The salary you get from work is as a direct result of your efforts at work. Active income can be earned only by investing time and effort directly in return for money; if you don’t work, you don’t earn. Whether you are a teacher, a builder, a banker, an athlete or an actor, you have to work to earn a living. With passive income, it is the other way; your money is actually working for you with no extra effort on your part apart from the act of active investing.
Most people live in the cycle of active income, which ties their time to their income. The wealthy, on the other hand, are able to detach the time spent from the money that they earn. They earn passive income from various sources including investment property, dividend income from owning stocks, interest income, royalties from publishing, business interests and so on.
Creating a passive income stream does not come easily. It takes time, effort, discipline, and consistency at the beginning of the cycle before it becomes passive. It will involve disappointment, failures and frustration; but if you invest your time and effort upfront, it can be the most fruitful and worthwhile investment of your time, as passive income continues to pay you long after the work has been completed.
Whilst having passive income is important, this does not mean that you should quit your full-time job. It is not always smart to drop everything to follow your passion; most people simply cannot afford to do this with the financial obligations that they face. The time must be right and, besides, if you enjoy what you do, there is absolutely no reason why you shouldn’t continue.
Here are some reasons why passive income is so important:
Passive income gives you the freedom and flexibility that comes with not struggling to make ends meet. Financial freedom is when your passive income streams far surpass your expenses. That is what we must all aim for as with this you have more choices; you can engage in work that you love, or even volunteer.
The inability to pay bills or debt can lead to fear, anxiety, depression and a sense of hopelessness. Just knowing you have that steady stream of income or emergency savings makes you feel less stressed. Passive income builds that important financial momentum that makes it possible for you to support others to do things.
You can do things that you love. We all have things that we are passionate about but we often put them off. You can now get involved with a project that you care deeply about without worrying about a monthly pay-check. Sadly, so many people wake up every single day dreading another moment of their work, even in periods of massive unemployment.
Passive income in retirement
If you are middle aged, and have been living solely on your salary, your goal should be to use as much of your income as possible from your remaining peak earning years to create sources of passive income, which is often the main source of funds for most retirees.
Here are some of the most common sources of passive income.
Interest income
Interest is a most basic form of passive income. Interest earned on savings account balances, fixed deposits, or bonds is a relatively risk-free source of passive income. However, note that interest rates hardly keep apace with inflation, so it will be difficult for you to grow your capital in this way.
Investment property
Residential or commercial property for investment purposes is a time-tested way of enjoying passive income along side capital appreciation. The location of the property is of importance for you to realise stable income far into the future.
Dividend-yielding stocks
One of the most effective ways to earn passive income is to buy shares in a publicly quoted company that regularly pays dividends to its shareholders. A reputable stockbroking house will select stocks for you but it is also important for you to develop your knowledge of investing and understand what is being done with your money.
In discussing the advantages of investing, one should never overlook the issue of risk, which is an integral part of investing. There is always the very real possibility of loss, as markets can be volatile and prices will go up and down. A diversified portfolio will help to mitigate this.
Business interests
If you are considering investing in an interesting business, seek professional advice. Some of the greatest sources of passive income have come from people taking a chance on an entrepreneur, after doing their homework.
Try to envision the type of life that you want in the future. Ask yourself these questions. What do you want to spend your time doing? Where do you want to live? It is rare to find people achieving their financial goals and dreams solely from their salaries and subsequent pensions. True financial freedom requires alternative sources of income: passive income; it is the foundation for long-term sustained wealth and future financial security.
Have you ever thought about the adage “the rich get richer?” Passive income is a key reason for this.
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