Do you wish to work till you are sixty? Your father did, and maybe your grandfather too. But do you? The answer to this question will mostly be a resounding NO unless you are doing something you are truly passionate about. An early retirement is a dream for many, but very few actually do something to achieve it. The only way you can retire early is if you are able to manage your expenses post-retirement without working. And how do you expect to do that? The only way to get cash in your hand without working is by creating passive income.
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But what is passive income?
The hint is in the name. Passive income is something you earn passively, meaning an income that doesn’t need your ‘active’ participation. When you do a job, your income is directly dependent on your active participation in the job. For the days you don’t go to work, you don’t get paid (unless those are paid leaves). The same applies for running a business too. You need to actively contribute to the business to make money out of it, or in better words, draw a salary out of it. (Unless you have children or partners who run it for you, in which case you may get money based on your shareholding in the business, which isn’t actually active income).
But passive is the opposite of active. So passive income is where you get paid even when you are not involved in the work itself. If you are wondering how it happens, you need to only look at your bank account. The money you put into a bank generates interest for you, and you don’t need to work in the bank or devote any time to make that money. You only need to invest. The same is the case with dividends you get from your shares. (Point to note: Passive income is loosely defined and in some countries, returns from portfolios are not considered as passive income for tax purposes. But in the general sense, these are passive incomes too)
So, in short, passive income is where you make money out of your money or assets, and not your time. It is easy to see, hence, that passive income can compliment your life by giving you additional revenue streams in addition to your primary job or business. Passive income can help you achieve financial independence or even early retirement by providing you a steady income stream for your expenses so that you don't have to "actively" work.
How to generate passive income?
The primary requirement of generating passive income is creating/building/establishing something that pays you even when you are not giving it your time. Fortunately for you, there are many ways to do it.
Investments:
Investing is the most basic and the most important step towards financial independence. (Read this to know why investing is not really a choice) Investments like stocks, bonds, fixed income instruments, fixed deposits, etc. create passive income by generating returns at different rates based on the kind of investment. You can park your money in any of these instruments and generate passive income either by interest or dividends. If you are in capacity to keep the money without taking out the interest for years, do that and reap the benefits of compounding.
Real estate:
Real estate is another form of investment and a good way to generate passive income through renting. In addition to the rent, the price of your real estate also appreciates over time (in most cases) which gives you additional returns in the future. Be sure that you study the rental yields for any properties where you are investing mainly for the goal of seeking rent.
Pro-tip: If you don't have a large capital to invest in real estate but still wish exposure to real estate market, REITs are a good option.
Create content or art:
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You may have read about the six stars of the popular show FRIENDS who earn millions even today solely by the royalties from their show that ended decades ago. Similarly, J.K. Rowling still gets paid if you buy a Harry Potter book today.
Good content can continue to generate massive passive income for years to come. The thing about content (films, shows, books, website, youtube videos) is that you have to make it once and it continues to pay even in the future for as long as it is being consumed and you have the ownership/copyright/royalty rights for it. This does not change the fact that you have to continue creating content to increase your visibility or become an even bigger brand. But content once created can continue to generate income without much participation from you, hence it is a form of passive income.
So, if you have the talent or passion to create or teach or show something to the world, start now. It doesn’t have to be perfect right away, but if you are able to learn and grow and make good content, you may hit the jackpot.
Some of the best content creation methods are:
1. Films or tv shows or short films
2. Music (gold mine of royalties)
3. Books, both fiction and non-fiction
4. Blogs and websites
5. Youtube or any other video streaming platform
6. Photography
7. Online courses
8. Podcasts
A case can be made that even Instagram or twitter can be a passive income source. However, personally, I feel they need much more active participation than other methods listed above. But they can definitely help create an audience for your main content as well as act as good tools for promotion.
The Bottom line
Passive income is your path to financial independence. It can compliment your day job, and provide you a good additional revenue stream to boost your personal finance and provide a cushion for emergencies as well. There are multiple ways of having passive incomes and with the world’s largest market at your disposal- the internet- it is simpler than ever.
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