What is Passive Income? – I Will Teach You To Be Rich
You may have heard the term passive income before and asked yourself: “Is this something I could actually do?”
By now, you are well aware that living your Rich Life is not about just making enough money to last until next Friday: Indeed, you need to start thinking bigger and more long-term. While this could mean asking for a promotion (hopefully, with an increase in salary along with it), it could also mean discovering additional or alternative ways to make money.
What is passive income?
Passive income is money you earn that requires little to no effort on your part. Making money in your sleep? Yep, that’s passive income.
When you receive rent money from tenants or royalty checks from a Hollywood studio, congratulations, you’re receiving passive income.
Why you should build passive income
Why wouldn’t anyone want extra income — it’s money. Duh.
However, finding a way to build passive income requires creativity, patience, and even a bit of luck. Earning passive income not only provides you with an extra financial cushion by insulating you from the ups and downs of your day job, but it also helps you build resilience. It makes you stronger. It prepares you for the future, for the unknown.
Passive income helps you live your Rich Life.
Can you get rich with passive income?
Generally, no. However, like the Aesop fable of the tortoise and the hare, slow but tenacious wins the race. Steady streams of income, monthly or regularly, can certainly build up over the long term.
For example, $300 extra per month becomes $3,600 per year, which over 5 years becomes $18,000 or more if the money is placed in an interest-bearing savings account or investment account. Not bad at all for passive income.
Types of passive income
Ramit offers 8 different ways to invest in real estate, and many of these certainly fall under the category of passive income. Let’s have a look at two of these.
Buying a rental property and collecting monthly rent from tenants is often seen as the classic definition of passive income. Even if you do not buy the property outright for cash and instead take out a mortgage, the monthly rental income should cover the mortgage, taxes, insurance, HOA, repairs, and other fees — any money leftover serves as the passive income.
Of course, this isn’t exactly passive income — there’s still some work involved. Unless you hire a manager or management company to oversee the property — which, of course, adds extra fees and reduces any potential income — you’re going to be the one your tenants call when the water heater breaks (or worse).
Real estate investment trust (REIT)
If becoming a landlord isn’t your thing, there’s a more hands-off strategy to reap the benefits of owning real estate — owning shares in a real estate investment trust (REIT).
A REIT is a company that owns a portfolio of commercial real estate, including office buildings, retail spaces, apartments, and hotels. Shares of publicly-traded REITs can be purchased through a regular brokerage account, and you can reap the rewards of the real estate market without the headaches of being a landlord. You can rely on the REIT portfolio manager’s investing expertise to select the assets in the portfolio. When the REIT performs well, you make income — passively.
Most people do not consider investing passive income, but from a physical standpoint, it is (to be clear, income earned from investments is classified as portfolio income according to the Internal Revenue Service).
To save millions for the future, Ramit does suggest starting to invest early, including maxing out contributions to your company’s 401k and setting up a Roth IRA or other retirement plan. It’s also never too early to contact a financial advisor for assistance in setting up these accounts.
While your investment income will most likely stay in your accounts and get reinvested (you will not be cashing it out regularly to spend it on things like vacations or an online degree), rest assured that it is still income that is growing quietly and securely — and passively.
The ‘social internet’
There are tons of opportunities to leverage social media sites to make income passively.
Ramit offers ways to use YouTube, Instagram, and even good ol’ blogging to make extra money. Whether it’s selling products or services, your expertise, affiliate marketing, or ads, social networks and online marketplaces are well aware that regular folks like yourself are using them as ways to make a little extra money on the side, and that’s perfectly OK.
So … is passive income really passive?
Be careful not to take the word passive too literally. You still have to do some work to make that money.
As Ramit pointed out last year regarding the truth about passive income:
1. Passive income is absolutely possible.
2. It does, however, require a lot of effort.
3. It can give you incredible freedom and flexibility.
4. Too many people pursue passive income opportunities without understanding *why* they want it in the first place.
5. Decide whether you want to stay small or go big.
Ramit admits, “I believe that making money without doing work is great, but I know there really is no such thing.”
So does this mean you have to abandon all hopes and dreams of creating a passive income stream? No. It just means that you have to decide how much time you want to put behind a side venture — hey, it might become your side hustle — to generate income and whether the benefits outweigh these efforts and risks.
Still considering options to make passive income? Ramit has no shortage of online business ideas and ways to get started with online investing.
Remember that pursuing a side project for passive income should still provide you with flexibility and freedom. If it’s providing just a tiny bit of money but you find yourself losing sleep and falling behind with other life commitments, then it’s not passive income at all.
Trial and error are perfectly fine, and you are not a loser if it doesn’t come quickly. Just like passive income can grow steadily, your passion can as well. You’ll be on your way to living your Rich Life.
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