What Is Passive Income?
There are a lot of definitions around the Internet today on what exactly ‘passive income’ is.
From Dictionary.com (http://dictionary.reference.com/browse/passive%20income)
Earnings an individual derives from a rental property, limited partnership, or other enterprise in which he or she is not actively involved.
Investopedia Commentary
There are three main categories of income: active income, passive income, and portfolio income. Passive income does not include earnings from wages or active business participation, nor does it include income from dividends, interest, or capital gains. For tax purposes, it is important to note that losses in passive income generally cannot offset active or portfolio income.
Based on this definition it seems that passive income is any income derived from investments/businesses in which one is not actively involved. Most business owners or free lancers are not passive income earners. This is because they need to be working and involved in things things in order for the income to be generated.
True passive income is when work is done initially and from then on the income comes in whether or not you work.
For example:
- rental properties
- royalties from books/films/music
- businesses which can be managed by an employee
All of the above examples require minimal effort to keep the income coming. Unfortunately they also require huge initial investments of either money or time which the average person cannot afford.
Passive income is a great concept and should you be lucky enough to inherit $1m I would definitely recommend buying a profitable business or a few investment properties. But for the rest of us we need to start off with income that is not quite as passive as the above examples.
Enter, semi-passive income.
Some people will argue that no type of income can be 100% passive as it will always require some degree of time and energy. Instead, the idea of a continuum is presented where a full time job is at one end (100% active, 0% passive) and living off the interest of a large sum of money in your bank is at the other end (0% active, 100% passive).
Of course even at these extremes, nothing is truly absolute. If you are on annual leave while working a full time job you can momentarily enjoy passive income. Also, if you need to negotiate new interest rates, or shop around with other banks for better returns on your term deposit you suddenly find your income is not passive (at least while you are sorted those things out).
Essentially this income continuum means we should want to be as close to the passive income side as possible.
Examples of semi-passive income:
An example of a semi-passive income could be that of blogging. A blog can earn money around the clock, with successful bloggers earning over $100k a year. A blog is not passive income as it requires maintenance and updates, and new content. But it can be seen as semi-passive income as the money you earn is not directly related to the hours you are putting into it.
Another example would be a drop-shipping e-commerce store. While it would require you to spend time and resources on marketing, logistics and product sourcing, the actual income would not be generated from the hours you put in but from the success of the site itself.
What does that mean for us wage slaves?
Well, assuming that people reading this blog are interested in starting their own business you will realize that you need to move away from trading time for money to a more passive form of income. A great way to do this is start small. Create a small passive income stream which you can then slowly build upon until it is reliable enough to move further towards the passive side of the continuum.
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