Passive income, residual income or multiple streams of income?
A few years ago, in a TED talk, Malcolm Gladwell talks about "abundance" in the world and how it's our generation's responsibility to create an abundance for the next generations. What does that mean? Well, one definition of abundance is a multiplicity of something or many things. So by creating more than one source of income you are able to create an abundant life! One way you can do this is through passive income which is receiving money from your business that's not related to working full time (or even part-time) in that company. This comes from operating your company without any employees and using it as a revenue stream instead of taking wages as all other employees often do.
Passive income is the most underutilized form of money in this country, according to a survey of 4,000 Americans by financial research firm Spectrem Group. Why? Because most people don't know about it. They are not aware of the different ways they can generate income from their investments and businesses without having to spend time doing it or taking on any employees.
Passive income is also more accurate for determining your true net worth than other types of investments. So let's look into what passive income actually means and how you can generate it for yourself as an investor in the stock market.
Passive income is defined as any income that isn't generated by working an hourly job, being a salaried employee or doing contracts. The most common types of passive income are:
1. Real estate, royalties and rentals
2. Investment services, such as financial planning and investments
3. Business development such as franchises and partnerships with other people
4. Passive investments in stocks and bonds
5. Franchises and businesses of all kinds
6. Online sales like eBay or Amazon (or other online platforms)
7. Unconventional passive products such as metals and gems
8. Passive businesses without employees include consulting agreements or independent contractors who sell your product (like the website designers on Envato).
9. Passive businesses that use a multi-level marketing strategy
10. Passive businesses that sell a physical product, like the craft store Hobby Lobby, who sell arts and crafts supplies.
11. Distributing products on eBay or Amazon (this is a combination of #'s 4 and 6)
12. Currency conversion
So how much passive income can you generate per year for yourself? Well, according to statistics compiled by the US Government in a study titled "Sources of Personal Income", the average American generates $1,000 to $4,000 per year in passive income that's not tied to an hourly wage or salaried job. This is directly from their tax returns which means that even people who make $100K per year were only generating about $3K in passive income.
But you can generate a lot more passive income if you increase your income and learn different ways to do so.
The Spectrem Group study also shed light on other forms of income, both part-time and full-time careers where people are taking a job to make money. The numbers show that the average American generates $25K to $100K per year in labor income (meaning they get paid by the hour) and $20K to $100K in capital gains (defined as profit from investments or stocks). That means there is an average of almost half a million dollars a year in capital gains for the average American, and less than half as much coming from labor income. So while the numbers show that people are generating a lot of income, it's not all from working full-time jobs. The types of income that make the most contribution to our overall economic status are those that are passive, like real estate, rental payments for property owned or capital gains such as stocks and bonds.
As an investor you want to look at the passive income sources and determine which will give you more earnings over time, when factoring in volatility. Being a mutual fund or stock investor can be profitable through frequent buying/selling activity but this type of activity can also result in high fees for trades made.
So where do you start if you're interested in passive income?
First, you must understand the various forms of passive income and how they work. Some examples include: owning real estate and renting it out, multi-level marketing (such as selling or endorsing products – as in network marketing or direct sales), selling stocks or bonds that pay dividends, collecting royalties from copyrights of your books or music and currency conversion (such as the foreign exchange markets).
There is a different way to generate passive income that is much more difficult to accomplish but can generate higher amounts of money. This method involves creating a product that people want and need. This is known as a "blue ocean opportunity" and involves creating a new market segment.
For example, McDonald's was an upstart company in the sixties that came out with a new idea of fast food, and was able to charge more for their products because they were drastically different than their competitors. Now there are thousands of fast food restaurants all over the world, but they all have one thing in common: they use microwaves to heat the food instead of using an open flame. So McDonald's actually created a whole new market segment by being able to sell a product that was fast but still served as sit-down restaurant quality food.
So you might have noticed that I didn't mention real estate in the list above. The reason is that real estate can be a great passive income resource for you as an investor. While it's true that many people buy their first home for the primary purpose of making a profit on it, it's sometimes also true that many people purchase real estate thinking they will make money on rentals. But rental income can be much more difficult to predict.
You might find yourself wondering why renting out property would generate passive income, but I want to look at some simple examples first. If you decide to lease your home to someone in exchange for a certain amount of rent (common in urban areas), the money coming into your bank account each month is passive income. But it's passive income that fluctuates based on how many people are living in your house. If your house is inhabited by two people, you receive twice the rent each month. If three people occupy the property, you'll receive triple the rent each month. This is known as a fluctuating passive income.
Another example of rental income would be if you lease your apartment to someone and they are paying a fixed monthly rent over time. This type of rental income has a different formula because it doesn't fluctuate while you have renters occupying the property, but rather just pays out consistently at the same rate each month.
Conclusion
In conclusion, I hope that this article gives you a little bit of insight into why you should be pursuing passive income as an investment strategy. If you are looking for information about passive income on the internet, you have to understand that it's just one part of the equation. There are thousands of methods for making money without getting a full time job or working your own hours. But passive income requires more effort in the beginning because there is no immediate return except for effort and knowledge.