The Truth About Passive Income

If you search the internet for “passive income”, you may find a definition or two, but mostly, what you find are websites trying to sell you on the passive-income-flavor-of-the-day. It’s frustrating, I know. I don’t know about you, but before I jump into any opportunity or even before I take a trip, I like to do my research. That being said, there are a lot of good opportunities out there. But before you start spending money, let’s discuss what passive income is and, most importantly, what it isn’t.

Webster’s dictionary defines passive income as “of, relating to, or being business activity in which the investor does not have immediate control over income”. I don’t think that tells the whole story. Passive income is money that you receive over and over again without having to do much work (notice I didn’t say “any work”). It is different than earned income in that you are not receiving money for your time (like you would a job). But depending on the passive income stream that you choose, you may in fact have immediate control over your income. But I’ll get to that later.

Why would you want passive income? Well, like Robert Kiyosaki explains in his book Rich Dad Poor Dad, that is the main difference between the rich and the middle class. The rich invest their money in various passive income streams. When their passive income exceeds their expenses, then they are financially free. “Financially free” simply means that you do not have to have a day job to pay your expenses. And you are “free” to then do whatever you want!

What Passive Income Isn’t

Before I go into telling you what passive income is, let me first tell you want it isn’t. Passive income is not the same thing as “residual income”. Residual income is money that you receive on a regular basis after having done work once. The best example would be TV sitcoms. Some actors get “residuals”. Actors get paid for filming the show. Afterwards, some actors get paid each time the show repeats. Sales people that sell services, subscriptions, or renewable products (like insurance) sell that item once and, providing the customer renews, will get a commission off of each renewal. Royalties from the sale of books and music are also residual.

Many say that multi-level-marketing or network marketing sales provide you with passive income. Guess what? That’s residual too.
If you have a small business or are self-employed, even if you are making a lot of money, this is NOT passive income. If you receive a salary from your business, that is earned income. There is a way to turn this into passive income, however – so stay tuned.

You know, I have to say that starting your own website cannot be passive income. Whether you are selling a product (such as an eBook, seminar or other information) or a service, you still have to market your website. You will have to do this regardless of whether you are selling your OWN products or have the rights to sell other’s products. Marketing your website is work, simple as that. But it’s not a job. And once your marketing efforts start taking off, you can make a lot of money with little additional effort. But that is residual in my book, not passive.

What Passive Income IS

Passive income is a lot of things. The first thing that comes to mind, and also, I believe, the most popular example is real estate. If you own investment property and are getting a positive cash flow from a house, commercial property, or apartment, that is passive income. If you rent rooms in your house, that’s passive income too. You only have to set this up once, and then the income comes in month after month. Interest income from savings accounts, CDs, and money-market accounts are passive – the bank pays you for keeping your money in those accounts. If you have a website with banner ads or Google AdSense ads, that can be called passive as well.

If you invest in any business, but don’t manage it, your profits are considered passive income, exactly what Webster was thinking about when he wrote the definition.

What about business? Well, that depends on how you set it up. Rich people create businesses and set up a system that the business follows. That way, if the owner goes on vacation for a month to Fiji, the employees follow the system and the owner still gets the profits. Any business will of course start out with a lot of work, but if you take the time to set up a business so that it gets reproducible results (exactly like a franchise), those profits become passive. And, according to the IRS, any salary you get from your business is considered “earned” but profits are considered “passive”. It is vital when starting a business to check with an accountant and an attorney to set up your business that financially benefits you the best.

What else can be considered passive income? How about self-storage facilities, parking garages/lots and dry cleaners! They all require some time to start up, but once they are set up, you collect money over and over again.

Residual vs Passive Income

Residual and passive income are like siblings. They are both very similar and most people really consider them synonyms. What does it matter, anyway? They are both excellent ways to get money in your hands month after month after month without trading your time or your freedom. How can it get better than that?

Reality Check

Beware of anyone that tells you that there is NO work involved in passive income. Passive income does not mean no work! If you are going to invest in a business, a stock, or a real estate property, you will have to do your research (this is called “due diligence”). Research is work! You will also be required to manage your investments, to check up on their progress and make changes as necessary. That’s work too!

The good news is that research and management is only a part-time endeavor. And most of the time, that work can be done from almost anywhere, including on a beach in Fiji.

Let us not forget the FUN factor. I’m sure there are some of you reading this who like, even love their jobs (if you still have one). Some of you have your own business – and congrats to you! But most of us are in jobs just because we need to feed our families and pay the bills. Looking into passive income streams and investing your time and money can bring you many, many returns. Researching for and implementing your passive income plans so that you can live your dreams is FUN. Getting money every month, week, or even every day is FUN. And trying out new strategies and managing your money – when you have some to manage – is FUN.

I hope I’ve done my job and given you the passive income basics. If you have any questions or thoughts, feel free to contact me through my website. I’d love to hear from you!

The Common Sense of Earning a Passive Income

How to Generate Passive Income

Most people agree that the key to success is diligence. They are afraid to get behind the race. These proactive people have proven to become stable in their life. On the other hand, the lazy don’t have any problem simply because they don’t have anything as well. Both types of people have chosen to be so. It sounds fair, doesn’t it?

However, this equilibrium is the thing of the past. If this is our mindset, we will surely be surprised at the great fortune of those who have exerted less effort and at the frustration of those who have done their best. It doesn’t mean that life is unfair. In fact, we earn not only from what we do but also from what we don’t do. The former is known as active income; the latter, passive.

Active income is an income we generate from our hard work. When we work for money, it is active income. But, when it is our own money that works for us, it is passive income. Passive income is an income we generate from our investment. How to generate passive income without active intervention is not a kind of magic that everyone could have.

How to generate passive income? Passive income is generated when our investment earns because of our timely decision. In this type of income, we are paid for the decision we make and for the risk we take. When we become afraid of investing, we tend not to make any decision. Consequently, nothing happens to our money. To generate passive income, we should make the right decision on what and when to invest and not decide about not investing. We must also calculate the risk – the higher the risk, the higher the return. The lower the risk means the longer it takes to get the potential return. It depends on who we are and what investment fits our personality. Proactive people are naturally career oriented so they can successfully generate active income. On the other hand, patient people are wise decision makers and risk takers.

Now, the question is which type of earners we should be. Active earners have full control of how much they could earn, but there is limit in the amount as there is limit in their energy and time. When they stop, so does their income. However, passive earners are more efficient in the sense that they enjoy the unlimited potential of earning high with less energy. Moreover, passive earners can be both active and passive earners. Apparently, passive income is more advantageous.

It is not difficult to know how to generate passive income. There is a lot of available information around us that can help us learn to begin this with. We generally have heard about investing and among the popular are stock market, bonds, mutual funds, insurance, pension plans, and treasury notes. Before investing, it is important to study your choice investment. We don’t have to be the jack of all trades. What is important is that we understand the risk and the potential of the market we want to enter and start small just for a try. As time goes by, we will gain experience and will master the market we have chosen. In the advent of technology, it has become easier to get more information about any field of endeavor. The internet offers numerous tools we need to become equipped.

The most crucial part of how to generate passive income is our attitude toward investment. Some people think that investment is done in order to sustain our daily need and this is a wrong notion. If so, it is not any more investment. It is livelihood. Our immediate need can only be sustained by active income. To depend on investment for daily needs is irresponsible. We should work in order to live and we invest because we secure our tomorrow. Real investors are future oriented. They don’t exactly make money right away. But their money makes them. That is the reason why we call this condition passive. Everybody’s need today is different from our need in the future. Our immediate need is answered by our immediate action and immediate results make us grow. But passive income is not something that should make us grow. This is something that we should grow. So, whatever we earn now is what we need now. Active income is the reflection of we do now. The right attitude toward passive income is to treat it as a separate living entity. Active income is what we need now. And passive income is what our investment need now. It is like a pet that we should raise.

What about business? Is it a kind of active income or passive? Actually, it is the combination of both. A businessman actively controls his cash flows to sustain his daily needs and at the same time spare some bigger portion for his business as a separate entity. However, businesses are complex nowadays depending on their size. Large corporations are mostly owned by a number of people called stockholders. They hire managers and even CEO’s to actively control their operations. Sometimes, they intervene in a macro level. But their control and effort are limited compared to the significant income they get every year if their companies continuously grow.

For these people, these large companies are their source of passive income. For small businessmen, they must exert all their effort for their business. They have trouble making their businesses grow because they also depend on the active income they generate from operating their businesses. Would this mean that in order to generate passive income, we should have had large capital to invest? Not necessarily! We can do so by investing in shares of stocks even in smaller amount of money. This is also true with mutual funds that pool individual investments in small amount to make it one big investment. This means that we generate passive income like big investors.

The Truth About Passive Income

I’ve been to more seminars and read more books about passive income than I can count. They make it sound so easy. When you set out to generate more for yourself, you may find that these seminars and books have left out some critical information.

First, it’s important to know what passive income is and what it isn’t.

Passive income is income that comes in whether you’re working, sleeping or playing. The America Internal Revenue Service defines it as income from “trade or business activities in which you do not materially participate.”

Some examples include:

* Rental income from real estate
* Earnings from a business that doesn’t require direct involvement or participation from the owner
* Royalties from publishing a book or from licensing intellectual property
* Earnings from internet advertisement on your websites
* Dividend and interest
* Interest on private mortgages
* Income from vending machines that you own
* Income from an online business that you have put on autopilot

When I heard about this type of income for the first time, my whole world changed. I started looking for ways that I could buy or create assets that would generate passive income for me. If I wanted to buy a car, I stopped focusing on saving money to buy the car. Instead, I focused on generating enough income for my assets to buy the car for me.

At the time, I didn’t have a lot of money. But everyone has to start somewhere, right? My first experience in this realm, other than interest on my savings account, was buying a candy machine, filling it with M&Ms and placing it in the lounge at my fencing club. I calculated the cost of a single M&M and figured out how many M&Ms I would give the other fencers for their 25 cents. Since I then knew my profit margin per sale, I discovered that I was making an average $25 per month in passive income after donating 10% back to the junior fencing program.

Some people think they are receiving passive income when they are actually receiving residual income. For example, an insurance agent may earn residual income as her clients renew their insurance policies. However, if the insurance agent leaves the company, that income goes away.

If you’re involved in a networking marketing or multi-level marketing company in which you have to continue to work the business in order to receive income, that’s not true passive income either. If you can stop working the business all together for as long as you want and still continue to earn income, that’s passive income.

The big myth about passive income is that once you buy or create an asset that produces it for you, you’re done. You may be under the impression that you don’t have to spend any more time on it or manage it.

The truth is that there are varying degrees of “passive.” For example, you can receive passive income from rental real estate, but real estate can be extremely time-consuming. Typically, when you buy a property, there is an initial stabilization process that can include anything from doing repairs to finding and screening new tenants. Once the property is stabilized, you may be able to sit back and just receive rent checks for a while, but then a tenant moves out, or the water heater breaks or a tree falls on the roof, and you have to spend time on the property again.

That’s very different from a certificate of deposit at the bank where you buy it, and that’s it. Of course, your potential income on the rental property is much higher than the potential income on the certificate of deposit if you know what you’re doing.

Be conscious of the difference between passive and residual income, and of how exactly how “passive” an investment really is.

Why is passive income important?

Imagine if you didn’t have to depend on a job, a spouse, your family, the government or anyone else for money. That’s what this kind of income can provide for you.

In many traditional financial planning models, you’re encouraged to figure out how much money you’ll need by the time you want to retire. Upon retirement, you spend that money. This plan has some serious flaws. First of all, what if you live longer than you expect and outlive your money? Second of all, what if after putting in so much energy to save that money, you would prefer to leave it as a legacy instead of spending it?

The key to financial independence is this:

PI > E

When your passive income (PI) is greater than your expenses (E), you are in complete choice about what you do with your time because your assets will continue to pay for your lifestyle whether you work or not.

The truth is that to be financially independent, you don’t need to be debt free, pay off your house, make a ton of money or be a millionaire. You just have to have more income than expenses.

It’s that simple.

Passive income allows you to have MORE CHOICES. You can choose to live out of joy and freedom instead of debt and obligation.

On a more serious note, what if something terrible happened and you couldn’t work anymore? How would you pay your bills? When you have enough passive income, you also have more peace of mind.

There are two parts to this formula. To become financially independent faster, you can increase your passive income, and you can also examine how to decrease your expenses.

So how do you get more passive income?

There are two main types of passive income. The first type is passive investment income. In order to receive passive investment income, you need to have funds available to invest in these income vehicles. If you have funds available to invest, you need to focus on doing an appropriate amount of research and due diligence to decide which of these passive vehicles are best for your situation and risk tolerance.

The second type comes from creating your own income vehicle with little or no money. For example, you might start a website that generates revenue from ads or join a network marketing company that will allow you to continue to receive income when you are no longer actively working the business. Or you might start your own business or become an affiliate of someone else’s business.

If you have money to invest, you will probably be able to generate income more quickly than someone who doesn’t. If you don’t have any money to invest, you have to be willing to contribute time, energy, skills, resources, creativity or all of these.

In my experience, the most realistic way to build passive income is to focus on incremental growth. Start by taking one small step. Don’t try to generate an additional $10,000 per month in passive income right this minute. Focus on what you can do to generate $10 per month in passive income and go from there.