What Is Passive Income?

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Interested in earning income without putting in the extensive work it usually requires? Traditional “active” income is any money you earn from providing work, a product or a service to others — it’s how most people make money on a daily basis when they head to their jobs. For centuries, people have been used to earning their day’s pay from a day’s work. These days, however, you’re not limited to earning this traditional type of income. You have several other options at your fingertips, and one of them includes earning what’s called passive income.

The idea behind passive income is that, instead of working continually to maintain a regular income stream, you can put in some initial or periodic work and continue earning money for your efforts. Think of a landlord — they make an initial purchase of a home, and, by renting it out, they continue earning regular income from their tenant’s payments. But there are many other ways to earn it — and much more to understand about how it works. Take a look at the basics of passive income to decide how it might fit into your financial strategy.

What Is Passive Income, and How Does It Work?

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Passive income is income that doesn’t require constant effort to earn. If you make passive income, you continue to earn money regularly, even if you don’t continue working for it or taking other action to generate the income. This type of income is tied to the earning power of your action or possession rather than your need to work continually.

There are hundreds of ways to earn passive income. Passive income can be a traditional business, such as drop-shipping clothing or other products you sell through an ecommerce store, or a side hustle, such as writing eBooks and listing them on a sales platform. Although passive income existed before society was spending ample time online, the level of worldwide interconnectedness that exists today thanks to the internet has made passive income even easier and more accessible for people.

What Makes Passive Income Different?

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Passive income is different because you can earn it independently of the amount of time you spend working — it’s not contingent on the hours you devote to it. Essentially, you take an initial action to start the income stream, and then, without further effort on your part, what you did can continue to generate earnings in a hands-off way.

Active income is based on what you do on a regular basis to earn income, such as going to your job each day. There are more limitations on active income because it’s dependent on the amount of time you’re actively working to earn it. Aside from it being illegal, even the most capable employee can’t work more than 24 hours per day or seven days per week. And that’s especially true if the job is physically taxing; people tend to become less productive the longer they work. Likewise, the most effective entrepreneur can’t sell to more customers than there are in the market. Income that’s based on current actions has plenty of logistical limitations like these.

Passive income lacks these limitations. A passive income stream generates income constantly without wearing you out. Here’s an example. Say you have a brick-and-mortar store where you sell home decor. You’ll likely only be able to reach customers who can physically come into the store during the hours that you’re open. This is active income because it requires you to be present and working in the store to earn money.

Now, say that you sell digital downloads online. Your website is accessible 24/7 to shoppers from around the world, and their purchases automatically download once your ecommerce website processes the shoppers’ payments. You don’t have to be present to process any transactions or run a store, so this form of earning represents passive income — there are no time or material constraints on the amount of money you stand to earn. Active income is often limited to the number of hours you work, but passive income can earn you as much (or as little) money as a product or service sells.

Although passive income may be considered less hassle than full-time employment, earning passive income isn’t always easy — and the scenario described above isn’t the only example of what a passive income stream might look like. Many effective forms of earning passive income require you to have money to invest upfront or spend years cultivating and maintaining an online presence.

What Are the Benefits of Passive Income?

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Personal finance experts often tout the importance of having multiple income streams to create financial stability. That’s one advantage of creating a source of passive income to use in addition to the active income from your job — or to supplement multiple passive income streams you’ve developed.

For example, if you work one job, you have one stream of income. If you’re laid off from that job, it’s no longer a source of income, and you’ll want to find another as you earn unemployment benefits. Even if you have two jobs that lead to two income streams, you can still lose both if you’re involved in an accident and are no longer able to work. Passive income is an attractive way of earning because it doesn’t depend on your current ability to work. When you have a consistent stream of passive income, you’re less likely to experience financial hardship if you lose your active stream of income.

How Can You Earn Passive Income?

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Investing is one of the easier and more popular methods of earning passive income. When you invest in stocks, for example, you earn money passively when the stocks’ values increase. You don’t have to put in the effort to make that stock increase in value; that’s a job for the company whose shares you own. After your stock values have risen, you can cash in on that income by selling your shares. You can also earn passive income through stock dividends. Dividends are annual, quarterly or monthly payments companies issue to all their shareholders based on earnings and the number of shares each person owns.

Blogging is another popular way of earning passive income. Say you write a blog post that answers a common question. People who want to find the answer will continue visiting your website for years to come to find it. You’ll need to put in some effort initially to create content for your blog, but you can earn passive income from selling advertisement space on the website.

Many people turn to the internet to capitalize on other opportunities for earning passive income. You might sell digital products, earn royalties or engage in affiliate marketing. You can even tap into your social media followers to earn money.

Renting out cars or homes is another method of passive income — but it can require you to make a costlier upfront investment to support earnings down the road. If you own a home, you can pay a property manager to find tenants and handle their needs. You profit from the tenants’ rent payments each month. The initial work involves qualifying for a loan, buying a house and hiring a property manager. But after that, you mainly only need to pay for repairs, property taxes and other regular expenses and continue earning passive income.