Passive Income: What Is It And Why Does It Matter?

passive-income-meaning-and-ideas

Have you ever wanted to sit back with passive income and watch the money roll in? How about using the money you already have to make money instead of using your time or your brain?

The wealthiest people in the world are using a passive income based strategy for investing in stocks, real estate, and businesses to continue to grow even richer.

If your creative in the way your work, you can get passive income too, even if you’re not rich. It will require a lot of effort and hard work upfront though. You’ll have to develop new skills and research ways to solve a problem for people by creating value.

Below, I’m going to explain more about what passive income is, offer some tips on how it works, and some examples of it.

(On a side note: The point of me writing this article is to elaborate some perspective on what types of expectations you can have when it comes to thinking about what passive income is and what it’s not.)

A Simple Definition Of Passive Income

The simple definition of passive income is to continue earning money from work you have already completed. This can come in a variety of forms, such as putting in work to save money for buying a rental property which gives you an income every month.

Or some other type of investment or business that pays you money while you are not actively putting in your time and effort to earn money.

Doing work that provides passive income gives you the freedom to do things out of the ordinary. Keep in mind though in the real world you can’t 100% walk away from something that makes you money, you still have to maintain it somehow.

Passive Income vs. Active Income (non passive income)

Using our example of rental real estate in the previous section we can compare passive income vs. active income pretty easily.

Here’s a realistic example of how I used active income to buy a passive income generating rental property:

If you work by the hour at your job to save money so you can purchase a rental property you are earning active income. With active income you’re paid no matter what because you have very little risk by trading your time for immediate payment. 

You take a much bigger risk taking the saved up money to buy a rental property. Because of this risk you are rewarded with rental income every month regardless of how many extra hours you work now. The biggest risk buying a rental property is unexpected repairs or the property value could down if a real estate market crash happens. Thus, causing you to lose some value vs. if you’re just working by the hour.

That is the best example I can provide you without getting to technical, to get more complex you’d need to speak with a certified finance professional.

My Quick Story Of How I First Started Making Passive Income

Passive income is something I first heard of back in 2002 when I was talking to my accountant and I needed to report my rental income from an investment property I had recently purchased.

I was also renting out the spare rooms in my primary home for the first time since I decided to get extra cash from the extra space I had.

Both the rent from the investment property and my roommates was considered passive income on the tax forms. I was thinking at the time, wow this is neat and it was on a totally separate form than my W2 income.

Specifics On How Other Passive Income Streams Work

Passive income streams can be generated in a variety of ways such as through investments, income opportunities online or as an absentee business owner.

A simple way of earning income is to put your money to work for you. Earning interest on the money you already have is the simplest form of passive income. You can start earning interest today by opening a high-interest savings or checking account.

Many millionaires have earned their wealth by participating in their employer’s retirement plans and earning interest in their retirement accounts over long periods of time. Earning interest can be key in building significant wealth.

Everyday earners are building wealth through passive income and with some creativity and a positive committed mindset, you can too (without falling for a get rich quick scheme.)

Never fall for ideas that promise any type of quick return or it needs you to commit to a huge amount of money upfront. Most of the time this will kill your long term financial goals. You need ideas that are steady, trustworthy, and can provide stable long term profits.

There are many beginner passive income options that people often hear about and don’t even realize its passive income, we’ll discuss them below.

These examples include vending or renting machines in public places for dispensing candy, coffee, soda, food, or other hard goods. (And in my case, renting out my rooms in my primary home and my investment property.)

Passive Income Benefits and Perks Explained

The biggest perk I see with having a passive income strategy is that you get to manage your time better. You don’t have to punch a time clock. But, you still need to educate yourself on the changing trends of your investments or the industries in which your business is in. Otherwise, you risk losing money and getting beat out by your competitors.

Some benefits include:

  • You may choose to retire early because you have created income that covers your needs without you having to work.
  • You may grow your wealth exponentially because you are earning income passively while continuing to actively work.
  • If you get laid off from your job, it provides you a backup income that’s much better than unemployment.
  • Passive income helps protect you from outliving your retirement funds.
  • Whatever it is that you choose to do, creating passive income allows you to live a life that is extraordinary when compared to hating your office job.
  • Depending on how your taxes are planned you can also write off a lot of your passive income on your taxes. See this link to the IRS for more details.

Beginner Examples, Sources, And Ideas For Generating Passive Income

Below were going to review some passive income investments, opportunities, online businesses, and other income streams such as renting out rooms or equipment. Some of the ideas presented will be simple, while others will be complex.

  • Create Or Invent A Passive Income Business Idea – You create an idea for something that builds up a residual income. The possibilities are endless with business. Some people will have enough knowledge to make a new business idea take off right away. Others can start small with a side hustle and then turn it into something big.
  • Real Estate Investments That Generate Rental Income – As I described earlier in the article, real estate rental properties are a popular way of generating passive income. The nice thing about real estate investing is that you don’t always have to have the cash up front. By taking out a mortgage, you can earn money off of money you borrow. As you collect rent, you can cover the monthly payment and other expenses. The money leftover is now passive income for you to use to continue building wealth. Many people, even novices, are finding that real estate investing is an excellent way to earn passive income.
  • Royalties Created By Writing Books and Producing Music – A nice way to earn income passively is through royalties and other similar earnings. Authors are generally the ones we think of when we mention royalties. They earn their income passively by spending the time and energy to write their novels up front. They continue to earn an income from the sale of their books long after the work is done (even eBooks on Kindle.) This happens in the music industry as well. Artists continue to earn royalties off their recordings after the actual work is done. To learn more about writing books, check out my article on: How To Make Money Writing and Self-Publishing Books
  • Blogging, YouTube Vlogging and Online Courses – Many are now passively making an income by writing a blog, vlogging on YouTube, or designing a digital course. These are big creative projects that do take some knowledge, commitment, and time to grow income from. These various mediums are digital so they scale out because of the Internet. Blogging is currently my personal favorite between these three choices.
  • Storage Of People’s Things – You could rent out some extra space in your garage and make money storing people’s things. If you don’t have your own car, you could store a car in a parking spot in the garage. If you have extra space in your home like an extra bedroom or basement, that is also an option for storage. This option may not be for everyone, but it is a perfect example of how to make passive income. On a large scale, you could invest or buy an actual storage based business.
  • Renting Out Rooms, The Driveway, Or land From Your Home (By House Hacking) – I”ve been renting out rooms in my home for years to get extra money that is passive. If your owning or leasing a big enough home with extra space, rent out the extra space to a roommate (housemates.) This will give you much more money in the long run than the previous idea of just renting it for storage. You can use AirBnB to rent out an extra bedroom or CurbFlip to rent your driveway as a parking spot.Have a big parcel of property? Gamping lets you rent out extra land on your property as a camp spot. Check out my article on: House Hacking: Make Money by Renting Out Your Rooms or Part of Your House
  • Laundromats, Arcade Machines and Vending Machines – The easiest way to get started in this idea of laundromats, arcade machines, or vending machines would be to buy an existing business from someone who is already established. Getting permits to open a laundromat is hard in a big city because of limited water supply and pipes. An arcade machine rental or vending machine business would be easier to set up but you still have to find the right location for each machine and make a route. After that, you just drive around and maintain the machines and collect the money on your own schedule.

Expert Examples Of Passive Income Ideas and Strategies

Disclaimer: These items listed below are traditionally how passive income is earned and are very hard to implement in the real world by ordinary people. You need a lot of hard work, risk tolerance and time spent learning how to make each one work.

Passive Income Online Resources

Learning is the key to earning passive income, whether you’re rich or not. If you’re rich you need to educate yourself about investment ideas or businesses to invest your money in. If your not rich you need to learn skills to solve problems for people to pay you, than make sure that idea can scale up into a passive income modeled business idea.

  • The passive income reddit forum https://www.reddit.com/r/passive_income/
  • Meet Kevin provides excellent information on investing in single family homes as rentals.
  • Google search each idea we talked about, find niche blogs around the topics.
  • I’ll be adding more links to this post over time, as I build out Money and Bills to have more expertise on making money ideas.

Final Thoughts

Passive income can be available to anyone. It takes effective planning and hard work, but everyone can do it if they want to. Passive income, in any or all forms, can be an integral part of your retirement plan. You may have heard the phrase “retirement is a number, not an age,” and when you incorporate passive income into your financial plan, retirement at any age truly does become an achievable dream.

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