Passive Income – How Do We Generate?
In our quest for financial freedom, we tend to come across the term “passive income” very often. So what exactly is passive income and why do so many people desire to have some form of passive income?
Passive income, according to Wikipedia, is defined as “an income received on a regular basis, with little effort required to maintain it.” In other words, once we have established the income stream, we do not need to devote much attention to maintain that stream of income.
A Common Misconception Of Passive Income
Having said that, some people may have the misconception that creating passive income is “easy”, given that little effort is required to maintain it. However, in most cases, it may not be as “easy” as it seems.
This is because even though little effort is required to maintain a stream of passive income, it may take a bit of hard work to generate that source of passive income in the first place.
Take for example, an author who receives passive income in the form of royalties from the sales of one of his bestseller book.
Initially, when writing this book, the author probably has to devote considerable time and effort to write and edit the book. It may take him months or even years before he is able to complete the masterpiece. In other words, hard work is involved in establishing this source of passive income.
However, once this book has become a hit with the readers, sales of this book is likely to occur on a recurring basis for some time, generating a constant source of income in the form of royalties for the author. At this stage when the passive income source is established, little effort is required to maintain it.
Common Sources Of Passive Income
Below are some common examples of passive income:
- Rental income from properties
- Interest from bank deposits
- Royalties from intellectual properties such as music, patent, computer, software & books (including e-books).
- Income from businesses where direct involvement is not required
- Dividends & capital gains (profits from buying and selling stocks) from stocks
Even though there are many possible ways to generate passive income as seen from the numerous examples above, some of these examples may not be applicable for most people.
Take for example royalties from intellectual properties. Unless the person has the talent to create products that consumers desire, generating passive income through royalties is only reserved for those who have business acumen.
In addition, in places where the price of properties are relatively high, generating passive income through rental income from properties may not be accessible to most people, given that one has to fork out a huge sum of money for the down payment of properties.
Best Way To Generate Passive Income For The Average Person
Even though we can easily generating passive income through interests from bank deposits, the interest rates are usually way to low to make this an attractive option.
Hence the best and most accessible way of generating passive income is through dividends from stocks and ETFs (exchange traded funds).
With a little bit of research, one can easily generate dividends averaging between 2-5% by investing regularly in a well-diversified ETF. What’s more, if you time your purchases and sales of the ETFs, it is possible to generate extra income when you sell your ETFs at a profit.
In addition, you can invest in real estate in the form of Real Estate Investment Trust (REITs) in the stock market with little capital and receive rental income regularly.
If you would like to learn how you can invest successfully in the stock market, do check out some of our investment articles below:
- Basics Of Investing
- 3 Deadly Investment Mistakes You Must Avoid
- An interview with Professional Investor, Adam Khoo
Alternatively, you can cut short your learning curve by attending our complimentary 3-hour stock investment workshop.