It occurred to me one day recently that I am starting to receive a significant amount of traffic to this site via search engines, and one of the search terms that commonly leads people to my site is “passive income.” One day a couple weeks ago I received traffic from a person or persons who were searching for an answer to a single question.
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That question was the search term typed in. That was when it dawned on me that even though I and many others out here in the personal finance world spend a lot of time talking about passive income, it is not immediately obvious what this means.
How can income be passive?
There are two kinds of income: Active income, which you actively trade hours of life for in order to earn money. The most common example of active income is money that you receive in the form of a paycheck from your employer. But other sources of active income could be different types of side hustles: dog walking, blogging, freelance writing, etc.
The other type of income is passive income. With this type of income, you may receive money from something that does not require that you actively spend hours working for it. You have either already put in the time or the hours or the money and you receive income based on work done or money invested in the past.
Some common examples of passive income are investment income (dividends or capital gains from stocks owned, etc), royalties (e.g., you wrote a book ten years ago and you still receive money, or royalties, from its sales today), rent (you own a rental property and the tenants pay you rent every month), etc.
Which type of income would you prefer?
Most of us would prefer to have as much passive income as possible, because that would essentially mean that you receive money for work already done. Or money invested. You yourself do not have to do any more work to earn that money. Now that’s what I call working smarter, not harder!
Why is passive income so great?
The big benefit of passive income is that it takes YOU out of your money-making equation. You can be lying on a beach in Jamaica or sick in bed with the flu and still be making money. Put simply, passive income can buy you freedom. Hate your job? Then create enough streams of passive income to cover your expenses.
Even if you like your job, if you have some passive income in the form of royalties, dividends/interest, or rent coming in, you may find yourself in a position to be able to choose to work less hours. Or perhaps choose to work a lower-paying job that would have more personal meaning for you. The options are limitless. That’s why passive income is, for many of us, the holy grail of personal finance.
How to Start Making Passive Income
Some think according to the old dogma that “it takes money to make money.” It’s true that some forms of passive income will require money to get. For example, it’s hard to earn any dividends or capital gains on your money if you don’t have any money invested. Rental properties can be excellent sources of passive income (be warned: being a landlord can be a dirty job!), but in most cases you will need some sort of a down payment on the property when you purchase it.
There are, however, ways to create passive income with either no money or little money invested. Creating something such as a website, starting a blog, or writing a book are examples of things that you can create that would require little money down and possibly bring in money for you for a long time to come. Make no mistake, though- these things can require an incredible amount of work! Especially running a website or blog requires ongoing maintenance and content creation, which for most of us takes it out of the realm of “passive” income.
Every dollar of passive income that you generate can help your net worth climb higher and higher, especially if you find a way to reinvest the money that you make passively (by reinvesting dividends, etc). These days the internet has made it easier than ever to keep tabs on things like passive income and net worth. If you don’t want to track down all your numbers and creating your own spreadsheet, the best FREE online resource that I know of to help you monitor your net worth is Personal Capital (review here).
Even though we’ve long kept our own net worth spreadsheet, I also have an account with Personal Capital. It’s a terrific resource to help see where your money is going and establish a better budget, as well as better plan your retirement savings strategy. And it’s FREE- doesn’t get much better than that!
What sources of passive income are we working on?
Currently my hubby and I own one single family home that we are renting out. We also have been diligently investing in our 401(k)s and Roth IRAs as well as a taxable account for the last eight years or so; at this point we earn a nice amount in dividends and/or capital gains every month. Right now we are not taking the dividends as cash since we don’t need the income; instead we are currently reinvesting all earnings.
I also make a modest income from this blog, which has increased since I took the Elite Blog Academy course (EBA is an awesome course, by the way! It only runs a couple times a year but you can get on the waiting list for it at this link).
We hope to continue to grow our real estate portfolio and our passive income sources in the future! Our long term goal is to be able to cut back from our jobs at some point, with the option of quitting paid employment altogether if we want to. It will take us years to get there, but through careful planning and continuously setting goals we think we can get there. 🙂
How about you? Have you made passive income a goal? If so, do you have any sources of passive income at this point?
P.S. If you liked this post, you might enjoy using our free Net Worth Calculation Template. Sign up now to receive each new post delivered to your inbox, and we will email you the template! Sign up here.