It’s a term most of us heard and seen in many videos and blogs. Many of us are already using many passive income ideas to generate part-time or full time income. I created this section for our beginners so that they can understand what it is and how to build a passive income and also to clear some misunderstandings about passive income.
Let’s look at two ways of earning money:
- First way is to generate Active Income, i.e. when we work for someone else and get paid for our time, efforts and skills. Let us call it trading our time & skills in exchange of a money.
- Second way is Passive Income, i.e. when you earn money by not being physically present, like enjoying a vacation in a resort and earning money. For example – you buy a house and rent it to the tenants. They will pay you rent every month whether you are vacationing at a beach or watching movies in a theater or travelling around the world. That is Passive Income, money coming in without any efforts.
When I started researching about passive income ways, I realized that usually we start with a job which is an Active income and then move towards Passive Income. I believe the road to Passive Income is via Active Income, so you go Active before going to Passive.
My personal experience is that if you are working then work hard and make a great Active income first that’s why I did before trying my hands on Passive income ideas. Try to get a job that you like, you should enjoy your Active income source so that you can make big money via active income stream. Then think about investing in stocks that can give you dividends and interest, or invest in real estate to earn rental income or capital gains etc.
I have written an article about Investment, read it when you get time, and you will realize that investment has a risk associated with it. So my two cents Passive income is enhance your Active income so much that you can handle the Volatility of Passive income. For example – a share price can crash and you may not get any dividend and end up losing your money invested in a stock, or a tenant may damage your house or left suddenly leaving you with no recurring income till the time you give your house to the next tenant.
Try to see how much you are earning versus how much you are spending. If your expenses are more than your income please don’t think about Passive Income right now. Manage your income and expenses first, when you start saving at least 10-15% of your income then look for Passive income route.
Reap what you sow
I think the above line is from a holy book and it fits perfectly when we talk about Passive Income. Spend time in planting a seed, nurture it, water it, take care of it and then reap the fruits or flowers. You cannot think about harvesting without sowing a seed.
I know you have seen many videos all over internet or read many blogs on passive income. I want to tell you that building a Passive income takes a lot of effort and the benefits are directly proportional to the efforts and its different from a Side hustle.
To get a rental income you need to work hard to earn money to buy that house, or you work hard to write a book or create a YouTube channel or a blog. I cannot tell you what Passive income route will work for you but I can certainly tell you with my experience that work hard in your current active job and if possible do a job that you enjoy. Use your Active earnings to build a successful Passive income model.
Just remember to reach a stage where you don’t have to physically involve or something all the time to create this income.
Before I end this blog, I just want to introduce one more term it’s called Portfolio Income.
I want to talk about it so that you don’t get confused between Passive Income and Portfolio Income. Let’s look at an example – if you put $1000,000 in bank like a term deposit for 1 year and you can earn an interest of 2% on it, then after an year you will get $20,000 as interest.
So, you will earn without doing anything.
Similarly, if you buy a share of a company for say $1000 and that company pays a dividend of 5% annually, then at the end of the year you will get $50 without doing anything.
Such income is called a Portfolio Income.
It looks easy but don’t forget in our above example to earn a $20,000 at the end of the year from a bank deposit you need to earn million dollars first or you should have a $1000 to buy shares of a company to earn a $50 annually.
And finally before I say bye don’t get confused between Passive income and side hustle. Below is just refresher:
You earn a Passive income without having to actively work for it on a regular basis. It requires an initial investment of time and/or money but to generate income with relatively little ongoing effort. For examples income from renting a house, dividend income, and interest income.
On the other hand a side hustle is an additional job or business that you actively work on in your spare time to earn extra money without giving up on your full-time job. Unlike passive income, a side hustle requires continuous effort and time commitment to generate income. For example income you generate from freelancing, selling products online, or providing services like tutoring or pet-sitting.
So, a passive income is like a magical money tree that grows money without you having to do much work, while a side hustle is like a lemonade stand that you have to keep working on to sell lemonade and make money.
Thank you for sticking till the end! I hope you find the blog interesting!