Quick Look
- Types of Passive Income: Passive income may come in a variety of forms including rental income, a business you own, or “gig work.”
- Levels: There are multiple levels of “passivity” for passive income.
- Reliability: Passive income should be reliably generated.
- Research: Do research based on your skills and interest areas. You may find better paying or more enjoyable work compared with the first opportunity that comes to mind.
- Impact: A little bit of reliable and passive income can have a huge impact on your ability to achieve financial independence.
Contents
Don’t Pass on Passive Income
If you want to achieve financial independence more quickly, it’s important to understand the types of passive income and how they differ.
Passivity in Passive Income Types
Let’s start by looking at different types of passive income broken down by the level of “passivity” that income source is defined by.
| Passivity | Description | Examples | |
| 1 | Completely Passive | After initial setup or qualification, this income comes in at a set time for a set amount like clockwork. | Social Security, employer pension |
| 2 | Diminishing Passive | These assets may provide completely passive income but the returns may diminish over time. | Royalties from creative work (writing, film, music etc.) |
| 3 | Maintenance Passive | This income is generated from an asset that largely “runs itself.” However it may require updating, upkeep, or hiring external people to keep it vibrant and relevant. | Rental property, e-Learning courses, subscription services, any business run mostly with hired labor |
| 4 | Flexible “Passive” | This income may not be passive but is so flexible that doing it doesn’t impinge on your desired lifestyle. The work can often be picked-up or dropped as desired. | Contract work, gig work (rideshare, food delivery, performance or speaking engagements), remote/online work (transcription services, copy editing etc.) |
| 5 | Invigorating “Passive” | This income may be the least “passive” but because the work is so invigorating for you, it hardly feels like work and you expect to be able to continue it in your “retirement” years. | Hobby for income (woodworking, art for sale), some form of teaching, coaching, or mentorship |
Passive Income Benefits
How “passive” will your passive income be?
From a purely financial perspective consider the two major benefits to having passive (or partially passive) retirement income.
- Smaller Nest Egg: Reliable, passive income can be subtracted from the total amount of income your nest egg needs to directly generate. This allows you to retire with a smaller nest egg. In fact, you may realize that with a little passive income you are much closer to reaching financial independence than you realized.
- More Flexible Use of Nest Egg Assets: Passive income can give you increased flexibility in determining when you sell your invested assets. Put differently, if your passive income is large enough to support you in a pinch, you don’t have to sell your investments in a down year when they are worth less. Instead you can wait until the market is up and your assets have appreciated.
Actions
Not all “passive” work is very passive but if you’re invigorated, it may pay off in the long run!
Write down the types of passive retirement income streams that are of interest to you. Then, consider the physical and mental skill sets and time commitments needed. Remember, you want to ensure that regardless of the level of passivity, the income is as reliable as you need it to be.
If you are self-employed, consider ways that you could train and hire others to perform the work for your business. If your business has a recognized brand, equipment, technology, methodology, or customer base, there are likely to be people who would like to leverage those assets. You may hire them directly or license a part of your business to them.
Finally, do additional research on passive income by finding additional articles or books describing ways to generate passive income. You may be able to leverage the assets or skill sets you already have or learn about a few skillsets you need to gain additional expertise. Either way, once you’ve honed in on a few promising opportunities, write those down and try them out!
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