Passive income is the pinnacle of personal finance.
That's because it gets you to the final destination along your financial journey. Here's what I mean.
Most people spend their entire life working at a job. They are at the mercy of their employer and, while some people love their job, many don’t. They tolerate it for the income it provides and do it in the hope that they can someday retire.
But the only way to comfortably retire is to have income that replaces what you get from your job.
That’s what passive income does.
But instead of waiting for social security and your 401(k) to kick in, passive income allows you to replace your earned income earlier. It bypasses a lifetime of doing work that you may not enjoy or find meaningful. It gets you to the endgame faster.
In this article, we are going to cover 8 specific reasons why passive income is important. Here's a preview.
Passive income is important because:
- Passive Income Gives You Freedom
- You Have Unlimited Income Potential
- You Might Lose Your Job
- You Gain a Valuable Skillset
- You Can Eliminate Debt Faster
- You Can Diversify Your Risk
- You Can Retire Early
- Passive Income Gives You Peace of Mind
Finally, I’ll discuss how you can actually start generating passive income. You are not going to find typical advice here like invest in dividends, write an e-book, etc. This is the secret sauce – the ninja tips.
I think you’ll find some really interesting and novel ideas that you hadn’t considered. With that, let's get into it!
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The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
Table of Contents
What Is Passive Income?
Passive income is earnings you generate without active involvement on your part.
Some forms of passive income require no work to set up or maintain. This is truly passive income in every sense of the word. But the rub is that you usually need money to get it. Think dividend-paying stocks, bonds, REITs, crowdfunding investments, and peer-to-peer lending.
Other forms of passive income may require initial work and skill (sometimes a lot of both), but once you set it up, the asset you created will generate income for you without your day-to-day involvement. This form of passive income includes e-books, online courses, blogs, royalties from music, and other creative assets, etc.
Usually, getting passive income streams requires money or effort at the beginning. There are ways to get meaningful passive income with just a little bit of both, though, and we’ll cover that later on.
Why Passive Income Is Important
Passive Income Gives You Freedom
For me, the biggest benefit of passive income is freedom. When you are not tethered to your job, you have the freedom to do what you want.
Don’t like your job? Find another one that you like, even if it pays less. Your passive income can make that a reality.
Want to work from anywhere in the world? Passive income can help with that too.
Want to follow your passion or retire early and travel the world? Passive income is really the only way to accomplish this.
Bottom line: Passive income means you are your own boss and can do what you want. Hard to put a price tag on that.
You Have Unlimited Income Potential
If you have a job, the only way to make more money from that job is if your employer is willing to pay you more. You may find that working harder leads to raises and promotions, and that’s great. But that might not be the case forever.
When it comes down to it, a huge part of your financial growth is in someone else’s hands.
I don’t like that.
Don’t get me wrong. I have been really lucky with my employers and they have always treated me fairly, but I have no illusions that this holds true for everyone. If you are unhappy or not finding traction in your job, there is hope.
You can take back control of your financial future by finding (and growing) an extra source of passive income. What’s better is that you have no limits to how much you can grow your passive income.
You don’t need to ask anyone for a raise or a promotion to make more money. And we are not talking about a lame 3% increase per year like you might get with a job. You can multiply your earnings from your passive income streams if you do it right.
Finally, when you are working at a job, you are trading time for money. That is naturally limiting. You only have so many hours in the day.
But with passive income, you don’t have these constraints. In general, the assets that generate passive income for you will be making money regardless of whether you devote time to it. And the more assets you get, the more money you make.
You Might Lose Your Job
I hate to be a downer, but the risk of losing your job can’t be ignored. This may be the most devastating thing that can happen to you financially if you are an income earner.
And if you are like many people, you don’t have enough to tide you over until you find your next job. In fact, the Federal Reserve reports that 4 in 10 people do not even have $400 to cover unexpected expenses.
Passive income is one of the best buffers against losing your job because it can replace part of that precious income you just lost.
Even if your passive income is modest at first, it will still be a tremendous benefit to you if you have nothing else coming in. I can’t imagine too many people regret their decision to start accumulating passive income, but I bet there are plenty who regret not having it when tough times come.
You Gain a Valuable Skillset
This might be my favorite on the list.
When you pursue a new passive income stream, you must learn what is needed to succeed in that area. Whether it is starting a rental property business, dividend investing, or an online business, you need to get more knowledge than you have today.
But that should not scare you. Quite the opposite. Warren Buffet said in 2017:
To me, this means that the knowledge you gain as you start your passive income stream is going to pay dividends for the rest of your life. So take this opportunity to learn as much as you can about the new income stream you may be considering.
As you continue to gain skill in your chosen area, you will get better results. And as your results improve, you will become more motivated to become an expert in something else, which in turn, will expand your earnings further.
It’s a virtuous cycle that allows you to achieve massive financial success.
You Can Eliminate Debt Faster
If you start generating passive income, you can aggressively tackle your debt. By applying all of the extra income to paying down debt, you should be able to eliminate it in pretty short order.
One of the best things about having a passive income stream is that you can tackle debt without sacrificing your current lifestyle. You can still spend at the same levels, but you are no longer treading water. You are making real progress toward becoming debt-free.
You Can Weather Financial Hardships
Having a source of passive income lets you better handle the unexpected. Whether it's a lay-off, a big medical expense, or an unexpected repair on your car, an additional income stream will soften the blow.
You know that these things are going to happen during the course of your life. Things break, people get sick, and the world can sometimes be harsh. If you have some passive income coming in, you are far better prepared to handle these surprises and won’t be in a panic when they happen.
You Can Diversify Your Risk
As you expand into multiple streams of passive income, the risk of a single setback derailing you decreases dramatically.
If a decline in the stock market is hurting your dividend portfolio, you are fine because your rental properties are still giving you rent checks each month.
Your online website business may not care that the S&P 500 dropped today.
These are just examples, of course, but you get the point.
You Can Retire Early
Early retirement is the ultimate financial goal for many people. It’s not surprising why.
You can travel, explore new hobbies, and participate in charitable activities that improve the world around you.
Once you establish one additional passive income stream and it grows, you can save and invest more money. This leads to increased wealth. As you get additional passive income streams, the growth of your income and wealth accelerates.
This type of growth makes a huge difference over time and allows you to retire much earlier than if you had just stayed at your job and done nothing.
Passive Income Gives You Peace of Mind
I guess what a lot of this boils down to is peace of mind. When you have meaningful sources of passive income, you just don’t have to worry about as many things financially.
Losing your job is less terrifying, mounting debts can be rapidly dispatched, you don’t have to worry as much about the volatility of a particular industry or market, and you can start on a realistic path toward early retirement and living your best life.
Best Ways to Generate Passive Income
Ok, so now that we’ve covered why passive income is important, let’s dive into how you can start generating passive income. There are some great ideas here that are a bit off the beaten path, so let’s get into it!
Rental Property Income
Investing in rental properties has been my go-to passive income strategy. It is not completely passive, but you can automate or outsource a lot of it to make it mostly passive.
I own nine rentals (which I self-manage) while working a full-time job, so I can say with full confidence that you can manage your rental properties in an efficient way that doesn’t require a ton of work.
Want to learn how to get started? Check out my step-by-step guide to getting started investing in rental properties.
Ninja Tip: Want to learn about a rental property investment that is completely passive right out-of-the box? Check out my article on Triple Net Properties. You can make a ton of money renting out property to corporations like McDonalds, Walgreens, etc. and they take care of all of the repairs, maintenance, taxes, etc. You will need some money to put a down payment on these expensive types of properties, though.
Rent Out Stuff You Already Have
The triple net strategy is a pretty good one if you have the funds, but if you aren't in that league yet, here's another little known strategy: Rent out your car (or even extra space in your house) for passive income.
For cars, I would check out Turo. They are like the Airbnb of car rentals. For renting out your extra storage space, check out Neighbor. I have used both and written articles on these passive income methods. If you are interested, check them out below.
If you want other great ideas on renting out your existing stuff, check out my article on 15 truly passive income ideas that require no money. It talks about how you can rent out stuff like your backyard, pool, musical instruments, and other things you probably never imagined could give you passive income.
Alternative Income-Producing Assets
You can also generate passive income by buying alternative income-producing assets. These include vending machines, ATMs, bounce houses, billboards, and blogs.
I have written step-by-step guides on how to get started with each of these alternative passive income strategies. Check them out below.
Passive Income Businesses
There are businesses you can start (or buy) that can be easily structured to generate passive income. They include FedEx routes, bread routes, laundromats, and automatic car washes. If you want to learn how to get started in these businesses, check out my articles below:
You can generate passive income through peer-to-peer lending. This is where you lend out your money to various borrowers through an online platform.
Depending on your risk tolerance, you can make a decent amount of passive income from the interest you receive on these loans.
Crowdfunding has become a popular form of investing over the years. You, along with many others, invest in various offerings through an online platform. These investments can be in start-ups, private businesses, real estate, etc.
Not all crowdfunding investments will give passive income. If you invest in notes or crowdfunded rental properties, you will likely get steady income, but equity investments in a company, for example, will usually not give any passive income.
As with any form of investing, there are risks. There may also be minimum investment amounts and your money may be tied up for years, so it is important to review and understand what type of investment you are getting into.
But this can be a way to earn passive income through investments that are off the beaten path.
Ok, there you have it. You know why passive income is important and have some great ways to get started. If you are tired of the same old, same old, consider making passive income a financial priority. It just might set you on a brighter financial path – it certainly did for me.