I’ve been two more seminars and read more books on passive income than I can count. They make it look so easy. When you get into it, you realize that these seminars and books have left out some essential information.
First, it’s important to know what passive income is and what it isn’t.
Passive income is income that is earned while you are working, sleeping, or playing. The U.S. Internal Revenue Service defines it as income from “business or professional activities in which you are not meaningfully engaged.”
Examples include:
* Rental income from real estate
* Income from a business that does not require the owner’s direct involvement or participation.
* Royalties from publishing a book or licensing intellectual property.
* Earnings from advertising on your websites
* Dividends and interest
* Interest on private mortgages
* Income from vending machines you own
* Income from an online business that you have put on autopilot.
When I first heard about this type of income, my world changed. I started looking for ways to buy or create assets that would generate passive income for me. If I wanted to buy a car, I stopped focusing on saving to buy the car. Instead, I focused on generating enough income for my assets to buy the car for me.
I had little money. But everyone has to start somewhere, right? My first experience with this, aside from the interest in my savings account, was to buy a candy machine, fill it with M&Ms, and place it in the living room of my fencing club. I calculated the cost of a single M&M and figured out how many M&Ms I would give to other fencers for their 25 cents. Since I then knew my profit margin per sale, I discovered I was making an average of $25 per month in passive income after donating 10% to the junior fencing program.
Some people think they are collecting passive income when, in fact, it is residual income. For example, an insurance agent may earn residual income when clients renew their insurance policies. However, if the insurance agent leaves the company, that income disappears.
If they involved you in a network marketing or multi-level marketing business in which you must continue to work to receive income, this is not true passive income either. If you can stop working in the business for as long as you want and continue to earn money, that is passive income.
The big myth about passive income is that once you buy or create an asset that produces that income for you, you are done. You may feel you don’t need to spend time or manage it anymore.
There are different degrees of “liabilities”. For example, you can collect passive income from rental real estate, but real estate can be extremely time-consuming. Typically, when you purchase a property, there is an initial stabilization process that can range from repairs to finding and screening new tenants. Once the property is stabilized, you may just get the rent checks for a while, but then a tenant moves out, the water heater breaks down or a tree falls on the roof, and you have to deal with the property again.
It’s very different from a certificate of deposit at the bank where you buy it, and that’s it. Of course, the potential income from a rental property is much higher than a certificate of deposit if you know what you are doing.
Be aware of the difference between passive and residual income, and exactly how “passive” an investment is.
Why is passive income important?
Imagine not having to depend on a job, a spouse, your family, the government, or anyone else for money. That’s what this type of income can do for you.
In many traditional financial planning models, we encourage you to calculate how much money you will need when you retire. Once you retire, you spend that money. There are serious flaws in this plan. First, what happens if you live longer than expected and outlive your money? Second, what if, after spending so much energy saving that money, you’d rather leave it as a legacy than spend it?
The key to financial independence is:
PI > E
When your passive income (PI) exceeds your expenses (E), you have a choice in what you do with your time because your assets will continue to fund your lifestyle, whether you are working.
To be financially independent; you don’t need to be debt free, pay off your house, make a ton of money or be a millionaire. You just need to have more income than expenses.
It’s as simple as that.
Passive income allows you to have MORE CHOICE. You can choose to live in joy and freedom instead of debt and obligation.
On a more serious note, what if something terrible happened and you could no longer work? How would you pay your bills? When you have enough passive income, you also have more peace of mind.
There are two parts to this formula. To become financially independent faster, you can increase your passive income, and you can also look at how to decrease your expenses.
So how do you get more passive income?
There are two main types of passive income. The first type is passive investment income. To receive passive investment income, you must have funds to invest in these income vehicles. If you have funds to invest, you need to focus on research and due diligence to decide which of these passive vehicles is best for your situation and risk tolerance.
The second type comes from creating your own income vehicle with little or no money. For example, you can create a website that generates income from advertisements or join a network marketing company that will allow you to continue receiving income when you are no longer actively working in the business. You can also start your own business or become an affiliate of someone else’s business.
If you have money to invest, you will probably be able to generate income faster than someone who does not. If you don’t have money to invest, commit time, energy, skills, resources, creativity or all of the above.
In my experience, the most realistic way to create passive income is to focus on incremental growth. Start by taking a small step. Don’t generate an extra $10,000 a month in passive income right away. Focus on what you can do to generate $10 a month in passive income and go from there.
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What are 10 things you could do in the next 30 days to generate $10 a month in passive income? What is one action you can take this week?
