Passive income is in many ways the dream of entrepreneurs: income, received on a regular basis, with very little effort required.
According to the IRS, there are three types of income: active income (earned), passive income (unearned) and portfolio income. Passive income comes from either rental properties or business that you do not have an active participation in.
What are some of the businesses that don’t require active participation?
- Bank account interest
- Royalties from book publications or patents
- Property rent
- Internet advertisements on website
Passive income is taxable, and is reported to the IRS as income. (Passive does not equal free.)
There is a growing interest in developing passive income streams – what wouldn’t be attractive about the idea of earning money while you were enjoying yourself on a dream vacation? The problem with passive income is that many people fall into the trap of defining passive as “not doing anything”.
While it is true that passive income is generally generated without any additional effort on your part, it requires management and growth if it is to be a sustainable form of income. The royalties from your book sale will eventually run out, and if you have not been actively working on your next book, your passive income stream will dwindle away. Your rental properties may generate regular monthly income, but unless you maintain the property and keep tabs on the tenants, you may end up losing money repairing damage and neglect.
Establishing avenues of passive income may eventually result in the ability to solely depend on the passive income, but will require years of effort and attention to do so. In addition, developing new sources of revenue is a part of the creative and meaningful purposes of life. Some of the most successful people also tend to be the busiest – not because they need the wealth, but because they need the activity. Creating success breeds more success, which leads to more creative means of generating income.
A well balanced investment will include elements of passive and active income, as well as portfolio income that will generate dependable streams of revenue.