For the majority of people in the world, they will never understand the basics of passive income; in fact they will never even have a basic understanding of financial education. Next is the type of people who have heard of passive income but have no understanding of what it is and whether it can even be achieved. Because of this, you always hear the question is passive income real?
Meaning of Passive Income
Passive income is the generation of a return through a fairly inactive process. The idea is that once you set something up to generate passive income – it will work diligently for you over the next couple months or years. It has to be an inactive process because otherwise it is not passive income and falls into the active income category.
Is Passive income real?
Yes – absolutely it is. Even in its simplest form you can generate passive income through holding an online bank account and generating interest from your savings. This is a completely passive income stream and one that is the perfect example of how passive income is real. If you want to start looking at generating more passive income or having various passive income streams then you need to expand into other ideas that may have a bit more work involved behind them. For example if you want to generate passive income through ETF’s then there is a little more work involved, only in the purchasing of the shares. Again once you purchase them you just sit back and watch the passive income come in the bank account. It is pretty simple.
Why do people not understand how important passive income is?
This comes back to financial education and I have to admit this was me at one stage. So I am trying to think of the exact reason why I never understood its importance. I think the main reason is ignorance, you go through your life earning paychecks and then spending those paychecks and you content with the lifestyle you are living. Only once you start to question why am I doing this all do you start to look for information on generation of wealth and then this leads down the passive income path. If you are brought up in a family who live this same lifestyle and are not entrepreneurs and have worked 9-5 jobs there entire life, how are you to know that there is otherwise. You are brought up thinking this is the way life is, so settle down and accept it. But it doesn’t have to be that way, there is something called passive income that can help you along the way. It won’t solve your problems instantly but in the long term it can help you move in the right direction.
How you can argue that passive income isn’t real?
There are two things I think of when I read this statement
1) to argue that passive income isn’t actually passive, it is active.
2) that passive income isn’t worth it.
Firstlya lot of “passive income” streams which I have listed in my top 30 passive income streams, have some element of activity to them. When I say that I mean that initially you have to do some work at the beginning and then you can sit back and watch some returns come in. For instance, if you were making a website and wanting to generate passive income through Google AdSense, in order to generate that income you need to make a website. And that website can take time to generate. Hence the argument here is that the income generated isn’t really passive is it?
Secondlythis is something which Gary VaynerChuk argues a lot, which is don’t focus on passive income. It will only generate a small return if any, and there is a much bigger and better result that can come about if you don’t focus on passive income. For instance with the same website example as above, if you were to build a website purely to sell in 3 years there is no way you would care about passive income. You could potentially sell the website for $50K vs the $100 a month in passive income you could receive over 36 month period equaling $3,600 in income. Which would you rather take? The $3,600 or the $50,000? This is the argument. Same thing with real estate, would you rather generate passive income through positive cash flows at the cost of capital gains, or would you rather generate capital gains over positive cash flows. To put some context here you can use the same figures but with an extra 0 on them to make it more realistic. I.e. $1,000 a month in passive income for 36 month period or $500,000 in growth over the same 3 year period. These figures are a little unrealistic but you get the point. Sometimes passive income can be a complete trap.
I have written more about the dangers of passive incomein other articles. I think the overall message I am trying to pass through here is that you need to assess based on your own financial situation what you want. If you are after a supplement to your income because you can’t work due to an injury, then passive income is suitable for you. However if you want to maximize your wealth then perhaps ignoring the passive income and seeking capital gains is more important. There is no right or wrong – just keep in mind what you are sacrificing from your choice.
Want to read more?
If you are like me and want to read all there is one generation of passive income, then follow this link through to my Top 30 Passive Income Ideas. Here I list out similar ideas to the one above, and go into detail explaining how to generate passive income through them.
I also have my Top 10 Passive Income Book list that I save you hours and hours of reading and take the very best lessons I learnt from each book.
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