Personal finance management is a lot about managing income and tracking cash flow. So having a deeper understanding of your income and your potential income would help you to achieve your financial goals.
Controlling expenses is much easier than controlling income, that is why whenever you think of managing the money you always think of budgets and why the internet always advise you to have and follow a budget. As always my perspective is that budgets always comes second. There are more important things to focus on and budgets are just clouding that.
So let's talk about passive income. If you are new to the word passive income, think about the opposite of passive income, which is active income. Typically, active income is trading your time for money. Remember this clearly, it is time that you trade for money if it's an active income stream. For example, having a 9 to 5 job and getting the salary is an active income stream.
But imagine you don’t have to continuously trade time for money, but money will just flow into you because you have “something”. Yeah, this is passive income.
The idea of passive income is that you have something, which continues to bring you money without spending your time. This “something" which I referred to is called an “asset". The best example of passive income is renting a house. Say you have a house, and you rent it for $1,000 per month. Do you spend time? No, you will just have money coming in because of that house. In this case, your house is your asset that generates passive income. Simply this is the whole idea of passive income. But these can simply be digital assets too such as an educational course. Where people will pay you continuously and take that course and you don’t have to spend any time.
Renting is a very common passive income stream. But one of the most common passive income streams in the world is investing in the stock market. Why? Once you invest, you get income from those stocks. But people never look at this as a form of passive income and rather look at this whole complex word called “investment" and there is risk and volatility involved.
The key here is to understand that to generate passive income your need to have an asset, and obtaining this asset is the task. You might have to spend money to get this asset or spend time, money both to get this asset. But once you get it, it will ideally continue to bring in money.
What are the risks of passive income?
This really depends on what kind of assets you have, taking the example of the house again, it is very possible that nobody wants to rent the house, it is possible that the house will be destroyed by a natural disaster. This is the case in stock market investments as well, typically these investments carry some amount of risks (again depending on which stock) and that is the risk you take in passive income. So you might end up spending money to obtain an asset and could end up having difficulties in generating income. But this is not to be discouraged but rather to be informed and cautious.
So why do you need passive income?
If we look at the full timeline of our life, at some point we will have to stop trading time for money, which is usually called 'retirement’. Many of us are taught to save money for retirement and after the point where you cannot trade time for money, you spend from your savings. Or while you are working, both you and the company contribute to something like a Pension Fund, which might be paying you after you retire (which is also a passive income asset). But if you start obtaining some passive income assets from now onwards, it will help you to create a no time commitment income stream.
What is the best way to get started?
There are many ways to generate passive income, just Google “Passive Income Generation 2022" you’ll probably find a lot of timely ideas. But mainly through this article, I wanted to give you a deeper understanding of what it really means so you are more informed and do it in a sustainable manner. But my final advice is that, choose an asset that you like and enjoy having and aligned with your values. For me creating educational content is something that I like and I enjoy and aligns with my values, so I choose that.
