What Is Passive Income?

---------

How much are you earning while you’re asleep?

If you’re like most people, then I’m sure it’s zero or very little. This is the reason why we go to work. We wake up everyday, dress up, go out into the world and use our skills and talents so we can earn the money to afford the things we need and spend on the things we want.

For several years, I thought that this was the only way to live. When I graduated from university, all I ever wanted was to find that perfect job. I searched and worked and jumped from one company to another.

Everything changed when I met a friend for coffee one afternoon. I mentioned to him that I was contemplating on joining another company by next year because I heard that it pays good there.

He showed a lack of enthusiasm towards my plan and said that I should instead learn how invest. He then introduced me to the different types of income and the importance of having passive income.

The Different Types of Income

In a broad sense, there are three types of income which a person can generate: earned, portfolio and passive. Any money which go into our pockets can generally be categorized under one of these three.

Active or earned income is defined as money that comes from working. Your salary as an employee is the best example. Activities such as gambling, running your own business and professional consultancy work are also considered earned income. If it needs you physically, then it is active or earned income.

Portfolio income is also called capital gains. It is basically the income you get from selling something for a higher price than which you bought it. Investing in the stock market is the most common example of this. Aside from trading paper assets and other investments which appreciate in value, one can also gain portfolio income from buying assets at bargain prices and selling them at market value.

Passive income is money you get from investments you have purchased or created. If you own a business which can operate by itself, then that can be considered passive income. The major difference of this type of income from the other two is that it generates cashflow with zero or very little effort coming from you. Owning an apartment and having it rented, getting money from royalties for an intellectual property or income from multi-level marketing investments are good examples of this type.

How important is passive income?

The amount of money we get from earned and portfolio income are dependent on our physical presence, skills, talents and knowledge. If we get sick, become inefficient or if the things we know become obsolete, then our earnings will stop or decrease.

However, passive income can continuously generate cashflow independent of our human limitations. It can financially provide for you and the next generations of your family.

The good news is that all of us have the power to create unlimited streams of passive income. It is just a matter of patience, perseverance and passion. It is the key to long-term wealth.

Did you like this post? Why not consider subscribing to Ready To Be Rich so you won’t miss out on articles like this.

———
Photo courtesy of SXC

---

Posts You Can Read Next:

Realizations About Passive Income Opportunities
Passive income is the most desirable type of income. After all, what’s better than having your money work for you and not the other way around? And if financial freedom is your goal, then seeking passive income opportunities should become part of your life. However, while there are many personal finance articles out there that talk about the...

On Employment, Income Streams and Financial Security
Yesterday, I was greeted by a text message from a friend saying that he was terminated from work. It came to me as a shock because he has been working in that office for almost 6 years now and I believe that he has done a remarkable job there. He was no ordinary rank and...

On Multiple Sources of Income and Working Smarter Not Just Harder
How many sources of income do you have? A friend of mine has about six. He works as a part-time bookkeeper, sells vitamins for a direct-selling company, owns an eLoad business, buys and sells computer parts online, works as a Math tutor and occasionally gets an allowance for running important errands for his father’s company. I know...

This entry was posted by Fitz Villafuerte on Sunday, December 2nd, 2007 at 11:16 pm and is filed under Life Lessons, Mindsetting. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. If it's your first time to comment here, they will be held for moderation. Off-topic responses may be deleted.