In today’s world, income sources have expanded past traditional revenue options. The strive for financial independence has created opportunities beyond the active workplace. This has changed the usual work routine and it is therefore important to have an understanding for the question what is passive income?
Passive income requires little to no active participation after the initial set-up. It can be received from certain investments, rentals, microbusinesses, blogs, royalties, commissions and other opportunities.
Passive income can be used as additional support, as a means to pay off debts, and as a way to make a living without the demands of an active job. In this guide, we will further explore the concept of passive income. We will also look at its benefits and disadvantages, as well as providing some tips that will guide you along this path. We will also list some passive income strategies and options.
Understanding Different Types of Income
There are three types of income designated by the Internal Revenue Service in the United States. These types of income differ primarily when it comes to their source. Depending on how it is generated, income can be separated into these main types:
- Active income: the traditional source of income that derives from active earnings such as taxable wages.
- Passive income: the source of income that requires no or little active or material participation.
- Portfolio income: a source of income that comes from investments such as certain dividends and gains from interest. This income type can be seen as either active or passive, depending on circumstances.
What is Passive Income?
Passive income, as we’ve seen, requires a minimum or nonexistent level of participation for its earning. This type of income is generally treated as taxable (source). There are various types of passive income:
- Property income: this type of passive income is derived from real estate opportunities which include renting out a property, any cash flows related to owning property, and financial assets that generate interest.
- Trade and business income: this type of passive income is related to revenue that comes from any trade and business income. This is only considered passive income if there is no material involvement required for the entire duration of the financial year.
- Royalties: This is income that refers to revenue generated from patents and any sort of rights to intellectual property. This type of income is only considered passive if it remains separate from an ongoing active trade or business investment.
What are the Benefits of Passive Income?
There are numerous benefits to setting up sources of passive income that can change your life for the better.
- Convenience. As passive income requires little to no active presence in earning it, this is an excellent opportunity to work remotely. Setting up and overseeing most passive income sources can be done from home, which can free up schedules and change routines.
- Free time. In a world as fast-paced as ours, time itself has become a luxury. With passive income, you can use the additional funds to reallocate the time you might have had to spend at a traditional workplace. You can travel the world, make memories with your family, and enjoy the things that never fit the schedule before.
- Stability. With passive income, you earn even when you don’t have access to a traditional income. Active income isn’t generated when the activity in question is ceased, but with passive income, you know that those additional funds will be there promptly according to your instructions.
- Independence. Having access to passive income means making your own rules and depending only on yourself. You can also choose when to retire.
- No hassle. A source of passive income doesn’t require you to manage it. When it comes to real estate, you will not be directly involved with maintaining property or tenants. When it comes to managing finances, you will not have to be a direct participant. Many banks have understandings with private companies that deal with passive income revenue. These companies can face banks on your behalf.
- Experience. Despite being passive income, the process of setting it up is very hands-on. There is much to learn in creating and generating passive income. This can also expand your knowledge of different markets and industries for your benefit.
What are the Downsides to Passive Income?
Passive income does also come with certain disadvantages.
- Setting up. The initial stage of creating sources of passive income can be both time-consuming and costly. This is the only active phase of passive income and it can be very complex and very demanding. You may also have to make a significant financial investment at the beginning of this journey.
- Diversification. A single source of passive income rarely provides enough revenue.
- Potential lack of balance. Working from home can always provide challenges even to passive income earners. The lack of specific schedules can cause a massive overlap between work and free time. A traditional workplace also comes with guaranteed social interactions that can be absent when working remotely.
Where Should You Look For Passive Income Opportunities
One of the most important stages of passive income is the initial set-up. This requires a great deal of research, as well as considerable amounts of time or money (or both). Nevertheless, there is a great wealth of opportunities that can provide ongoing sources of passive income. These opportunities are also great for working from the comfort of your home.
- Rentals. Property rentals in the form of houses and rooms are the main contenders here, but not the only ones. You can also rent items on a smaller scale, like bicycles, parking lots, and storage spaces.
- Peer-to-peer lending. While most investments are considered portfolio income, peer-to-peer loans require little to no activity. There are plenty of websites that can assist with setting up loans according to your criteria and level of investment.
- Become an affiliate. This is usually done by setting up a link on your blog, social media, or website to a third-party product. If the link gets clicked and/or if this results in a sale, you get a commission.
- Sell ad space. This is an excellent passive income option for YouTubers and bloggers with an established following. Selling ad space on media with plenty of traffic is a sure way to make ongoing commissions.
- Subscriptions. This is an option catered to creators and experts looking to share their work. You can charge an ongoing subscription in exchange for creative works, tutorials, articles, seminars, and so on. In-depth, unique, and fresh content is a plus for those looking to subscribe.
- Selling courses. People tend to be on the lookout for online courses ranging across an array of subjects. Putting together a course is a lot of work but you only have to do it once and then make it available to potential buyers. This will then continue to generate income on its own.
- Buy and sell websites. Various online tools can provide help with ‘flipping’ online businesses for low commissions. With numerous businesses getting sold all the time, this could be another source of ongoing passive profit.
Passive income can be a highly beneficial source of income that involves little to no material involvement after creation. There are various types of passive income that provide different opportunities for different interests and levels, from real estate to subscriptions.
Prior research is recommended before creating sources of passive income, and timeframes can vary when it comes to seeing a return on your investment. However, passive income can also lead to financial independence, early retirement, and plenty of free time. This type of revenue is also unaffected by the limits of traditional workspaces like needing continuous employment to receive a salary.
We hope this has answered your question what is passive income and also how it is created.