There has been a boom in passive income content all over the internet in the past couple of years. The script is usually the same. Someone who looks well put together tells you they make 6 figures a year in passive income and will share their secret with you. For a small fee of course. In this blog I’m going to break down what passive income is. Then, I’ll share what they don’t tell you about passive income.
What Is Passive Income
Passive income is any money gained from trade or business activities that you do not materially participate in. According to the Internal Revenue Service (IRS), these activities include rental estate, royalties or stock dividends. Generally, if you have dedicated more than 500 hours to the activity for the tax year then income gained from that activity is not considered passive income.
What They Don’t Tell You About Passive Income
You Need Capital
What they don’t tell you about passive income is, you need capital to get the money flowing. Remember, the aim is to earn money without actively putting in time and effort. To achieve this, you’ll need to have a lump sum of cash to invest in a capital asset or another activity that will result in a constant cash flow. For example, 2.5% is the average high yield stock on the S&P 500. In order to earn as little as $100 a month in dividends, you’d have to invest about $50,000.
It’s Only Passive If You’re Not Actively Managing It
People often think their side hustle is passive income. I’m here to tell you it’s not. If you’re spending over 500 hours or have an active managerial role, then you do not have passive income.
It Takes Time
Another important piece of information they don’t tell you about passive income is it may take years to achieve an amount that has a material impact on your income. This is because you need to invest either a substantial amount of money or put in great effort. It can take years for the average person to save $50,000. Equally, it could take years to acquire a skill that would allow you to create a product that can sell itself.
It’s Not As Easy As Your Favorite Celebrity Makes It Seems
What they don’t tell you about passive income is how hard it is to establish a new consistent income stream. People who already have a large following or a recognizable brand can easily create a product/service that results in steady reliable cash flow. It is not so easy for those who are just starting out with the hope of making a lot of money quickly.
My Passive Income Experience
What I will tell you about passive income is it is very much worth the effort. When I started seriously investing in college, my total dividend receipt for that year was a measly $54. Effectively, I made $4.5 every month. This was encouraging though, because the year before I made $0 each month. While I’m still not at a point where I can maintain my current lifestyle with passive income, I anticipate that by my 45th birthday I will be able to.
To learn more about investing check out these other blog posts!