The Common Sense of Earning a Passive Income

Most people agree that the key to success is diligence. They are afraid to get behind the race. These proactive people have proven to become stable in their life. On the other hand, the lazy don’t have any problem simply because they don’t have anything as well. Both types of people have chosen to be so. It sounds fair, doesn’t it?

However, this equilibrium is the thing of the past. If this is our mindset, we will surely be surprised at the great fortune of those who have exerted less effort and at the frustration of those who have done their best. It doesn’t mean that life is unfair. In fact, we earn not only from what we do but also from what we don’t do. The former is known as active income; the latter, passive.

Active income is an income we generate from our hard work. When we work for money, it is active income. But, when it is our own money that works for us, it is passive income. Passive income is an income we generate from our investment. How to generate passive income without active intervention is not a kind of magic that everyone could have.

How to generate passive income? Passive income is generated when our investment earns because of our timely decision. In this type of income, we are paid for the decision we make and for the risk we take. When we become afraid of investing, we tend not to make any decision. Consequently, nothing happens to our money. To generate passive income, we should make the right decision on what and when to invest and not decide about not investing. We must also calculate the risk – the higher the risk, the higher the return. The lower the risk means the longer it takes to get the potential return. It depends on who we are and what investment fits our personality. Proactive people are naturally career oriented so they can successfully generate active income. On the other hand, patient people are wise decision makers and risk takers.

Now, the question is which type of earners we should be. Active earners have full control of how much they could earn, but there is limit in the amount as there is limit in their energy and time. When they stop, so does their income. However, passive earners are more efficient in the sense that they enjoy the unlimited potential of earning high with less energy. Moreover, passive earners can be both active and passive earners. Apparently, passive income is more advantageous.

It is not difficult to know how to generate passive income. There is a lot of available information around us that can help us learn to begin this with. We generally have heard about investing and among the popular are stock market, bonds, mutual funds, insurance, pension plans, and treasury notes. Before investing, it is important to study your choice investment. We don’t have to be the jack of all trades. What is important is that we understand the risk and the potential of the market we want to enter and start small just for a try. As time goes by, we will gain experience and will master the market we have chosen. In the advent of technology, it has become easier to get more information about any field of endeavor. The internet offers numerous tools we need to become equipped.

The most crucial part of how to generate passive income is our attitude toward investment. Some people think that investment is done in order to sustain our daily need and this is a wrong notion. If so, it is not any more investment. It is livelihood. Our immediate need can only be sustained by active income. To depend on investment for daily needs is irresponsible. We should work in order to live and we invest because we secure our tomorrow. Real investors are future oriented. They don’t exactly make money right away. But their money makes them. That is the reason why we call this condition passive. Everybody’s need today is different from our need in the future. Our immediate need is answered by our immediate action and immediate results make us grow. But passive income is not something that should make us grow. This is something that we should grow. So, whatever we earn now is what we need now. Active income is the reflection of we do now. The right attitude toward passive income is to treat it as a separate living entity. Active income is what we need now. And passive income is what our investment need now. It is like a pet that we should raise.

How to Find the Right Passive Income Opportunity For You

Never limit yourself to thinking that the only way you can make money is from trading your hours for dollars.

Why not have your money earn you money? Better yet, why not have money deposited into your bank account from work you previously completed?

Limiting yourself to one type of income is a very risky way to make a living. The purpose of this post is to explain the three types of incomes and advantages and disadvantages of each.

Earned Income – The most common type of income that you’re familiar with would be earned. Simply put, earned is trading dollars for hours.

Earned is very easy to obtain, but very easy to lose. If you get fired, you lose your income.

Passive Income – My favorite type of income is passive. Passive income is income received from work you have previously done.

Examples include

Owning rental properties
Types of online businesses that need little or no direct involvement
Royalties from publishing books or music

Earning 100% of your income from passive sources takes a little more creativity but can easily be done, especially with the Internet. There are a many ways in which you can start earning passive income online very quickly. Examples include writing an e-Book to creating an online video.

Portfolio Income – If you have a savings account, you have received portfolio income. Portfolio income is income derived from paper assets like stocks, bonds, money market accounts, savings accounts…etc

There are three types of portfolio income.

Capital Gains – Income from the sale of a paper asset
Dividends – Income from earnings passed down to shareholders
Interest – Income from investments such as savings, checking, CD’s, money market accounts, and bonds

One disadvantage of portfolio income is that you need to invest a lot to earn a lot. Therefore, it’s not until later in your life that you can live solely off of your portfolio income.

The typical path to riches today is to accumulate as much money as possible and build a portfolio of stocks and bonds. Once you no longer want to exchange your hours for a salary, you begin to live off your portfolio.

This way of building wealth is pretty simple, but it’s risky. As we have seen in 2008 & 2009, investments are bit very stable and jobs can disappear fast.

An important theory to managing assets, that is commonly associated with investing in the stock market, is diversification. Diversification is the opposite of putting all your eggs into one basket; instead you put many eggs into many baskets.

Diversification is not just important to managing a stock portfolio; it’s also a good practice to diversify your income. If one source of income gets turned off, you have another one to replace it.

The Key To Diversification Of Income Since you’re trading dollars for hours, there is a limited amount of diversification you can achieve through earned income. I.E., you can’t have three full time jobs.

It’s easy to diversify your portfolio income through index funds. However, you have no control over performance of each individual fund. One option are fixed investments like CD’s, but it takes a lot of money upfront if you wanted interest from a CD to provide enough income for you to live off. Plus, you also face reinvestment risk if interest rates were to go down.