What is Passive Income?

By | January 30, 2012

Passive income is beginning to be an internet craze. Sometimes people define it pretty loosely (like when I suggest that a blog can generate passive income). This often leads to some confusion about what is passive income.

For example, I post a monthly update on my extra income (that isn’t from my day job). I have labeled these updates passive income reports because I am working on developing a passive income stream from my blogs. It currently isn’t truly passive because I am investing a lot of time to build up my sites. But I have labeled these passive income reports because they will be eventually. So, what makes it passive or not?

What is Passive Income?

Passive income is money that you have earned without any significant investment of your time. In other words, it is all about producing a business of some sort that will continue to produce income without your time. The hype behind passive income is that you are creating a system that will keep going after you stop putting in your time. Work hard now with a continual cash flow later.

A popular means to generate passive income is to create  a profitable business that you can pay other people to run and let you keep the profit. Many people are able to scale their business to the point that they can own the business, hire enough people to run and manage it, and enjoy the profit without having to do very much. The money literally rolls in while you sleep.

What Passive Income is Not

While I have tried to define what is passive income, sometimes it is better to explain it by giving examples of what is not passive income. Here are some things are not to be confused with passive income.

  • Side Income: A side income, while very beneficial, does not equate to passive income. In other words, the large side income that I am generating with my blogs is not passive at this point. Since I am still investing a lot of time to manage them, I would hesitate to say that these are passive.
  • Raise: While you may get more money for your time when you get a raise, it still requires your time to earn that money. Analyzing your hourly rate is important to consider if you are trying to build a passive income, but it should not be confused with passive income. If it still requires you to work at your day job, it isn’t passive. Passive income is about establishing a cash flow that will continue if you stop working.

Understanding the definition of passive income as creating a system that will generate income with no (or perhaps very little) work will help you on your way to build passive income. Often times, passive income is only made possible with money that you already have, but it is possible to create it with very little upfront costs, like what I am attempting to do with my blogs. This site is an attempt to inspire you to create your own passive income.