Passive income is sweet.
It's income you derive without working. You just sit there and collect oversized checks.
It sounds alluring, doesn’t it? But is passive income really that easy? And if so, how do you sign up for some of that lovely stuff?
How to create passive income
Let’s answer this by way of a few examples. Let’s say you buy some rental property and then hire a manager to do all the work. The deal is that you will pay the manager a fee and they will take care of everything. You won’t get any phone calls or deal with any of the problems. The only thing you have to do is cash the check the manager sends you after paying all the bills. That is a good example of passive income.
When you collect dividends from shares you own in a business, that’s another example of passive income. You don’t get paid wages. You get paid simply because you own the shares. Tasty.
And you can also create passive income by loaning your money to a bank (buy CDs), a corporation (corporate bonds), or lending your money to an individual. The check the borrowers send you is passive income.
Is it really passive?
While collecting checks is easy, you actually have to put in a lot of work before you receive passive income. That’s right: You have to work hard to accumulate the cash in order to buy something that will create that cash. Once you accumulate the capital, you have to do your homework to make sure you invest in the right passive income alternative. Finally, you have to keep your eye on what’s happening at all times. The last thing you want is to have your passive investment turn to mush by neglecting it.
So passive income is really "ownership income." It is compensation you receive simply because you own something. Of course you have to tend your garden, but other people are really doing the work. That’s why most people love passive as opposed to active income.
Why this is important to you even if you have very little capital
Unless you plan on working forever or will be able to survive on your Social Security, you’ll need passive income to replace your active income once you retire.
That means you need to build up equity in real estate, stocks or mutual funds, or a business. The other alternative is to buy bonds or lend your money out. You can go any way you want — or you can take advantage any number of these options.
But regardless, the best way to build a worry-free financial future is to start building passive income streams now.
