What is passive income?

| Aug 11, 2020 | Firm News | 0 comments

While the idea of making money while you sleep is always tempting, passive income is not quite that easy. Earning passive income is easier than, say, building a mud fence in the rain or rolling a heavy stone up a hill for the rest of eternity. Truth be told,  passive income, if thoughtfully invested, can be a way to supplement your income or make money in your retirement.

Passive income is money earned by, well, not working, per se.  It’s the income you get from a rental property, or dividends paid if you are part of an LLP, or income earned off of other investments, such as a portfolio in some instances. Bankrate lists other passive income possibilities for 2020 as well.

3 types of income

There are three main categories of income: passive, active and portfolio.

Active income is that income you work for- either hourly or salary. It comes when you do something. It can include tips and commission.

Portfolio income is money you receive from your investments, royalties, dividends, interest or capital gains.

Passive income as stated above, is money earned from real estate such as rental properties, real estate investments (REITs) which are dividends paid to you as an investor, or the new social-media driven  peer-to-peer lending which is social lending or crowd funding, which began in 2005. Dividend stocks and index funds are two more risky but proven ways to earn passive income. A winning lottery ticket is also a form of passive income.

5 facts about passive income

Passive income is a viable way to make money for both the risk-averse and the thrill seekers. There are a few things to know. These are:

  1. It’s perfectly legal.
  2. It is taxable.
  3. Passive income is not guaranteed. Natural disasters or loss of renters can shut down the flow.
  4. Just because it’s “passive” doesn’t mean there isn’t some work required. Most sources of passive income require maintenance of one kind or another.
  5. Passive income can add up quick with the right investments.

Passive income, from a website, e-book, bonds or rental property, can be a great way to supplement your income. While most forms of passive income require up-front investing of time or money (such as buying a strip mall, apartment complex or writing an e-book) once the initial investment is done you may just be able to lie back and make money while you sleep.