When it comes to living your best life, it’s much easier to talk the talk than it is to walk the walk. You may have big plans, but when that alarm clock goes off each morning, you may hesitate. You must have the courage to get up and tend to your responsibilities.
Financial pressure is one of the biggest elements that can get in the way of living a truly independent and fulfilling lifestyle. These financial worries can be a nagging concern that follow you right into retirement, too.
The lifelong struggle with money makes financial independence one of the most valuable elements to help you live a better life. One of the best ways to achieve freedom both now and in the future is by developing a solid source of passive income.
What Is Passive Income?
Passive income is a term that a lot of people use, but what does it actually mean? In many investors’ minds, passive income implies the ability to sit back, relax, and do nothing while you make money — and, in a certain sense that can apply. But it’s an incomplete picture.
At its core, passive income is the ability to earn a consistent income that doesn’t come from an employer or a contract. In other words, you aren’t being paid for a pre-defined amount of effort or time. It’s the opposite of being paid by the hour, per unit of work, or even on a salary. Instead, it is a stream of income that generates itself regardless of the specific amount of resources you apply to the asset at any given moment.
The IRS specifies that passive income can come from one of two different places. Either you can generate income from rental property or from a business in which you do not actively participate. Passive income can include anything from purchasing a dividend stock to owning a coffee shop that you don’t manage on a daily basis. (There’s more on different kinds of passive income below.)
Critically, The Motley Fool also clarifies that getting paid without working may sound too good to be true – and it is. The investment company states that “Passive income doesn’t materialize on its own; it requires an up-front investment of money and time.”
Passive income may not require work over time, but it usually comes with a significant amount of effort and resources up front. Time, money, blood, sweat, and tears are all common investments that go into establishing streams of passive income. These elements of passive income are often required at a point when you’re making little to nothing in profit, too, which begs the question, is it worth it?
The Benefits of Passive Income
There are several key benefits that come from passive income. Here are just a few of the biggest ones to consider.
Passive Income Lets You Genuinely Rest in Retirement
Retirement is a wonderful way to wind down after a busy career — but that doesn’t make it a given that you can rest. If you can’t generate enough wealth over the course of your life, chances are you’ll end up working through your retirement in one capacity or another.
If you strictly stockpile a big enough pile of savings to survive retirement, you risk not having enough when the costs and curveballs of actual retirement living kick in. By focusing on self-perpetuating streams of income, you can finance a comfortable retirement and even maintain (and in some instances grow) your base wealth in the process.
Passive Income Lets You Choose to Work
The goal with passive income is to be financially free — not lazy. You’re not trying to avoid work entirely, but rather the need to work due to circumstances out of your control.
LifestyleInvestor, Justin Donald, refers to this as living a “job optional” life. Donald adds that this means you need to “have a firm handle on maximizing your money and have financial confidence that will ultimately seed your economic well-being.” In other words, you need to think ahead with your finances and invest in things like passive income streams.
Passive Income is More Predictable
Don’t misunderstand. There are plenty of ways your streams of passive income can fluctuate over time. However, since passive income is a proactive activity, you’ll have time to react and maintain control over each situation.
In contrast, working for a paycheck leaves you at the mercy of countless external factors. Your age and health can factor into things over the course of a career. There’s only so much time you have each day. Your daily performance can impact your paycheck, too.
The 3 Most Common Forms of Passive Income
Understanding the freedom that passive income provides is an enlightening experience and is the first step. If you want to let passive income improve your quality of life, you need to put in the grunt work to establish those income streams.
Fortunately, you have a few options to choose from. Here are the three primary forms that passive income can take, along with a few examples of what each step can look like.
Purchasing Passive Income Streams
The easiest way to build up passive income is to buy it in a pre-established form. This purchase requires minimal effort from yourself. However, you’ll need a solid amount of initial cash to make it work. A few examples of purchasable passive income include:
- Dividend stocks: These are stocks that generate consistent dividends for their owners (ideally while improving in value, as well).
- Bonds: These are personal loans that you give to governments and corporations and which they pay back to you with interest over time.
- Rental Properties: Renting a property can generate significant returns, and hiring a management company can make it a low-effort activity.
Purchasing assets like these is a great way to streamline a passive income setup. If you have the resources to invest in pre-established streams of income, you can create a stream of predictable, low-effort revenue in no time.
Creating Passive Income Streams
This is the most exciting form of passive income. It includes a huge variety of options, all of which revolve around one concept: making your own product or service that generates cash. The possibilities here are literally endless, and can include:
- Blogging: You might have subject matter expertise or a particular perspective or style that attracts others. Turning your expertise into a blog allows you to monetize your passion through advertisements, affiliate marketing, and even coming up with your own product lines.
- Creating a business: Entrepreneurs can create passive income. However, creating a business isn’t always an option for entrepreneurs. A freelance writer, for instance, still needs to compose text to get paid. However, there are many business models that you can turn into passive income. Even something as simple as shoveling driveways can become passive if you grow enough to hire others to do the work.
- Writing a book: Landing a book deal or something similar (like writing a piece of software) can lead to a stream of residual income through royalty sales.
The exciting thing about creating your own passive income stream is that you are in the driver’s seat. You can choose what to pursue and even align your efforts with your personal passions. Just remember to do your homework and make sure you’re pursuing a viable business idea beforehand.
Supporting Passive Income Streams
If you already have a certain amount of wealth built up, another simple way to build up passive income streams is to look for other ventures that you can invest in. This, in effect, unifies the first two options. You take existing wealth and invest in a creative idea that someone else is turning into a profitable business.
For instance, you might become a passive partner in a brand new startup. You could also buy into a business that is well-established but has room to grow. You can even look into something like peer-to-peer lending. This allows you to become a private bank that others can use to borrow and repay loans with interest, often to fund their own business ideas.
Living Your Best (Financially Free) Life
Living a fulfilling life is a complex and intricate topic. It includes emotional and mental stability, a deep sense of peace, and the ability to cultivate contentment. It also requires self-awareness and being in the present. In other words, a happy life doesn’t revolve around money.
Nevertheless, there’s no doubt that financial freedom can be a key element in helping you gain a higher quality of life. The ability to remove financial concerns from the picture opens up the door to focus on other things that matter. And one of the best ways to achieve this financial freedom is through passive income.
Establishing passive income streams earlier in life provides a healthy, recurring source of revenue throughout your retirement years. It isn’t a finite source of wealth, like a savings account or a pile of cash, which means it can maintain itself and even grow if managed well.
Money may not be the focal point of happiness, but the absence of financial concerns certainly facilitates a happier, healthier lifestyle — especially when you’re trying to wrap up a career and enter a restful retirement. So, assess your current wealth. Do you have streams of passive income feeding into your savings? Are you looking for more of these options? Being proactive about passive income now can help you live a better life in the future.