What is Passive Income?

What Passive Income is: Developing a Passive Income Strategy

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Submitted by Mark - Mark is a biz-dev hero at Invoicebus - a simple invoicing service that gets your invoices paid faster. He passionately blogs on topics that help small biz owners succeed in their business. He is also a lifelong learner who practices mindfulness and enjoys long walks in nature more than anything else.

(Contributions are guest opinions only and don’t reflect the opinion or endorsement of Money Fit by DRS, our staff, clients or other interested parties.)

Yearning for financial independence

It’s something most must fight for in their lifetime. Even though there are multiple ways of achieving financial independence, the struggle is very real.

Whenever you decide to tackle this issue, it is not easy. Whichever path you choose to take will require you to make sacrifices, invest hours upon hours of your time and, of course, work very hard.

No path to financial independence has you simply sitting on your couch, drinking coffee and watching daytime television while money pours into your accounts. Perpetual motion is a fantasy and it goes the same for the world of finances. Still, when you consider the end game, passive income paints a picture that looks attractively similar.

What Is Passive Income?

Passive income is defined as any type of income received periodically which requires little to no maintenance or effort to perpetuate. While the term’s meaning has changed somewhat through colloquial use, the notion nevertheless behind the idea remains the same. The goal is to work and be engaged as little as possible while still making money on a regular basis. Now that sounds like fantasy, right?

You can establish passive income in numerous ways, although the best-known variations include real estate rental properties, dividend-paying stocks, and even peer-to-peer lending. Some approaches require more effort beyond the initial financial investments, such as creating an intellectual property (e.g. ebooks, photos, videos, courses) you can collect royalties from in the future. As the years go by, the market continues to open and generate new opportunities and new ways of acquiring passive income.

The Top 3 Benefits of Passive Income

Even though the word “passive” sound unappealing in other contexts, in terms of income, there are many reasons you should feel excited about it. The three main benefits of establishing sources of passive income include:

1.    Freeing Up Your Time

This is definitely one of the greatest benefits to be gained from having a source of passive income, because it improves your quality of life in more ways than one.

Having more free time throughout your day is a valuable contribution to establishing a work-life balance. Your schedule will feel less constrained and more flexible which will take out a huge chunk of the unnecessary stress from your daily life. You’ll also have more time in the day to relax, pursue new hobbies and interests or spend quality time with your friends and family.

Another way of approaching this gift of free time is to consider it an opportunity to further increase your financial gains. Once you have set up one source of passive income, why not work on creating a second or a third? Or maybe there is a passion project you have always wanted to try but never had the time or financial security to really give a go at.

2.    Improved Financial Security

The market is everchanging due to technological advancements to a point where certain professions we all thought were safe are now dying out. Workers nowadays have to be more flexible about their careers. However, going all-in on active income is becoming a riskier and more unpredictable strategy. That is why diversification of your income sources is one of the best approaches to earning money, because it minimizes your risks while generating returns.

Passive income fits great with the overall goal of achieving financial security through diversification, since it provides you with an alternative stream of income while also giving you something to fall back on in case your career takes a hit for whatever reason. It can also be a step in the right direction if you are considering new ways to increase your retirement savings.

3.    More Control Over Your Work-Life

Once you have gone through the setup phase, your passive income stream should by definition require little-to-no additional effort or maintenance. Furthermore, you are free to organize these engagements to fit your schedule and deal with them whenever it suits you best.

Aside from being able to march to the beat of your own drum, you can also do the drumming from anywhere in the world! With passive income, you are no longer bound to one geographic space. Additionally, if all your engagements can be handled online, why not travel and explore new places and cultures?

Lastly, passive income does not have to be all that passive. If at any point in time you wish to improve or add to your strategy, you can so! Make sure you have an exit plan, though, for when you are ready to go back to a hands-off approach.

How to Choose the Right Strategy

The key principle you should follow with regard to passive income is sticking to what you know. Take a good, hard look at your skill set and determine the resources you have at your disposal. After that, work on figuring out the best way to utilize what you already have in order to create a valid passive income strategy.

It is not impossible to enter a field you know nothing about and come out successful. However, the approach would demand a lot more effort and come with additional risks, losing some of the key benefits of passive income.

Once you have managed to successfully set up a source of passive income, you can continue along those lines and create multiple streams of it. It is important to add new streams gradually while making sure you are not accumulating more responsibilities than you are able or willing to handle.

Final Word

Even though we have discussed some of the benefits and advantages of passive income, we have to underline the fact that it does not come easy. It is not a life hack or a get rich quick scheme. It requires investment, effort, strategic planning and quality decision making. You cannot make lemonade without actually giving up a couple of lemons.

However, if you have the means and the skills to establish a source of passive income, you should give it a shot. After all, getting lemonade for life from a one-time investment of lemons still sounds like a pretty good gig, right?