Passive Income Vs Linear Income

Luxury Rental Apartments in Dallas by Andreas Praefcke

What is passive income and why is it superior to linear income?   There are many sources of income, most people earn a linear income throughout their life, you go to work and exchange your labour for an agreed amount of money.  However, linear income has a problem, when you stop working so does your income.  This means that even if you have a great job that pays plenty of money, your income will always be limited to the amount of time you are able to spend working.

Contrast this to passive income streams and you’ll see how income can become technically unlimited and more importantly linked to what you own rather than how much your work.  Passive income is income which is earned from past efforts and investment in productive assets requiring no further investment of time or effort.  For example, if you buy a rental property you will have to work to get the property but the rental income is passive, invest in a ten year bond at 3% and you have a 3% passive income for ten years.

So what’s so great about passive income?  Despite the fact that you may have to work hard to get passive income streams up and running, once you have a few it frees your time up to do other things, like generate more passive income streams.  This is just not an option with linear income, imagine trying to convince your boss to let you spend a couple of hours working on a personal money making venture?

Is it too good to be true? The answer is no but this doesn’t mean it’s easy or that you can give up work tomorrow.  Most people will at some stage live off passive income, usually by investing for an entire lifetime in a pension and then buying an annuity to live off for the rest of their life.  However, creating passive income streams earlier in life can be challenging.  One problem is that the initial work required to generate a passive income stream can be considerable, think how long it may take to save up for your first rental property or the length of time it takes to write a book that people actually want to buy, passive income is not a something for nothing deal.  In addition, while passive income may provide a return without any further effort, returns can be low and in some cases hardly worth the effort, think of the tiny returns on your savings account, that’s passive income but it’s hardly going to keep a Ferrari on the road any time soon.

Final word, if you want to get seriously wealthy in life passive income is the way to go.  However, be realistic, most of us aren’t going to be living off passive income in the next year no matter how hard we try but a small amount of time and money invested in passive income streams over a prolonged period of time will start to put a bonus in the bank each month and who knows, one day it might just put the Bentley on the drive.