Would it not be nice to be earning money without doing much work? That is what Passive Income is all about. Passive income is the money you earn with little effort. But, it isnt easy. You need to put in lot of work and planning to set up a stream of passive money first.
What is Passive Income?
Passive income is money earned with little to zero effort. In traditional income, you perform some job and you get paid for your time, effort and skills. When earning money passively, you have already done some work or invested money, time or energy. You are simply earning a steady stream of revenue that is recurring in nature. This could be from any source such as a Fixed deposit that pays interest or stocks you bought that pay dividends.
Active or Standard Income vs Passive Income
There is just one criteria for Income to be classified as Passive. That is, it should not require much work from you. You should be getting the money without exerting effort or investments. Eg: If you are a partner in a business and are working there, money you earn from it is standard income. Instead, if you are a sleeping partner in the business, money you get from it is passive cash, as you are not putting in any efforts into that business.
Types of Passive Income generating sources
As I said earlier, generating cash without doing work is not easy. You need to have put in some hard and smart work to be able to have money coming to you every month. All sources that provide a passive return can be classified under two major headings based on your major input being time or money.
- Income earned by investing: This is when you have a lot of excess cash and invest it. These investment generate regular income
- Income earned by effort: You may not have much money, but have great skills. Then you put in effort to create something that will get you money regularly. Videos that you create and generate advertisement income on Youtube. Book you write that generates royalty, apps you build that people continue to buy are all example of this.
How to earn Passive money
There are a lot of creative ways you can start earning money every month. Assess what your strengths and capabilities are. If you have a high salary or excess money, then you can choose some of the investment sources, that provide a monthly return on your investment. On the other hand, if you are studying, working and on a low salary or don’t have a job, choose a way where you monetize your skills and abilities to earn a recurring income.
Some ways you can earn money passively by investing:
- Fixed deposits: Stable, low risk low return investment
- Shares: High risk, high returns. You can earn dividends(paid annually and some stocks don’t pay dividends) and also profit from the increase in stock price
- Lending/P2P lending: Loans given out generate interest. Risk varies depending on who and where you lend to
- Rent: Invest your money in buying a residential property or commercial property. You earn rent and the value of the property stands to appreciate with time.
Some ways to earn money passively by working:
- Programming/App development: If you are good with coding, build intuitive apps such as calculators, notes, alarm, reminders etc. These require no maintenance and if it is good, will get you continuous income in the form of app store purchases and advertisements
- Creative assets: Put your creative skills to use, photography, music and video creation is easily monetize now. Youtube, stock photography and music sites pay you royalties or ad earnings
- Writing: You can ghost write books, content writing for companies and blogs, or simply write your own blog or book
- Online courses: Create courses on subjects that you are good in. Sign up to a platform that will be able to sell this for you.
- Pension/Provident fund: This is a source of income that you worked for and is paid to you later on without you working any longer
Also check out my detailed list of 6 best ideas for earning passive income in 2020
How does generating Passive Income matter in FIRE
FIRE is all about how you reach Financial Independence to Retire Early. Once you retire, you need a steady stream of money to sty retired. This money should cover all your expenses for the rest of your life. Additionally, this should also handle the increase in your expenses due to inflation. This is why it is important to be Financially independent, in the sense, you are generating sufficient income passively so that you are not dependent on your job for your living expenses.
Ask questions and pass your comments in the comment section below.
Some frequently asked questions on Passive Income
No, it is not. I am currently earning income passively. So is half the world who get interest from investments, dividends from stocks, rent from a property or even pension.
Some good examples of passive income are rental income, interest on deposits, dividends from stocks, royalty, pension.
Passive income is usually perpetual in nature and will go on as long as the underlying source is active. Eg: In rental income, you will keep getting rent from the house as long as the house is in good condition and occupied.
For active/standard/normal income you need to work and put your efforts in order to earn money. Passive income on the other hand is money you earn without putting in efforts.
Yes, money earned as passive income is taxable. In India, there may be different classifications and tax structures. Eg: Income earned from Fixed Deposit upto Rs.10,000 is tax free (up to Rs.50,000 for Senior citizens). Similarly, there are other tax exemptions and tax classes on royalties, patents, dividends etc. Rental income is taxed as normal income.
You can get passive income from any source that pays a return on your investment. Or you can create assets that can earn you money such as music, apps, videos, writing, educational course content etc.
Yes, it is. Pension and Provident funds are what you accumulate working previously. Later on once you retire, the money is paid to you without you needing to work or put any efforts.
Once you retire, you are dependent on a source of income to sustain. So it is important you first build a regular recurring income stream which will help you continue with your retirement without the need to step back to work.
This depends on your lifestyle and when you are planning to retire. A simple way to calculate is to use the 4% rule. Just take your current monthly expense, multiply that by 12, then multiply that by 25. This is the amount you will need to retire. As I said, it varies person to person and you will need to calculate it and plan properly.
Passive income is recurring monthly income. Residual income is the balance money that is leftover after all other expenses are covered.