The definition of passive income
Posted by lamgy on November 17 2007 15:39:13
The main topic of this website is passive income. If you’ve never heard of passive income, or are confused with how it works, don’t worry. There will be lots of information and explanations here for you.
The word passive essentially means inactive. As a result, the idea is to create income but remain inactive or as close to inactive as possible. For example, once you have established a business and have people to run the business for you, this is passive income. If you take an extended holiday or retire, you will still earn an income, but you are not physically doing the work. The one problem with this example is that once someone establishes a successful business he/she can be very committed and reluctant to step away or delegate the decision making responsibilities.
As everyone knows, income is really revenues minus expenses. In order to be profitable, you need to earn more in revenues than the costs incurred to make the revenues. In a family, where both partners work, there are generally two incomes. In some cases, two incomes may not be enough to buy the things that people want and/or need. As a result, there are other ways to make money that can increase your overall income, this is known as supplementing your income. One way to supplement your income without increasing your work load tremendously is to create passive income. This will allow you to generate regular income without on going effort. For example, you can buy a rental home in Texas.
For example:
You rent a small house for $1,000 per month. If you spend $400 in renovations and other costs, you will earn a passive income of $600.
Generally, in establishing passive income there is initial work to setup the project or investments costs to launch. In this example the $400 in renovations would be the initial investment. Initially, it may seem like a lot of work and may seem quite risky; however, there should be less investment and work to be done as time goes by. In the example, you will note that once the property in renovated and rented, there will be less investment and/or work required to maintain the house, but the income remains steady. This is the definition of passive income, to generate income where the effort required to produce the income diminishes over time.
Passive income offers a lot of potential for people wanting to increase their self worth and generate long-term financial stability, but the process can be time consuming and is a lengthy process. Although there may be great opportunities, you should understand the risks and know that patience is essential in establishing regular passive income.