TL;DR – Passive income is the money you earn even without doing anything. It can be through dividends, interests, rental income, and more. It is money working for you.
Have you ever thought about spending your day doing what you love without thinking about your typical 8-to-5 job, but you also realize that you still have bills to pay? If so, then you probably need to start building your passive income.
You may have heard, watched, or read various media about the importance of starting to build your passive income through different sources and investments. Still, it can be confusing or even overwhelming at times.
I hope this post can help you, and your future self will thank you.
What is an active income?
Before we can fully define what passive income is, we must first differentiate it from active income.
Essentially, an active income is your earning from the work you performed in the form of salaries, payments, or commissions.
Full-time and part-time employees, self-employed, freelancers, and contractual workers are mostly earning some sort of active income.
Here are several examples. Suppose you’re an employee and you work for 40 hours a week until the foreseeable future. In that case, your employer will pay you a salary in exchange for that service (throw in the bonus).
If you’re a freelancer working on a specific project, your client will pay you on a per-hour or per-deliverable basis for the project.
If you’re a professional, like an architect, engineer, or doctor, you can earn after completing services, like drawing plans, constructing a building, and consulting patients.
The rule of thumb is that you earn an active income if you’re exchanging your time, energy, and expertise into an endeavor in exchange for money. If you stop working, your income will also stop.
What is a passive income?
Now that you know what an active income is, we can contrast it with passive income.
Passive income is the money you earn without directly or actively being involved in the day-to-day activity or operation.
Unlike the active income, where you need to work for every peso you’ll earn, passive income can be made even if you’re on vacation or sleeping. It can be in some investments, prior works, rentals, and more.
However, it is essential to note that passive income also requires work before you earn a considerable amount.
Basically, active income is you working for money, while passive income is your money working for you.
Why is it important to earn passive income?
Remember that you will grow old and will not always be capable of working forever. Years and decades from now, you will have to retire from more active engagements. When that inevitable day comes, how will you support yourself?
On the other hand, there are also a whole movement and group of young individuals taking passive income to the extreme, the F.I.R.E. (Financial Independence Retire Early) Movement. They believe in saving to the extreme to gain enough money to support their early retirement.
However, whether you belong to one of the extremes, either you want to maximize your working years or retire early, you will still have to gain some passive income.
How will you earn a passive income?
There are several ways to earn passive income, and the way to obtain them will also differ. However, it is essential to note that most methods to obtain passive income involve prior work or capital before it is self-sustaining.
1. Dividend Income
Dividends can come from different investments, but a common requirement is you need to be a shareholder or part-owner of a company. Dividend income can be paid annually, semiannually, quarterly, or even monthly.
You can invest as little as P1,000 to buy dividend stocks or P500 for PAG-IBIG MP2.
Remember that volume or capital is very important when investing in these types of investments before earning a living income, so you will have to invest a considerable amount of money first.
After receiving your dividend payments, you can always buy more shares to increase your holdings and, in return, pay you more dividends in the future using the power of compound interest.
2. Interest Income
In the past few years, there has been a rise in digital banks and neobanks that offer higher-than-average interest rates that can reach up to 6% interest rates per annum against the less-than-1% interest rate of traditional banks.
Some digital banks pay around 2% to 6%, but it can be higher if they offer promos.
You can maximize interest income by continuously increasing your savings without withdrawing so that the power of compound interest will do its job for you.
3. Rental Income
Maybe rental income is one of the hardest to attain because of the high upfront investment capital you’ll need to pay, but the return of investment is too good to ignore.
With the price of lots, materials, and constructions ever increasing, you will need to invest millions of pesos before you can erect an apartment, a boarding house, or a commercial space.
However, once the infrastructure is built, you can live off the rental income since it can be profitable for a long time.
The downside would be the location, especially if it is not accessible. Another problem is if your borders and renters are always delayed in paying. Lastly, natural calamities can damage your building, like strong typhoons and earthquakes.
You can earn royalties if you allow someone to use your prior works, such as copyrighted works, like books and songs you created. The use of inventions and patents can also be a source of royalty income.
For example, JK Rowling, the author of the Harry Potter Book Series, reached billionaire status in 2004 through mostly royalties from book sales.
The inventors of the sports drink Gatorade are said to surpass the billion-dollar royalty earnings from the sales of the drink that was formulated more than fifty years ago.
Another way to earn passive income is through selling ad spaces on your websites, setting ads for your YouTube channel, or directly partnering with ad agencies so you can monetize your creative spaces.
With the emergence of online media, advertisers are now focusing their attention away from the traditional T.V. and broadcast media and partnering with online brands and influencers.
Passive income is a great way to secure your future and live a more intentional life. However, it is not a simple task. Creating a livable passive-income portfolio takes a lot of effort and hard work and will usually take years.
Take one step at a time and learn how to maximize earning opportunities while sleeping.
It is also essential to understand that you are not building passive income so that you can avoid working for life. You need to shift your focus towards working on what gives you joy and provides value to people.
Happy investing and escape the rat race.
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