What is passive income?
Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends. While legally that’s true, in practice passive income may take other forms.
“Many people think that passive income is about getting something for nothing,” says financial coach and retired hedge fund manager Todd Tresidder. “It has a ‘get-rich-quick’ appeal … but in the end, it still involves work. You just give the work upfront.”
In practice, you may do some or all of the work upfront, but passive income often involves some additional labor along the way, too. You may have to keep your product updated or your rental property well-maintained in order to keep the passive dollars flowing.
But if you’re committed to the strategy, you can find ways to generate income and create extra financial security for yourself along the way.
“One of the questions people always ask me is: ‘When will I be financially successful?’” says Jerry Lynch, a CFP® and senior vice president at OneDigital Financial Services. “The answer I give them is: When your passive income exceeds your expenses.”
“That can include Social Security, dividend income, real estate income or if I own a company and I’m not actively working there,” Lynch says. “There’s a variety of different sources that could kick off this income.”