Updated: December 11, 2018
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 goes 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.