What is Passive Income?

What is Passive Income?

02-01 What Is Passive income?

If you’re not familiar with passive income, let’s start by creating the definition: “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.

“When you’re collecting passive income, your money is unproportionate to the hours you work. “

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 - your boss won’t keep paying your salary unless you keep showing up for work.

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 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 cheques.

Sometimes it’s even more passive when the money is deposited directly into your bank account every month. But then you may still need to report this income and pay taxes on it.  Passive income is really a spectrum of possibilities.

Some income streams are very passive. Book royalties are one example of this.

Write a successful book and regardless of what you do or don’t do, most likely the publishing house will keep selling your book and people will keep buying it. 

All you need to do is deposit the royalty cheques.

You don’t have to process orders, interact with customers, or do any on-going marketing—now that’s passive.

Other income streams are semi-passive. You may need to do some work to maintain them even if you’re not working for a salary.

For example, if you own a house and rent it out, you may earn passive income as rent payments from your tenants.

But you may also need to invest some time, energy, and money to maintain the property, to find new tenants when the place goes vacant, and to handle the mortgage, insurance payments, and property taxes.