What Is Passive Income?
April 26th, 2012 by Steve Pavlina
I want to kick off this passive income series by clarifying what I mean by passive income.
I prefer to define passive income fairly broadly as revenue you earn even when you aren’t actively working. Another name for passive income is residual income .
By contrast active income is money that stops coming to you when you stop working. If you get paid a salary and you quit your job or get laid off, most likely you’ll stop getting paid. You may get a severance package to help you transition, but your boss won’t keep paying your salary unless you keep showing up for work.
Similarly, if you do contract work for clients who pay you, and if you’ll stop getting paid if you stop doing this work, that’s also active income. You may have more flexibility with contract work, but you still have to do the work to receive your payments.
With passive income, you would keep getting paid whether or not you do any meaningful work. You may do a lot of work up front to get the ball rolling, but eventually you reach a point where the passive income stream gets activated. At this point you can essentially stop working on this income stream if you so desire, and more money will keep flowing to you through this stream regardless what you do or don’t do.
Passive income doesn’t mean one-time lump sum payments such as an inheritance or the sale of an asset like your home or some stock you own. Passive income is a source of income with some sense of continuation over time.
Passive income doesn’t mean permanent income. Some forms of passive income may last a few years. Other forms may keep going for decades or even for centuries across multiple generations. But all forms of income eventually dry up for one reason or another.
Passive income doesn’t mean 100% secure income. As Helen Keller wrote, “Security is mostly a superstition.” Some forms of income are more secure than others, but there’s always a risk element. For any income source, there’s a non-zero probability that something could destroy it. This is one reason it’s often wise to create multiple streams of income, so you can reduce the risk that all of them will fail simultaneously.
Passive income doesn’t mean perfectly 100% passive with no maintenance required. With any income source, you may need to do a little maintenance to keep it going. Sometimes this is really easy and only involves checking your mail and depositing checks. Sometimes it’s even more passive when the money is deposited directly into your bank account every month. But then you may still need to report this income and pay taxes on it.
Passive income is really a spectrum of possibilities. Some income streams are very passive. If you do essentially no maintenance on them for years, the income will keep coming. My book royalties are one example of this. Regardless of what I do or don’t do, most likely Hay House will keep selling my book. and people
will keep buying it. Even if I shut down my website and go incognito for some reason, my book can keep selling online and in bookstores. All I need to do is deposit the royalty checks. I don’t have to process orders, interact with customers, or do any ongoing marketing.
Other income streams are semi-passive. You may need to do some work to maintain them even if you’re not working for a salary. For example, if you own a house and rent it out, you may earn passive income as rent payments from your tenants. But you may also need to invest some time, energy, and money to maintain the property, to find new tenants when the place goes vacant, and to handle the mortgage, insurance payments, and property taxes. If your tenants get ornery or become delinquent, you may need to do even more work. You may delegate much of this work to someone else, but then you have a business partner or employee to manage instead.
Passive income doesn’t mean it’s passive for everyone. There may be other people with regular jobs who do some of the work that enables you to receive passive income. You may also leverage technology to do a lot of work for you. The level of passivity is perspective dependent. One person’s passive income is another person’s active income.
I also want to distinguish passive income from what I’ll call moocher income. Moocher income is what people try to earn when they succumb to a get rich quick mindset. This is an undisciplined attitude that seeks to get something for nothing. The idea is to find a way to mooch money from people or the economy without providing any meaningful value. It is possible to generate income this way since markets contain plenty of inefficiencies, but it’s not an approach I recommend. I don’t personally define passive income to include moocher income, but there is a spectrum here where some forms of passive income deliver more value than others.
In this series I intend to help you create passive income in a way that generates good value for others. This is more sustainable in the long run, and it’s better for everyone. Fortunately there are lots of ways to create value.
That said, this isn’t a series for the lazy ass delusional types who spend six hours a day playing Angry Farm Ninja Madness. Nor is this series intended for the desperate “I need to make $500 by Friday to pay my rent” nutters. Creating passive income streams is work. You can meditate on abundance, invoke the Law of Attraction, and pray to Hestia all you want, but also expect to do some real work if you’re going to make passive income a reality for you. Creating streams of passive income is a very active endeavor. You must do the work first; then you can enjoy the results.
P.S. If you do wish to pray for assistance, don’t pray to Hestia unless you want a baby or need to start a fire. Pray to Hades (aka Pluto) since he’s the god of wealth.
Just don’t tell Hestia.