.
Earning passive income is a great way to hedge against the risk of unemployment.
Every cent you earn in passive income comes without you having to put in an effort to earn it. In this way, passive income puts you closer to financial independence, a stage where you no longer have to work to earn money.
Take my example – I have money in emergency fund saved in an interest-bearing checking account. Every month I earn around $15 in interest (at 1% APY). Now imagine I have 100 times more money and I invest with a 5% APY interest rate. I could earn $7500 per month. For calculation’s sake, I could retire and live happily ever after.
Can I have $1,500,000 in savings now? No, I can’t, and that’s why this passive income cannot make me rich. It can grow and with the power of compounding returns, I can become a millionaire one day. But, that is a time-consuming way to reach financial independence.
Taking a few passive income-generating steps helps to achieve financial independence sooner.
Ways to create passive income
Passive income doesn’t supplement your wage income. If someone claims that you can get rich from a passive investment, he or she is adopting a cheap selling tactic. In order to get rich from passive income, you need to be rich in the first place. Only then can you invest in a huge income-generating asset.
Here are some sources of passive income that I’m looking at for my own future, along with some suggestions on how you can get started.
Writing books. Royalties represent passive income in that the author of the book puts in all the work upfront, but does not have to put forth much effort to continue to receive payment for his or her work (with the exception of self-promotion, etc.).
Real Estate investment. Passive income from real estate can be derived in two ways, primarily. Homeowners may choose to rent out their property, in which case the rental income is mostly passive, although basic landlord duties do require an investment of time. (You can enroll in a service contract to make this a truly passive investment).
The appreciation of real estate also increases net worth without requiring any additional work from the homeowner. Remember, continuous buying and selling to take advantage of fluctuating prices is not passive; you are constantly putting the time in arbitration.
Interest/dividend income. Interest income is passive income in that it does not require any additional work on the part of the investor. The money invested may have been earned through work, but the periodic interest and dividends received are passive income.
Advertisement revenue from static websites. Create a few sites and add pages with good content. Do some awesome SEO to bring in search traffic, then place advertisement blocks and AdSense to earn regular income.
Making blogging passive. Once you put the initial time and money into your blog and start generating ad revenue, hire virtual assistants and staff writers. Publish only the posts written by staff writers and distribute a part of the ad income.
Rent your parking space. If you are in a big city, you can earn a lot of money by renting your garage/parking space during office time when your car does not occupy the place.
Earn interest on emergency cash. Until last year, my emergency cash was sitting idle in a Bank of America checking account and was losing value to inflation, but now I am earning interest. Find an interest paying to check account and switch your bank account, to earn passive income every month.
Use cash-back credit cards. I earned more than $1000 in cash back rewards by using my credit cards optimally. It’s easy money awarded to you just for making your regular purchases on your credit cards.
Every bit helps. Even $5 per month in interest is not small. See if you can put some money away in a passive income-generating investment. Act now!
Readers, what passive income you are generating? Do share with us here.