What Is Passive Income and Why Is It Important?
By: Casey Botticello
Tags: Entrepreneurship, Productivity, Investing, Technology, Venture Capital

What is Passive Income?

Passive income is generally defined as a stream of income earned with little or no ongoing effort needed from the individual receiving the passive income in order to grow the stream of income. Passive income is income that is not proportional to the time you physically put into acquiring it. Active income (typically one’s regular job or additional part time jobs) is a direct exchange of your time and skills for money.

Examples of passive income include real estate rental income, stock dividends, fixed income/bonds, book royalties, peer-to-peer lending, and stock photography royalties.

The intriguing thing about passive income is that it can generated literally while you are sleeping, freeing up additional time for hobbies or allowing you to increase your earnings by performing some other form of work while still generating previously established streams of passive income.

An example of this would be a person working a 9–5 office job where they are paid a fixed salary. This same person also receives regular passive income from an eBook that he wrote on gardening over two years ago. The office job requires direct effort to produce the agreed upon amount of income. The eBook is different. Regardless of what is going on in the office employee’s life, the book is listed for sale in its digital form on Amazon and the author does not have to perform any work (beyond the initial creation of the content) to maintain this stream of income.

Why is Passive Income Important

There are many articles dedicated to exploring the various ways to make passive income. But many fail to consider the underlying question — why is passive income (as opposed to active income) important?

The answer is actually a fairly simple relationship between time and money. Time is the most valuable commodity. There are only 24 hours in a day. Time is the greatest equalizer because not a single person can have more of it. It can never be recreated or re-spent. It exists once, then it’s gone. And that’s precisely why passive income is so important — because time is more valuable than money.

Unlike money, which can be earned, saved, spent, invested, squandered and lost, we can’t tuck away minutes on a clock. We can’t expect dividends on seconds or hours in the bank, or invest the time that we didn’t use on something else. Considering that most of the free world needs to work for a living, consuming much of the time they do have, this precious commodity needs to be prioritized.

Passive income is one of the most important that the rich get richer. It’s how you detach your ability to earn from the limited time that you have in a day. With passive income, you make money while you sleep. You also make money while you’re awake. It’s automatic and simply keeps coming in.

“If you don’t find a way to make money while you sleep, you will work until you die.” — Warren Buffett

However, creating a passive income stream is far from easy. It takes an enormous amount of effort and investment of your time with very little return in the beginning. It involves an overall sense of frustration and an enormous learning curve. Still, it’s one of the most worthwhile investments of your time that you could possibly engage in.

As the chart below illustrates, any amount of passive income earned is exponentially more valuable than the equivalent amount of money earned through traditional work (trading time for money). $100 in passive income per month may not sound like a lot. However, to generate the equivalent of $100 in monthly passive income, you would need to have $30,000 invested earning 4%. This 4% return is fairly conservative when compared to the historical average annual return of the S&P 500, which is around 7% (after inflation).

Monthly Passive Income and the Annual Investment Equivalent

While passive income might not be the answer to all of your immediate problems, it is the pathway to success and most certainly the foundation for wealth and happiness. When you’re not stressed out focusing on just making enough money to pay the bills and you’re no longer living from paycheck-to-paycheck, there’s a mental clarity and an emotional catharsis that sets in. You become free to spend your time doing things you actually care about. You can spend more time with your family, focus on improving your health, have the freedom to escape a job you hate, or pursue a creative passion that you otherwise would relegate to the few hours of your free time on the weekend.

What are some Examples of Passive Income?

Writing and self publishing an eBook on a platform such as Amazon Kindle Direct Publishing (KDP):

2. Uploading photos you have taken from your phone or camera to a stock photography website:

3. Creating digital designs and uploading them to Zazzle.

4. Use mobile apps to get paid for thing you already do. One example is Sweatcoin which pays you for walking or running:

5. Creating content on an online platform, that is designed to be monetized. An example of this would be writing for Medium:

6. Affiliate marketing is the process of earning a commission by promoting other people’s (or company’s) products. You find a product you like, promote it to others and earn a piece of the profit for each sale that you make. This can be achieved using social media, news articles, and by developing authority websites on niche topics: