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Understanding the Importance of Passive Income
Achieving financial stability in one’s life is something that everyone desires. While financial stability is something that can be achieved, what most people actually desire is to have a consistent income stream without having to work for it every day. Making money without putting in any effort is something that might seem like a strange concept, but in reality, this is absolutely possible. Creating an income stream that requires little to no effort is known as passive income. With passive income, you can spend more time on things that you’ve always wanted to pursue, rather than work every day to pay the bills and meet your expenses.
We all have the same 24 hours each day, but what separates the rich from the rest is how they utilize their time every day. While the average person spends most of their time working in a job or business, millionaires have multiple income streams that help them maintain a steady cash flow, without having to work for it every day. We at Financial Education believe that with financial stability, one can work on themselves and spend time doing what they love, rather than work every day to earn a living and have no time left for anything else.
This is why passive income can benefit you as it ensures you have a consistent income source to pay your expenses, while you can spend your time doing whatever you desire. It also helps in achieving financial stability and acts as a backup in case you lose your job or your business doesn’t perform as you expected. In this article, we shall understand the importance of passive income and how you can create passive income sources that help you achieve financial stability. So, let’s get started!
What is Passive Income
Before we proceed further, it is crucial that you understand what passive income is. Passive income is a source of income that requires minimal effort to earn and maintain. Basically, passive income is the money you generate without having to work for it actively. This allows you to have a consistent income stream without having to spend any time of your day working for it. However, in order to create a passive income stream, you need to put in a lot of time and effort initially, so that you can enjoy its benefits in the future. Once your passive income stream is set, all you need to do is to review it every once in a while and enjoy its benefits.
There are several differences between active income and passive income. For example, the amount you can make from an active income source is limited to the hours you put in. So, the maximum earning potential is capped by the amount of time you put into your work. On the other hand, passive income sources do not require active involvement, therefore the ability for it to grow is based upon the asset and its potential, instead of being dependent on you. The only effort you need to put in is at the beginning, and once the passive income stream is set, you will be able to enjoy its benefits for years to come.
Generally, income from real estate, rental properties, dividend stocks, silent partnerships in a business, blogs, royalties, and more are the most popular type of passive income. The Internal Revenue System or the IRS distinguishes passive income from other active income sources and generally taxes it differently. The IRS categorizes income into three different sources; active income, passive income, and portfolio income.
Considering the current scenario with the Covid-19 pandemic, having multiple streams of income can be helpful when times of distress arrive. Founder of Financial Education, Jeremy Lefebvre believes that with passive income, one can ensure their basic expenses are met while they can simultaneously compound and build wealth. In a nutshell, below are the main categories of passive income:
- Any income or cash flow from real estate, that may include profits from ownership of capital, rental income, and interest from owning real estate is considered as passive income.
- Any income from a trade or business activity that does not need active participation is also passive income.
- Income from blogs, royalties, dividend stocks, licenses, and more are also passive income.
Types of Passive Income
When it comes to creating a passive income source, there are several options out there. From rental income to dividend stocks, there are a lot of ways you can create passive income. Passive income can help you break free from the daily chains of a 9-5 job and can allow you to spend time doing what you love. Let’s go over some of the ways you can earn passive income.
1. Rental Properties
Real estate can be a great way to earn passive income. Investing in properties and then renting them out is a great way to have a consistent stream of cash flow. Properties that are rented out for the long term can be great sources of consistent passive income and can help you achieve financial stability. However, this depends on the location and market conditions, as rent can vary from location to location and the condition and type of the property being rented.
While rental income is a great way to have a steady stream of income, it comes with its own set of problems. Maintaining properties and collecting rent from tenants can prove to be a time-consuming and stressful job. Additionally, maintenance bills, property tax, and other costs can be a bit stressful. However, rental income is one of the best ways to earn passive income.
2. Dividend Stocks
Investing in dividend stocks is a great way to create passive income. Dividend stocks are those publicly listed companies that offer regular dividends to their shareholders. These dividends are generally distributed to shareholders quarterly and can help one build a good source of consistent cash flow. Companies that offer dividends are generally well established and tend to value their shareholders, therefore they offer regular dividends.
Additionally, dividend stocks tend to be less volatile than growth stocks and also help in the diversification of an investor’s portfolio. Investing in dividend stocks is a great way to create a consistent stream of passive income.
3. Affiliate Marketing
Affiliate marketing is a great way for social media influencers, bloggers, and website owners to generate a consistent stream of cash flow. Affiliate marketing is one of the best ways to generate passive income without having to do anything. Platforms like Amazon offer their affiliate program, which is one of the largest affiliate programs in the world. These affiliate programs offer a commission on any orders placed via your affiliate links.
Once a visitor clicks on your affiliate link, any purchase they make will earn you a commission. This can prove to be a great source of passive income provided you have a well-established online presence where you have a lot of traffic. While building a large audience and generating traffic might take time, it is worth the effort as affiliate marketing is one of the best ways to generate passive income online.
4. Peer to Peer Lending (P2P)
Peer-to-peer lending or P2P is another way one can earn passive income. Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions.
As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower. According to Financial Education, this can be a great way to generate passive income.
5. Blogs & YouTube
Blogging and YouTube are other ways to create a consistent source of passive income. When it comes to blogging, if you establish a good reader base and have a lot of traffic on your blog, then it can turn out to be a great source of cash flow. Once you start to build traffic on your blog, you can monetize your blog with ads and generate ad revenue. Platforms like Google AdSense can help you monetize your blog and generate a consistent stream of income from your blog.
Apart from blogging, starting a YouTube channel is a great way to generate passive income. If you are skilled in a certain craft; for example, playing the guitar or you love to travel and explore new places, then starting a YouTube channel can help you create a consistent source of income. However, starting a YouTube channel is quite a challenging task and one needs to be passionate and dedicated and should not start a YouTube channel only for the money. However, once you develop a large subscriber base, you can monetize your videos and earn money without having to work actively.
6. Real Estate Investment Trusts (REIT)
Real estate investment trusts or REIT is another way to generate passive income from real estate without the hassle and stress of owning and managing properties yourself. Just like mutual funds, real estate investment trusts are companies that own commercial real estate that includes office buildings, warehouses, shopping centers, hotels and apartments, retail spaces, and more. REITs generally pay high dividends but they are complex financial instruments where liquidity is oftentimes a concern.
REITs can be publicly traded on major exchanges, publicly registered but non-listed, or private. The two main types of REITs are Equity REITs and mortgage REITs (mREITs). Real estate investment trusts can be a great way to generate passive income.
The Importance of Passive Income
Passive income is one of the best ways to achieve financial stability and build wealth. While money can be saved, invested, spent and earned, time on the other hand is precious and can’t be bought. This is where passive income helps one earn money even while they sleep. When you have multiple sources of income that do not require active participation, you can spend time on things you love or be with your family, instead of working every day to earn and meet your expenses.
Passive income is probably one of the primary ways the rich get richer, as compounding plays a major role in wealth creation. Passive income is the pathway to success and financial independence, as you can remain stress-free and not have to worry about paying the bills. It helps one break free from the shackles of a 9-5 job, where they have to work every day and live from paycheck to paycheck. Passive income gives you the freedom of time and helps you achieve flexibility in your life.
Additionally, it reduces your stress, anxiety, and fear of the future as you no longer have the pressure of paying the bills and daily expenses, as the passive income you earn can easily help cover that. It gives you the ability to live and work from anywhere while pursuing the things you love instead of doing what pays the bills. We at Financial Education believe that passive income is something that everyone should consider as it provides a platform for financial stability and growth.
Passive income is something that everyone should focus on as it is the pathway to success and financial freedom. With passive income, you achieve financial security in your life and you attain flexibility in your daily schedule. With no fear, stress, and pressure of paying the bills and meeting expenses, you can focus on the things you love and live the life of your dreams. While passive income might not be the answer to all of your immediate problems, it is the pathway to success and most certainly the foundation for wealth and happiness.
We hope that this article provided you with valuable information about passive income and its importance. However, before making any investment decision, always check the current market conditions and other factors that might affect the value of an asset class, as investments in the financial market are subject to market risk. If you liked this article, make sure to visit Jeremy Lefebvre’s YouTube channel “Financial Education” for more such informative content! Happy investing!