What Is Passive Income?
What are the different types of passive income you can earn?
What are the essential elements you should know!
In this article, we will break down the question “What Is Passive Income” so you know all there is to know about it!
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Table of Contents
What Is Passive Income
A “passive income” is a phrase often used to refer to a stream of income generated with little to no involvement of the business owner or the recipient of the income.
For example, a real estate property offering its owner a steady stream of rental revenue cash flow is said to offer its owner passive income.
However, the formal definition of passive income is said to be income earned by a person or business entity without a person’s involvement.
A passive income is one where a person is not materially involved in generating income.
In our real estate example, an income property generates income with the passing of time rather than a person’s efforts or active involvement.
As a result, many invest in real estate to generate an income passively.
In today’s digital economy, many use the phrase passive income to mean a business enterprise or operation generating income with little human effort.
For example, a blog generating income can be considered as an activity providing the blogger with passive income.
Another example is affiliate marketing generating an income for the affiliate marketer.
Passive Income Definition
According to Investopedia, passive income is defined as follows:
Passive income is earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved.
As you can see from this “formal” definition, active income is:
- Derived from rental property, a LP, or an enterprise
- Where a person is not actively involved
In today’s economy, the phrase “passive income” is used to refer to income generated from sources other than a person’s primary employment or business.
Passive Income vs Active Income
What is the difference between passive income and active income?
Financially speaking, passive income is a type of income that is materially generated from a business activity or operation without a person’s active participation.
More broadly speaking, passive income is a type of income that is generated by investing in financial products or business operations that may require some effort to implement but will then earn steady income over time without significant effort.
For example, if you start a blog and earn advertisement income on a monthly basis, you are considered to earn a passive income.
That’s the case as it takes time to set up the blog and write an article, but once the article is published, you will regularly earn an income for every person reading your blog.
Active income is, by contrast, a type of income that is generated through the full-time and active effort of the entrepreneur or business entity.
For example, a marketing agency will actively earn business income by offering marketing services such as search engine optimization services, website development, email marketing services, or other marketing services.
To render marketing services, the marketing agency not only needs to invest time, effort, and money in starting the business but will also need to continue putting in important effort and invest further money to generate active business income.
According to the IRS, passive income is defined as a trade or business activity in which the taxpayer does not participate in a material way or income generated by rental activities.
Why Build Passive Income
The idea of building passive income is attractive for many reasons.
Some may want to develop sufficient cash flow to be able to retire early or live a lifestyle that makes them happy.
The beauty of passive income is that it does not depend on you in a significant way for the income stream to come to you.
In other words, once you have built an income stream, you will continue getting the regular cash flows day in and day out, no matter if you are sick, if you have a job, if you are tired, or whatever.
The main reasons why you may want to build a passive income is to:
- Increase your wealth
- Help you live the lifestyle that makes you happy
- Protect yourself against the loss of your job
- Provide you and your family with greater financial security
- Increase your savings
How To Make Passive Income
You can consider passive income to be money generated from either investments, sources other than your primary job, or in a way that requires relatively less effort in relation to the amount of money generated.
The main objective of earning passive income is to earn a long-term and steady cash flow without having to commit a lot of time and effort on an ongoing basis.
For example, if a person earns money by blogging or affiliate marketing, he or she will need to put some time and effort upfront to build the blog or create the affiliate marketing structure, then will earn a steady stream of income (during the day and while sleeping!).
Earning passive income is not necessarily easy or something everyone can achieve.
Just like any business venture, you need to put some time, effort, and money to build one or many profitable passive income sources.
Depending on the nature of the passive income you want to earn, the process, time, effort, and initial investment may vary.
For example, a person looking to find out how to generate passive income from a blog may not have the same initial investment need requirement as a person looking to find how to earn passive income from a rental revenue property.
What’s important is that you have a clear idea of what type of passive income you want to generate, do your research on how to get started, and then dedicate yourself to building your income stream.
Another important piece of advice is to persevere and not give up if in the first months or years, you do not generate the level of income you originally desired.
Types of Passive Income
What types of passive income are there?
Let’s answer this question by looking at the financial definition of the phrase passive income.
For income to be considered “passive”, it means that it is being generated without much participation of the recipient of the income or business.
In the United States, for income to be considered passive from a tax point of view, you’ll need to observe the IRS rules related to such income.
For example, according to the IRS, the following may be considered as passive income:
- Self-charged interest
- Rental revenue
- Income from sources where you have “no material participation” in the business
For example, self-charged interest is when you personally grant interest-bearing loan money to your business entity (like a C Corporation, S Corporation, LLC or other).
Rental revenue is when you earn income from real estate investment properties.
Finally, income from sources where you have no material participation in the business is like a silent investor in a business earning an income without spending much time or participating in the business.
Passive Income Ideas
There are many ways that you can generate passive income to make money or generate extra cash.
What’s so attractive with passive income is that you can either choose to keep your career job while earning easy money on the side or you may even choose to leave your primary job dedicating yourself full-time to generate passive income.
Although there are many passive income ideas, here is a list of some ideas that can help you generate cash flow in a passive way:
- Affiliate marketing
- Bond ladder
- Build your own website
- Create an online course
- Earn royalties
- Email marketing
- Flip websites
- Flipping retail products
- Fractional investing
- Instagram sponsored posts
- Invest in funds
- Investing in bank deposits
- Investing in bonds
- Investing in dividend stocks
- Investing in GIC
- Investing in high-yield certificate deposit
- Peer-to-peer lending
- Real estate investment trust
- Real estate rental income
- Renting storage space
- Renting your house
- Selling digital products
- Selling information products
- Start a dropshipping store
- Starting a YouTube Channel
- Write ebooks
Unlike what many may believe, generating passive income is not to get into a “get-rich-fast” scheme or make money without any effort ideal.
Even though it is true that income can be generated with less effort, you still need to put time, energy, and effort to set up the passive income structure and maintain it going forward.
What Is A Passive Income Takeaways
What is passive and non passive income?
What is a passive income stream?
Let’s look at a summary of our findings.
What Is Passive Income?
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