What Is Passive Income Really?

financial freedom

I’d like to kickstart this passive income series by clarifying exactly what I think and mean by passive income.

It’s best to have a broad definition of passive income as revenue that you earn/make/receive even when you aren’t actively working.

It is also frequently referred to as residual income. In the opposite contrast is active income, which means that you get the income actively by actively trading your hours and time for your dollars. No work means no active income. Today if you get paid a salary and if you quit your job or get retrenched, it’s likely that you won’t be getting any more income. Yes, you may get a severance package to help you ease your transition, but your company won’t keep paying you your salary unless you stay hired and keep showing up for work.

Likewise, if you do contract work for clients who pay you, and if you stop getting or servicing clients, you will stop getting paid – this too, is active income. Yes, you may have more flexibility with contract work, but it’s still active income as you still have to do the work to receive your payments. Currently our physiotherapy and hand therapy business income type is in this category.

With passive income, you will keep getting paid regardless you did any work or not. You may need to do lots of stuff and work upfront to get the system up and running, but eventually you will reach a point, a critical mass, where the passive income system gets activated. Once you reach this point you can actually stop working on this passive income stream if you want to, yet passive income will still stream to you regardless you work on it or not.

Passive income is not inheritance or sale of a property or business or something like that. Passive income is simply a source of income that is recurrent over a period of time. Truth to be told, it may not be permanent – sometimes it lasts for a couple of years, some go on for decades or over generations, but they always dry up slowly due to many different reasons.

Just because an income is passive doesn’t mean that it’s 100% secure and safe. Some forms of passive income are more safe and secure than others, but there’s always an element of risk involved. This covers all form of incomes, be it active, passive or portfolio income – that’s why it makes perfect sense to create multiple streams of passive income, so you can “spread” the risk over multiple incomes.

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Passive income may be passive in the nature it is generated, but it may require maintenance to keep it going. In some cases, it may be easy where you pickup cheques and deposit them. In some other it becomes even easier if the money is wired directly into your bank account every month…but you will still be required to report this income and pay taxes on your income generated.

Passive income is really an open-ended ball game, with seemingly endless possibilities. Some income streams can be very passive, and if you do no maintenance on them, the income will still come in. People with intellectual properties (IP) do this – the writers, songwriters, singers, artists, actors, patent owners etc – the royalties still come in as long as the IP is being used.

My incomes are almost always semi-passive: outsourcing and delegating contract work, my short stint of renting out our flat in 2010-2011 (we needed to do maintenance work to the flat periodically, ensure that the money is wired in, communicate with the tenants and agents etc).

Passive income for you doesn’t mean that it’s passive income for someone else. There will be other people with regular jobs or being regular employees who do some/all of the work that enables you to receive passive income. You may also leverage on technology to do much of the work for you (like how I built a website using the Site Build It platform to market our physiotherapy services without me worrying about it). One person’s passive income is another person’s active income.

I’d like to highlight that I intend to make passive income that delivers good value for others, and I urge you to do likewise – this is always more sustainable in the long run, because everyone wins. It’s not for the desperate, nor is it for lazy people, nor is it for people who don’t believe in passive income.

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