July 25, 2024

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Passive Income? The Basics

Passive Income? The Basics

The ‘Rat Race’ as popularised by the ‘Rich Dad, Poor Dad’ guru Robert Kiyosaki is what most of us are in when we have to get up every morning and go to work.

Although a lot of us may be happy with this situation, very few of us realise what we are doing with our lives and think that there could be a better way of earning a living and ‘getting by’.

Work is essentially selling your time for money at a fixed rate, which is your salary. For the economy to work as a whole, the employer buys your time and from it, gets back more than he is paying you, so the old adage applies ‘You, as an employee, are working to make your employer rich’.

To start to break free from this ‘linear’ method of making a living, you need to learn to supplement your income with ‘additional passive income streams’. Additional, because they may be in addition to your job salary and passive because they ‘take care of themselves’ and work in the ‘background’ of your life.

Passive income usually involves a bit of work to set up, and then it can generate a regular income (which can be forever!) by doing a little ‘work’ to maintain it.

The best, although not the simplest example of passive income, is renting out property. The drawback with this is that you have a large initial outlay of capital. Real passive income ‘streams’ start from no money outlay and build themselves up into substantial ‘rivers’ of income over time.

The idea is that when you rent out a property, tenants pay you rent on a regular basis, so you can actually work out how much you are going to make each month. This is fixed passive income. The initial bit of ‘work’ is that you need to set up the rental property with furniture etc., decorate it and then advertise.

As a bonus, if the property market is buoyant, you will get capital appreciation on the asset as well as getting rent, so this is doubly good. The capital appreciation is not part of the passive income equation though.

As stated above, you will need to do a little work to keep the project going – replacing furniture, paying bills and maintaining the property, but generally, the work is minimal – the important thing is that it does not require continuous attention, so you could go off on holiday and still be earning rent from your property. This is the real benefit of passive income – it works when you don’t!

Another example of passive income is buying and selling stocks and shares. Now I know this involves risk, (As a lot of passive income ventures do) but the idea is simple. Buy shares in a solid company that you’re pretty sure will be around in the next few years, and hold them.

The important thing to learn here is that the passive bit of the income is any ‘Dividend’ paid from the shares, not the increase in the value of the shares. As in the property example, there may be a substantial increase in the ‘Capital Appreciation’ part of the equation, but the passive bit is in the regular dividend payments. These will vary, so this model is not as fixed as the rent in the above example.

Both of these examples require lots of money up front, but are not the only examples.

Now that you are aware of the term ‘Passive Income’ when it comes to money, you can start thinking of ways to make money without having to ‘work’ for it!