Thursday, April 3, 2008

Passive Income

I’ve recently exchanged a few emails about different financial matters with a reader (shout out to Grant). In one email Grant asked me about what I meant for passive income when I stated my goal for financial independence would be when my passive income = desired life style. Our email conversations got me to thinking more about passive income so I decided to share my thoughts and share Grant’s thoughts so you could then share your thoughts. J Thoughts, Thoughts, Thoughts – the best way to gain knowledge.

Until writing this post I considered passive income to be income/money that I didn't have to "work" for, as in a traditional 9-5 (or in my industry 7-6) job. What passive income plans entail is to have saving and principal money that earns interest and dividends.

For 2007 I earned $2,919 in passive income, which is the equivalent of more than a month of expenses for me. This was earned through laddered CD's which contain my house down payment, a money market which contains my emergency fund, and an interest baring checking account which contains my monthly expenses budget.
For the time being I do not include in my passive income calculation any money earned from my retirement plans (401k and Roth IRA) since I don't actually have access to them until I retire. As I progress I want to grow my passive income so that it's about 20 times what I earned for 2007 and invest more in non-retirement brokerage accounts.

Grant was kind enough to share his thoughts:

I have a slightly different perspective on passive income. I view it as money I can make while I sleep (even if it requires a little work here or there). For example, owning a business like a gas station or car wash, owning real estate, earning residual income on intellectual property, etc. Of course, income from investments like yours also fit in my definition.

I agree with Grant – owning businesses is a type of passive income, just not that type of passive income that I personally want.

Before posting this article I did a little recon about other types of passive income besides owning a business and earned interest and discovered something very interesting from Wikipedia. “There are three types of income—earned, portfolio and passive income. Most types of passive income are derived from rental/property, while other types of passive income are derived from royalties from patents or license agreements.”

So while finding out more ways to obtain passive income I learned that what I considered passive income is not passive income. What I considered my type of passive income is actually portfolio income. I guess I’ll be modifying my goal explanation to be financial independence when investment/portfolio income = desired lifestyle.

What about you, what are your plans for passive or investment income? How are you going to achieve financial independence?

PS check out this article, How to Earn More and Work Less at About.com – it has some interesting ideas of how to obtain passive income.


3 comments:

JB said...

I believe in your original definition of passive income. It's money you earn literally by doing nothing... it's passive. Your reader, Grant's definition, is more of what I consider active income. You do have to be actively involved in running a gas station - it's not a normal job, but you still have to do some work.

I think active income streams are great as long as you don't spread yourself too thin... but passive income is even better.

"Future Millionaire" said...

I'm with you there JB -- I already work too much for my one active income stream (my day job) that I can't imagine trying to do more. Which is why my original definition of passive income aka interest/portfolio income is what my key to financial independence is going to be otherwise I'd be so tired from actively gaining income I'd drop dead before reaching financial independence. :)

Dylan said...

JB- I believe that if you do own a gas station, you pay a manager to do all the work for you.

At least that's what I'd do- would definately work out better.

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