What Is Passive Income? (Detailed Definition and Example)
What is Passive Income?
Today, lets explore and talk about passive income, including the definition and how to generate passive income.
But before we dive deeper, let us define passive income.
Passive income, referred to (unearned income by IRS) is any income/money earned in a manner that does not require too much effort/work.
It is the opposite of active income, which requires active participation to earn.
I know you may be shouting wow, this is great. Or you may even be blaming yourself for not making passive income.
Passive income requires the highest effort ever, and most of the time, you may lose money trying to set up a passive income means.
The wonderful thing about passive income is you have to take the biggest risks.
And after that, you will only maintainance it with little effort or hiring other people to do the work for you.
And another thing is some passive income is like a seasonless fruit tree.
You plant, water it, and do other work on it, then wait for it to grow and bear fruits.
You see, once it grows, you will not do any hard work to pluck the fruits.
Deeper Understanding
There are three main categories/types of income:
- Active income
- Passive income
- Portfolio income
Fewer people are talking about another type of income, called (Inherited Income).
I will talk about the type of income in another topic, but for now, let's continue with Passive income.
Passive incomes can include earnings from a rental property, limited partnership, having a website, or other business in which a person is not actively involved.
It can also include; money generated from your website, the interest generated from a bond or savings account, dividends paid out by a stock investment, etc.
Passive income has been a term used relatively loosely in recent years. As many people seek a way to live their dream life.
And this can allow you even earn money while on vacation or sleeping.
As you may have noticed, the definition of passive income varies depending on who is giving you the answer.
But according to IRS, interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business, can be considered as passive income.
Passive income is generated from “business in which the taxpayer does not materially participate,” or "net rental income," according to The IRS.
Overall, I will advise you to also explore from a tax professional to gain more insight.
Investopedia states that Portfolio income is considered passive income by some analysts. However, the IRS does not always agree that income from dividends, interest, and so forth is passive.
So according to IRS, property rental, equipment leasing, and the limited partnership interest can be considered passive income only when real estate is not your line of work.
Reasons to Consider Passive Income
I would ask, who doesn't like better/easy things?
Most people who engage with passive income are usually entrepreneurs.
Just imagine working for yourself; you will no longer have to hurry up to the office every morning or become afraid of being fired, as opposed to active income.
Another reason is passive income will free you, leaving you with opportunity to do/explore more work, people, and places.
Most people still keep their formal work while engaging themselves in passive income.
Passive income is full of challenges and discoveries therefore, giving you more knowledge and power to make broad decisions.
Additionally, passive income can be a backup plan in case you lose your day job and can also help with retirement.
How much can I make from Passive Income?
I can say, there is no fixed or limited amount you can make through passive income.
Again, passive income is not a get-rich-quick scheme and doesn't guarantee immense wealth overnight.
So, the amount you will make from a passive income depends on many factors like; the path you choose, the amount you are sacrificing, etc.
But what makes a passive income is that, once it starts coming, it keeps coming even when you get tired of it, if one can ever get tired of making money.
Different Ways to Build Passive Income
There are numerous different ways to build passive income.
Here are a few of them:
Investing
Investing is another way you can start generating passive income.
But you must be very clear about what you are investing your money in.
Relax and rethink before making any investment. Remember, many people have lost their money in investments. And also, never fall for huge/unverified returns, and don't forget to seek legal advice before investing.
Digital ad space
This is one of the most common ways to start generating passive income.
And this way can be more rewarding, but you must have great ideas and significant audience.
A YouTube channel or a blog can generate a lot of online traffic, and you can start generating passive income.
It is always my first recommendation to people asking me how they can start making passive income.
once you make up your mind, everything will start making sense to you.
So you also need to understand that magic will not happen overnight.
You must be consistent and dedicated at the starting phase.
And once you are through with the starting phase, you can relax then and see the power of passive income.
Real estate
Through real estate properties you can earn passive income.
There's no point in seeking debt to finance the purchase of a property.
It also makes sense to buy property nearby to ensure the owner can look after it properly. It means consulting a property agent who understands the owner's area to ensure the new property can attract tenants.
Digital products
This method comes in two ways, by selling your product or marketing other peoples products.
This method works best when you already have traffic. You can market the products on your traffic and earn passive income.
If you already have traffic, then next thing is a product that will benefit your audience to purchase.
It can be anything rangging from an e-book or an application that offers the potential to generate income for a long time.
Conclusion
You can generate passive income through many avenues.
While looking for an idea that can work under the prevailing circumstance, consider ideas with a positive long-term record. Find out if people elsewhere have benefited from that idea.
I hope you enjoyed this article.
I will allow you from here.
You can also explore more articles, have a wonderful moment.
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