I am pretty sure you’ve heard about passive income before and if, for any reasons, you haven’t I am going to kick off this income guide by clarifying what I mean by passive income. Of course, there are other definitions but you can stick with the one I am giving you in this guide.
I prefer to define passive income fairly broadly as revenue you earn even when you aren’t actively working. Another name for passive income is residual income.
By contrast active income is money that stops coming to you when you stop working. If you get paid a salary and you quit your job or get laid off, most likely you’ll stop getting paid. You may get a severance package to help you transition, but your boss won’t keep paying your salary unless you keep showing up for work.
Similarly, if you do contract work for clients who pay you, and if you’ll stop getting paid if you stop doing this work, that’s also active income. You may have more flexibility with contract work, but you still have to do the work to receive your payments.
With passive income, you would keep getting paid whether or not you do any meaningful work. You may do a lot of work up front to get the ball rolling, but eventually you reach a point where the passive income stream gets activated.
At this point you can essentially stop working on this income stream if you so desire, and more money will keep flowing to you through this stream regardless what you do or don’t do.
Passive income doesn’t mean one-time lump sum payments such as an inheritance or the sale of an asset like your home or some stock you own. Passive income is a source of income with some sense of continuation over time.
Passive income doesn’t mean permanent income. Some forms of passive income may last a few years. Other forms may keep going for decades or even for centuries across multiple generations. But all forms of income eventually dry up for one reason or another.
Passive income doesn’t mean 100% secure income. As Helen Keller wrote, “Security is mostly a superstition.” Some forms of income are more secure than others, but there’s always a risk element.
For any income source, there’s a non-zero probability that something could destroy it. This is one reason it’s often wise to create multiple streams of income, so you can reduce the risk that all of them will fail simultaneously.
Passive income doesn’t mean perfectly 100% passive with no maintenance required. With any income source, you may need to do a little maintenance to keep it going.
Sometimes this is really easy and only involves checking your mail and depositing checks. Sometimes it’s even more passive when the money is deposited directly into your bank account every month.