Have you ever dreamed of making extra money without actually having to do anything? That’s the basic idea of passive income. Sounds awesome, I know.
The Farlex Financial Dictionary defines passive income as follows:
“Income from a venture in which an individual does not directly participate. The most common types of passive income are rents and income from a limited partnership. Some analysts consider income derived from securities such as dividends and coupons to be passive income, while others put it into a separate category as portfolio income. Passive income is taxable, but it is often treated differently than active income.”
Though this article mainly will deal with passive income, I want to address residual income. Passive income is sometimes labeled residual income; while this is not entirely correct, the two terms are closely related and will be discussed in this article as passive income. Residual income is defined by Legal Dictionary as follows:
“The term “residual income” refers to the income that someone makes after their work has already been completed. An example of residual income is the earnings an author continues to make on a book after it has been published, when fans continue to purchase copies years later. Residual income is ideal because it is money that is being earned while doing nothing in the present moment to earn that money.”
Residual income deals more in royalties and continued payments after a finished job while passive income is connoted as income received from a live job without active participation. Both methods can be great sources for extra money earning if done with careful planning.
Why is it important to have passive income?
Money is a big stress; everyone always could use more. And yet it can be hard to balance work with all the other commitments we have; sometimes we have to make a choice between making enough money and sleeping. This is why passive income is so important: it is money earned without the strain on our time or our resources. Passive income could allow for an early retirement or it could make the difference in an emergency medical situation. If you are unable to go out everyday and work a full-time job, a passive income stream would make it possible for you to provide for a family. Here are a few of the main benefits of passive income:
- Time. Enjoy a flexible schedule and the freedom of choosing how to spend your time.
- Financial stability. Build up your account and learn your way around investments.
- Work from anywhere. Travel, live nomadically, work from home, etc.
- Reduced stress/fear. Be prepared for the future and whatever life throws at you with some extra dollars in the bank.
- Job security. Amidst economic instability, rely on another source of income that you can control.
- Variety. Explore the various passive income opportunities that let you take advantage of what you already have.
- Pursue your dreams. Rely on a passive income and go out and pursue your dream occupations without worrying about not being able to provide.
What is the difference between active and passive income?
Think in terms of time. Active income is directly connected to the amount of time you spend working. If I go to my job or work for X hours or X days, I will receive X money. Passive income, on the other hand, is not time dependent; but passive income doesn’t mean you don’t work. It usually involves a bit of work in the beginning, but then a lot of reward later without having to be actively involved. Take a laundromat, for example. The person who runs the laundromat arrives early in the morning, helps the customers: they are actively earning their income. But they may not own the laundromat–actually they probably don’t. The actual owner isn’t on site, but still makes money because they own the laundromat; therefore their income is passive while the person who actually runs the place has active income. It takes a bit of work to initially start or buy a laundromat and hire someone to run it, but once it’s in place, you can sit back and enjoy the benefits.
How many streams of income do millionaires have?
The average millionaire has 7 streams of income. That is 7 different sources of income pouring into their account; (does it make sense why they are millionaires now?) But those 7 sources aren’t necessarily 7 different types of income; they could be the same type of stream such as 7 different investments or 7 different businesses. The point is to build up your income, and the way millionaires have done it is to start with active income and then invest some of that money into a passive income stream. This means a little sacrifice of current wealth for the promise of future passive income. Their passive income streams are initially extra money, but with time and success, their passive income becomes their main source of funds, therefore eliminating their need for active income. The more streams open, the more money you can make as they grow and grow.
Passive Income examples
We all would like some extra money, but we don’t always know how to make money on the side. Here is how to make money with a list of passive income examples and business ideas.
- Investments. This is the number one passive income platform. We’ll talk more about it later in the article if you want more information.
- Websites. Start a website and post advertisements on the side. For every person that buys something off of those links, you receive commision. The more activity on your webpage, the more business you generate and the more commision you get.
- Blogs. Even more than side advertisements on a webpage, bloggers that test out products and review them and provide links can earn a lot. Granted, you have to gather a pretty big following to begin to earn big money. But you get commission on sales and also free products to test and review.
- Apps. Design an app and then rake in the dough. Apps are low-maintenance and can be really profitable if they become big enough.
- Rental Properties. Rent out an apartment or home. You only pay for the occasional cleaning between tenants and the maintenance costs; otherwise, that’s a couple hundred or thousand in the pocket each month.
- YouTube Channel. If you get enough followers, you can make a lot as a YouTuber. Be creative in your videos–be it music, comedy, DIYs, how-tos, or reviews– and receive commission off of the ads placed on your videos.
- Airbnb. This may require a bit of upkeep, but really you make a lot more than you have to do. Rent out your spare bedroom to the traveler in need.
- Neighbor. If you don’t want people staying in your house, rent out your space with Neighbor as storage. That way you can still take advantage of the extra room in your home.
Passive income investments (stocks, bonds, dividends, mutual funds, etc.)
As a reference point for passive income investments, this income stream works great once you actually have some money to invest. Don’t just invest off the bat and expect to make your big break. Think smart and plan ahead–that is the key with investments. Here are your major investment areas.
- Stocks. These are the only passive income stream where you really can get all your bang for your buck. The stock market can be very profitable if you educate yourself on stock trends and buy wisely. Check out this list on the 10 ways to invest in the best stock.
- Bonds. There are generally two types of bonds where investors focus their attention: corporate bonds and municipal bonds. Corporate bonds are loans to businesses that as investments yield about 7%, but they are subject to ordinary income taxes. Municipal bonds, on the other hand, are loans to the national or state government and therefore are tax exempt, although they only yield about 5%.
- Dividends. Dividend investing can be called the least risky of passive income investing. Find a business or company that regularly pays dividends if you are looking to enter dividend investing. Every so often, receive a cash flow on your investment; this method is the most hassle free. Check out here for more info.
- Mutual Funds. These investments are more focused on a cash return rather than reinvestments or redistribution. Look here for the details on how to set up a passive income stream through mutual funds.
What assets generate income?
You might ask what assets are the best to have in order to generate income or what business ideas are best. Here you go:
- Real Estate. This can be commercial or personal. Commercial real estate can generate large sums of rent, although there is the risk of vacancy. Investing in apartments or condos might be more stable in occupancy, but will not generate as high of an income as commercial real estate.
- Storage Facilities. Own an actual storage facility and gain income without too much work. Or participate with companies like Neighbor and monetize the storage you already have.
- Patented Ideas. Apps, songs, blueprints, etc. Any idea that you can potentially market, sell, and reserve royalties to can become a valuable asset and a source of passive income.
- Businesses. The business owner who does not actively participate in the material process of a business will actually have better tax returns than the self-employed business owner. To have a business as a passive income stream can be highly lucrative.
What are the tax rates on passive income?
Passive income is taxed differently than ordinary income because many times the companies with such investments, etc. have already paid on their dividends. Federal tax for ordinary income can be up to 35% while passive income taxation is more around 15%. Obviously this can be more specific to the type of activity that generates the income. For a more comprehensive list, click here.
What are ways to create passive income online?
The great appeal of passive income is that it can be done online and therefore from anywhere. Working from home is not impossible. But clearly it is harder done than said to be able to earn a living just by working online. Here are some tips and business idea starters for maximizing your online profit skills.
- Advertising. Whether you have a website, blog, YouTube channel, etc., advertisements are your best friend. This is how any internet millionaire really works his magic. With money up front for just posting ads on your space and the extra money from commission sales, it is no small number you can earn from advertising.
- Reviews. Write about products after having tested them in order to earn commissions and receive free products.
- Online Shopping. Using companies like Ebates, get paid to shop online and save a lot. Just use self control and don’t buy what you don’t need because that’s when you start losing money.
- Online Businesses. Especially with fronts where you offer products without actually stocking them or having to ship, you can earn a lot from commissions. And you can save money without having to rent the space of an actual business.
- Course Creator. Whatever skill or talent you have, teach it. There is always someone who wants to learn what you do, so make a course for it and get earning.
- Ebook. Be an author. It may sound intimidating, but you probably know something that could benefit other people. Write about it; you would be surprised how much success you could have.
How you can create multiple streams of income to pay for retirement
As you begin working, think ahead. First, consider how much you have saved/are earning and investigate the investments market. Investing with dividends would be a great place to start. Then take stock of your interests and your time availability since most passive income streams take time and money to set up initially. Find something you are interested in, like real estate or a music YouTube channel; go ahead and set it up now in order to begin generating income for later. Don’t just settle on one passive income venture, and remember you can have multiple streams from the same passive income source.
Passive income is designed to help you make money without having to work so hard. It will give you peace of mind in our ever-shifting economy and it never hurts to have a little padding in the pocket. Be prepared for a comfortable retirement and don’t worry about the future. That’s why passive income is so awesome!