If you’re interested in improving your financial situation, earning better peace of mind, and/or setting yourself up for retirement, you might consider investing more in passive income. Passive income is a long-standing financial strategy that’s generated significant interest in recent years, due to its higher accessibility and greater diversity of options.
But what exactly is passive income, and how can you use it to change your life for the better?
What Is Passive Income?
Let’s start by defining passive income. Passive income is any kind of income that you can generate without much need for ongoing effort. For example, if you work 40 hours a week and earn a paycheck, this is not passive income; you have to expend effort to get it. But if your blog generates $1,000 in monthly revenue, without much ongoing maintenance, that could be considered passive.
The Perks of Passive Income
Why is passive income so valuable?
Minimal time investment. For starters, passive income doesn’t require you to invest much ongoing effort. It doesn’t bear a time requirement, the way a full-time or part-time job would. Accordingly, you can have your passive income strategies idling in the background, while you have plenty of free hours to devote to a main source of income—or anything else you want.
Compounding returns. Passive income also allows you to take advantage of compound interest in many cases. You can make money with passive income, use that money to invest in more passive income endeavors, and start making twice as much money from both sources.
Consistent results. People also use passive income as a way to get a predictable stream of revenue, like if they’re preparing for retirement. Because many forms of passive income generate returns based on an interest rate or fixed revenue stream, you can count on this money.
Examples of Passive Income
It’s easiest to understand passive income with the help of examples of passive income in action. These are some of the most common choices:
Rental properties. Many investors turn to rental properties as a way to generate passive income. With the help of a property management company, you can manage the property in a relatively hands-off way; these professionals will take care of things like rent collection, tenant screening, and even repairs and maintenance. You’ll collect rent from tenants, covering your expenses with enough left over to provide a decent monthly profit.
Stock dividends. Publicly traded companies typically offer dividends to their investors as a way to share profits. If you hold stock, you’ll earn a fixed amount of proceeds, based on the amount of stock you hold. This often adds up to around 2 to 4 percent of your total investment, annually.
Blog ads. If you run a successful blog, you can monetize it to turn it into a passive income source. One of the most common options here is advertising, but you could also include affiliate links or pursue alternative strategies.
Digital content sales. You can also make recurring passive income by posting digital content for sale. For example, you can sell an eBook, stock photography, or digital graphics for a fixed fee. As long as people keep buying it, you’ll keep making money.
Caveats to Keep in Mind
Of course, passive income isn’t a perfect financial strategy, as there are some caveats to bear in mind.
Investment requirements. Some of these strategies do require a significant upfront investment. For example, if you want to take advantage of dividend stocks, you’ll need tens of thousands of dollars or more to make it worth your while; at 4 percent interest, $10,000 will earn you $400 in annual revenue.
Time requirements. The passive income sources that don’t require an upfront cash investment will often require an upfront time investment. By some definitions, this makes them not truly passive. For example, before you can make money from blog ads, you’ll need to spend time creating your blog and building up an audience.
Volume and reliability. Passive income is never a guarantee, and unless you have a significant amount of capital, it may not add up to a volume sufficient to sustain you. You can typically overcome this issue by snowballing your earnings and continuing to invest.
Diversification. No matter what your investment or income generation strategy is, it’s important to diversify your holdings. Diversification will decrease the risks you face, and increase the total amount of revenue you collect; it also has a stabilizing effect on your returns.
Passive income isn’t a perfect financial strategy, but there’s no such thing as a truly perfect strategy. When used intelligently, as part of a comprehensive investment strategy, it can dramatically increase your income—and help you achieve all your long-term goals.
Guest Author Bio
Jamie is a freelance writer who covers trends in business, technology, and health. She loves to go skiing, camping, and rock climbing with her family.