Passive income is income which can be earned without active involvement of a person. It does not require a person to spend too much time, effort or resources in order to earn it. The ideal goal is to earn income while you sleep. Passive income has gained a lot of attention and importance in the post-Covid19 world.
Understanding Passive Income
Let’s understand this concept with examples. Raman has a 9 to 5 job. Raman also owns a house which he has given away on lease. The monthly lease rental is Rs 30,000. Here, the lease rental income does not require Raman’s active involvement. The house is making him money while he is doing other things like doing his job. So, the lease rental is passive income.
Neeta has a full time job. On weekends, she teaches students Maths & Science at a coaching class for 2 hours. The weekend teaching activity fetches her Rs 40,000 per month. Here, Neeta has created a passive income source. She puts in limited effort (i.e. 2 hours of teaching) and generates income for herself.
Why should you build passive income?
Passive income is an excellent wealth creation tool. It also acts as a buffer in times when the main income source is endangered. Like for example, when a person loses their full time job or when a person has to take a work/career break due to unanticipated situations. Having a passive income source generates many benefits. It brings more financial stability, security and control. It opens up new wealth expansion or wealth creation options/avenues which previously were not available due to limited money availability. It also helps to pay off debt faster.
How much money can passive income sources generate?
The earning potential depends on the type of passive income source. A leased out property would fetch a fixed amount of monthly rental as passive income. Whereas an investment as a silent partner in a thriving business would generate more income. Passive income is not a ‘get rich overnight’ operation. It is an alternate source of income which over a period of time can help to create significant amount of wealth.
Ways to build passive income
While building passive income streams, one should remember that the source should be able to generate passive income on a long term basis. Below mentioned are some ways of building passive income:
- Invest in dividend paying stocks
- Mutual fund investments
- Invest in a REIT (Real Estate Investment Trust)
- Lease out property
- Sell digital products
So, to conclude passive income is that income where minimal or limited effort, time and resources are required to earn it. It doesn’t require you to do a lot of active work. Passive income is taxable in India.
