What is passive income?

If you’re anything like me, your Facebook feed is a mess of different sponsored posts promising you passive income if you just ‘invested in this’ or ‘learned to trade that’. Come to think of it, I click on them quite regularly out of curiosity which is probably perpetuating the issue.

So what is passive income? Well in its simplest form, passive income is income generated not through personal exertion. In your usual job, you attend at a place, perform a service and are paid for it. This is more commonly known as ‘active income’. The downside of active income is its reliant on your personal exertion and you can only exert so much.

Passive income is more commonly associated with investments. For example, if you buy an investment property, each week you will receive rent from your tenants. This is referred to as passive income as you did not have to attend at a workplace every day to earn it.

Another example is investing in shares, if you buy a share, you are essentially buying a small portion of a company. Each year that company earns income through selling their product or service. You in turn, as an owner, get a small portion of that income referred to as ‘dividends’. This is an example of passive income.

So why do sponsored posts keep promising you passive income? Well, whilst people may enjoy their jobs, we all dream of being able to retire and live off income we don’t have to work for. In the case of these Facebook ads, this is probably unlikely. But passive income is real.

Many people have invested over a number of years and are now living off those investments. A perfect example is people who have retired and are living off their super.

A quick fact, nobody became wealthy because they had a high paying job. This will only take you so far. It doesn’t matter how much you earn, if you are not saving this money and investing it, you will quickly find others starting to surpass you in wealth. This is the benefit of passive income, whilst your active income is limited by how much personal exertion you can do, passive income is unlimited.

If you have any questions, please feel free to reach out.

This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.

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Posted in: Ben Brett, Financial Planning, Investments