Why in the world should you consider Passive Income?

Submitted by H.K. on Tue, 11/10/2020 - 12:30
While work is noble, wouldn't it be nice to be able to generate a decent income even when you have taken a break? Knowing that your income does not require your everyday effort input is quite liberating .
On the beach

Whenever we think of earning an income, the options that come to mind mostly have to do with the work that we can do and get paid for it; this is not a bad starting point because indeed there is a lot we can do with our skills and ideas that can bring us money. Once we have identified what we can do with our skills and time, we can then decide to get a job and be employed by someone or some organization or we can become self-employed and offer our skills and time in exchange for money. Many of us are therefore either employed by someone else or are self-employed. The kind of income that we earn when employed or self-employed requires our active presence and participation and therefore when we do not spend time or effort, we stop to earn. As an example, a doctor who runs his consultancy clinic puts in time and skill and clients pay him/her in return. If the Doctor decides to close the clinic for a time because he/she is indisposed or just decides to take a rest, he stops earning; this doctor is self-employed and is earning active income.  Let us also look at the example of an employee in an organization. The employee comes to work Monday to Friday from 8 to 5 and trades his time and skill for a salary at the end of the month. If the employee decides to resign from his job or is laid off, the income from that organization stops even though during the time of employment the employee was a brilliant performer. As you can see one clear aspect of active income is that in order to earn, you must actively spend your time and skill in the task and when you stop, the flow of income stops.

Wouldn’t it be nice to earn income that does not only come when you spend time and expertise and cease when you stop? This is where passive income comes to the rescue.

Now first off I would like to clarify that passive income does not mean that you get money for doing nothing but it entails putting in strategies that enable you to continue earning beyond your time and effort input. I also do not suggest that spending time and putting in skills into a job is bad; in fact work is noble and regardless of how much money one is making, many people would still find satisfaction in doing work that is fulfilling. I personally would not find satisfaction lying on the beach all my life even if millions were flowing into my bank account.

One obvious benefit of passive income is the ability to diversify and have multiple streams of income. Many people know too well the rude awakening that they encountered when their employer showed them the door and they realized that they can no longer enjoy the life they were living when they were employed. The fact that the only source of income for such employees was the employment salary means that when employment ended, their flow of income stopped. There are however other employed people who, in addition to their salary, have other sources of income which cushion them (albeit partially) when their main source of income dries up: the practical way for such persons to be in employment and at the same time have other income streams is when those other income streams are passive. As you can see, in passive income you are not being paid for the time and effort you are putting in and therefore it is possible for multiple streams of income to exist at the same time.

Types of passive income

The two ways of making a passive income that I know of are starting a business or making investments. Let us look at the two strategies in more details.

Starting a business:

A business is a venture that offers products or services and generates income as a result. As regards passive income, it is paramount to distinguish between a business and self-employment. There are many people who are in self-employment but incorrectly consider themselves as business owners. When determining whether yours is a business or self-employment, one question to ask is whether in your absence the business can make money and if the answer is No, then may be your venture is self-employment.  Using the example of the doctor that runs a clinic, we can see that the doctor’s time in the clinic is what translates into an income. If the doctor, however, were to employ other doctors to offer services at the clinic even when he is not available, then the venture moves from self-employment to a business and therefore becomes capable of generating passive income. 

Making investments

Investments are a good source of passive income where one puts in money and gets a return from the amount invested; the invested money effectively "works" on behalf of the investor to generate an income. There are many types of investments that one can put their money into without being required to spend a lot of time and effort to earn an income.  It is however important to understand the details of the investment and the people managing it to avoid losing your hard-earned money.

Both starting a business and making investments require a seed to be planted which grows into the desired objective; the seed is either putting in money or skills and time. To start a business, one needs to put in money as capital and/or skills and time. On the other hand, making an investment requires one to have the money to invest. 

How to start

All of us must start from where we currently are. If you are employed and have a dream of making passive income, a good starting point is to set aside a portion of your salary and save it so that it can eventually become the capital for your business. You can also start putting the money in an investment so that it grows as you accumulate your business capital. If your plan is not to start a business, the returns from the money you put aside in an investment is passive income already!

If you are self-employed, I would encourage you to work towards transforming your self-employment venture into a real business so that you can start enjoying passive income from it.

As you can see, it is possible to transition from earning only active income to passive income. The important thing is to begin making that transition as soon as possible starting from where you are now. Remember also that passive income is not a get-rich-quick strategy; I would highly discourage you from getting into get-rich-quick schemes as they are not good for you and only end up in ruin. To conclude, I will leave you with this nugget of wisdom: I once attended a meeting where the speaker said that “Only governments and counterfeiters make money; everybody else must earn it” ; happy earning!

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