I bet you know generally what passive income is, but have you really weighed out how passive income could change your entire life — in ways you likely never thought possible?
What would you do with your time if you didn’t have to work a full-time job?
The Definition of Passive Income
According to Wikipedia (one of my favorite go-tos!), Passive Income is defined as:
Income received on a regular basis, with little effort required to maintain it.
What does this really mean? This means you don’t have to work (or put effort in) for your income. I know you probably could decipher this on your own, but I want to elaborate more on this because I doubt most of you have really taken the time to think about the reality of how big this really is.
How Can You Get Passive Income?
There are two main ways you can earn passive income:
- Start a business
Easy enough, huh? Well, you can’t just invest in anything or start any kind of business and get passive income from it. Well, maybe you can, but you have to know how to do it right in order to make sure you are actually getting passive income and you aren’t working for the income.
- Invest. If you make an investment, you have to make sure the income from it really is going to be passive. This would be in contrast to active income. What’s the difference, exactly? The question to ask yourself is: Do you have to work to get the income? The biggest example of active income investing and passive income investing in real estate is flipping versus rental properties, respectively. With flipping, you are required to do active work in order for the income to appear. With rental properties, in theory you don’t have to do any work for that income to come in (also assuming correct setup). The IRS agrees with these assumptions about both types of investing because they label the income from each as either active or passive, and each type of income has a completely different taxation.
For a deeper explanation of passive income versus active income, check out “The Truth About Active Income vs. Passive Income.“
There is room to make active income investing passive, however. For instance, flipping properties can be extremely lucrative. Why pass up that kind of income, if you have an interest and skill in flipping, if what you really want is passive income? In this case, there are two ways to make flipping, which is active income, passive:
- Invest whatever income you earn from flipping directly into passive income investments.
- Outsource as much of your flipping business as you can, until eventually all of the work required to earn the income is being covered by people other than yourself.
Once you do either of those with your active income investments, you have learned to master the art of passive income! The latter option, outsourcing, leads to the second option for getting passive income:
- Start a business. This won’t happen initially in whatever business you start, but you eventually have to get to where the majority of your business is outsourced. Therefore, the income you receive from the business is money you didn’t specifically have to work for. That doesn’t mean, nor does it with outsourcing your flipping business, that you can’t be involved at all in order for the income to be passive, but you should be at a point with it that you’ve outsourced enough so that if you disappear for a month or two, or a year, business will remain just as profitable as it did when you were around.
Once You Have Passive Income, Then What?
Okay, now here is the fun part. And I want all of you involved in this part, as well, in the comments.
Not having to rely on a full-time job means you have enough passive income, whether through real estate investing or running an outsourced business (can be an outsourced real estate investing business, too!) to pay all of your bills by doing… not a lot!