The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
It’s every person’s dream — earning money while they sleep. And, through passive income, it can be a reality.
By definition, passive income sounds too good to be true. Colloquially, it’s defined as money you earn by putting in little to no effort. While there’s some truth to that, there’s no such thing as getting money for doing nothing.
Setting up a passive income stream is all about utilizing your skills and time for the maximum return. It’s not so much about working less as it is about working smarter.
If your interest is piqued, read on to learn more information about passive income and how to make it below.
What is Passive Income?
Passive income is earnings derived from an enterprise in which a person is not actively involved. What that really means is that passive income is not tied to how many hours you work. In order to better understand what this means, take a look at the three different types of income:
- Passive: income from work in which a person is not actively involved
- Earned: income from paid work (also known as “active” income)
- Portfolio: income from investments, dividends, interest and capital gains
If you have a salaried or hourly job, you’re making earned income. This is probably from the type of income that people are most familiar with. Passive income is a different model entirely because it allows a person to earn money without trading their time for money one-to-one.
There is no “correct” way to make money. Once you understand the different types of income, you can decide which aligns with your life goals with respect to work and money.
Why Should You Earn Passive Income?
After studying the habits of millionaires, Tom Corley, author of Rich Habits, found that over half of self-made millionaires had at least three streams of income. Much like the proverb “don’t put all your eggs in one basket,” having multiple sources of income is a key ingredient in setting yourself up for financial freedom.
This is because we only have a finite amount of time to earn active income. When you limit yourself to earned income, you’re capping the amount of income you can generate based on your physical limitations. After all, there are only so many hours in a day.
Here are just a few benefits of passive income:
You can achieve true financial independence
Passive income can help you achieve true financial independence, which means having enough income to pay your living expenses for the rest of your life without having to work full time. Passive income is crucial to the FIRE (Financial Independence, Retire Early) movement, a movement dedicated to achieving financial independence and retiring early. Whether you’re committed to retiring early or not, passive income is a great way to make progress towards your retirement goals.
You’ll have more time to focus on the things you care about
When your cash flow is automated, you can focus your attention on other things such as big picture ideas, creative pursuits and even family or travel.
You’re not tied to any one location
Most passive income ideas are location agnostic. That means this type of income lends itself well to the work-from-home, entrepreneurial lifestyle. Or you could spend more time traveling!
You can pay off debt faster
Not all passive income ideas require money to start, so if you’re struggling to pay off debt you might want to explore a source of passive income to help supplement your regular income. You can funnel your earnings straight toward your outstanding debts.
Passive Income Ideas
Passive income can be broken down into two categories. Those that do require capital to start, maintain and grow and those that do not require capital to start, maintain and grow.
Passive income is all about “front-loading” your time and/or money.
You will have to do the work upfront to automate the process. Once that’s done you can continue to enjoy revenue month after month with minimal adjustments.
If you want to invest money, here are some examples of investments that generate passive income:
- Investing in index funds or dividend-paying stocks
- Buying a rental property
- Opening a high-yield savings account
Or, if you want to invest time:
- Creating a proprietary digital property, like a mobile app
- Starting a blog
- Licensing a business idea
- Licensing your photos
While you’re setting up your new income stream, keep in mind that there truly is no such thing as “free money”.
You’ll feel even more satisfied with the reward knowing what it took to get there. While there’s no one magic trick to getting passive income to work for you, with so many different methods, there’s surely one option that will fit your situation and skill set. Set up your passive income stream today to start making money, free up time and set yourself up on the path to financial independence.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.