Passive income isn’t passive in the beginning

By Jessica Dosseh

Passive income requires an initial investment of money, capital, time, or all three before seeing any results. Passive income requires more work than active income – at least in the beginning.

So before jumping into any passive income project think about the following:

Have a clear understanding of the industry you are entering.
Calculate your Return On Investment (ROI) and Net Present Value (NPV) to understand what it will take to make the venture worthwhile.
Calculate recurring expenses and how it will affect your overall activity.
Calculate when profit becomes truly passive (if ever).

Passive income isn't passive in the beginning.

Passive doesn't mean none; it means partial.

What Is Passive Income?

Passive income can be a great way to generate extra cash flow. Passive income can allow you to make money while also pursuing other aspects of your life by providing you with a bit of extra security.

Before we dive in too deep, what does passive income really mean? From a technical perspective, passive income is earnings derived from an enterprise in which a person is not actively involved. In other words, passive income is used to define the amount of money being earned regularly with little or no effort on the part of the person receiving it.

Categories of income.

There are three main categories of income: active income, passive income, and portfolio income. The categories of income are important for tax purposes.

Passive income is the bridge between active work and active investing.

Active income.

Active income refers to income (wages, tips, salaries, commissions) received for performing a service, or income from businesses in which there is material participation.

Income earned through employment, self-employment, or contract work is also classified under active income if it meets the Internal Revenue Service (IRS)’s definition of material participation. This means at least one of the following is true:

The taxpayer works 500 or more hours in the business during the year.
The taxpayer does the majority of the work in the business.
The taxpayer works more than 100 hours in the business during the year, and no other staff works more hours than the taxpayer.

Passive income.

Receiving income from a business in which you don't actively participate is considered passive income. Passive income is usually taxable, but it is often treated differently by the Internal Revenue Service (IRS) – Publication 925.

Portfolio income.

Portfolio income is income from investments, such as dividends, capital gains, interest, and royalties. It does not come from passive investments and is not earned through regular business activity. This particular form of income can be favorable due to lower tax rates than earned income.

One of the major reasons why knowing the difference between these different income categories is that two people could contribute relatively the same amount, yet one would be passive and the other active. John and Kathy, who are not married to each other, each have a 50% interest in a business (most likely online). If John does the majority of the day-to-day work in the business, the IRS would consider his income active. On the other hand, if Kathy assists with activities like (marketing, content creation, ideation, etc.) but works fewer than 100 hours a year in the business, the IRS would consider her income from the company to be passive. Both parties can contribute the same amount of money and knowledge, but the one contributing the least amount of time is the truly passive one.

Myths About Passive Income.

You can "set up then forget" your revenue streams.

Passive income still requires an active presence, effort, and time. It may have a 'get-rich-quick' appeal, but it still involves work. You just do the work upfront – because of this, passive income isn't as passive as you think it is. If you think you can build a business where you can sit back and do absolutely nothing, you will end up disappointed.

Building passive income is the act of gradually decreasing the amount of time you use to do a collection of tasks.

When building your passive income streams, take into account and calculate the following:

Calculate your Return On Investment (ROI) and Net Present Value (NPV) to understand what it will take to make the venture worthwhile.
Calculate recurring expenses and how it will affect your overall activity.
Calculate when profit becomes truly passive (if ever).

You only need a single weekend to get started.

You can come up with a simple plan to get started in a single weekend, but it takes a lot longer to make it fully profitable. Creating a source of revenue that will deliver lasting results requires a lot of research and work before you can even earn a single penny. Hence why it's important to think clearly through the type of passive income project you want to build; otherwise, you are likely to give up on it before it can start to produce anything and end up with a loss. Regardless of which type of business you are building, quality will always win over speed every time.

You need a lot of money to start earning passive income.

Many assume they need a lot of money to start earning passive income. This simply isn't true. What matters most is your willingness and determination to put in the time to research your market idea, investment opportunities, and build a self-sufficient / automated system that does the work for you.

One solid source of income is all you need.

Just like you would for an investment portfolio, having a diversified collection of passive income spread across different sources could reduce risk and capital loss. By diversifying your revenue streams, you'll likely earn enough to support your needs. However, having too many can become problematic if you cannot properly manage them.

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Here's what you need to remember.

With passive income, you have to invest money, capital, time, or all three before seeing any results. Passive income requires more work than active income – at least at first.

Passive income is not about getting something from nothing; it's about using less to make more.

Passive income ideas in relation to asset classes.

If you are going to spend time learning about an industry to create a business, you might as well learn enough to become an investor in that area or asset class. The important thing is to understand how each financial market relates to one another. As you build your passive income structures, take full advantage of all its characteristics.

It’s extremely important to have a clear understanding of the industry you are entering.