Passive Income is regular income where an individual is not actively involved in deriving the income or spends very little time to maintain the income. Wages and salary are not passive income; they stop when you stop going to work unlike passive income.
Good examples of Passive Income are:
- Income from rental property
- Income from a business (without active involvement)
- Interest from a bank account
- Royalties from book publishing
- Earnings from website advertisements and online affiliate marketing
- Retirement income like pension.
Income as defined by the IRS in the US:
- Earned Income – This is your wages and salaries. Taxed at the highest level
- Passive Income – Good tax benefits. See benefits below.
- Portfolio Income – Limited tax benefits. Portfolio income is derived from paper assets such as stocks, bonds, mutual funds and currencies.
Keys to Passive Income are:
- Dedication – You have to put in the hard yards to create passive income. This starts with education and research.
- Patience – Creating passive income is not quick nor does it happen overnight.
- Taking action – If you don’t take action nothing in life is going to change. Put in the hard yards today and enjoy passive income for your future years. This will help you escape the rat race and your 9 to 5 life.
Benefits of Passive Income:
- Greater tax benefits compared to other types of income. Think about the tax benefits of real estate investment or an online business.
- You can use borrowed funds. You can typically borrow up to 80% of a residential property and then rent it out for passive income. You get 100% of the benefits not just the 20% you put in.
- You can start an online business for under $100 and create passive income. This does take a lot of time and effort though.
- You have more control over your investments compared to portfolio income. When you invest in stock, you as an individual investor have no say in the day-to-day activities of the company you invested in. When you buy a rental property you can decide whom to rent the property to, who should manage the property and who will be doing the maintenance to the property.
- Passive Income is usually recurring income on a monthly basis.
- Passive Income ultimately leads to Financial Freedom.
Good luck to you on your search for Passive Income.
If you are new to the site or new to the topic of Financial Freedom then visit Escape your 9 to 5 Life blog post to get started.
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