Writer : Hira Ejaz
Isn’t it intriguing to think of earning or creating money regularly over a long period without putting any or little effort into it?
Those who enjoy being the privileged and fortunate members of society would find this idea fascinating enough to be materialized into reality. Creating more money out of what is currently available would undeniably benefit those who consider luxury an essential aspect of their lives. That is where the perks of passive income come in first and foremost.
When a person earns a regular income, gains, or revenues through ventures in which they are not actively involved or participating, they are creating passive income. Passive income refers to generating a consistent source of revenue without the need for the individual to put in significant efforts.
The Internal Revenue Service (IRS) is the tax collection agency of the US. It is responsible for administering the Internal Revenue Code, which was enacted by Congress.
IRS divides the income into three categories:
An active income refers to the salary earned from specific duties or services provided according to an accepted job within a specified time limit. Salaries, tips, fees, commissions, and allowances from the companies a person renders their services are examples of active income.
Portfolio income comes from money received from investments, dividends, interest, and capital gains. Investment property royalties are also considered sources of portfolio income.
Passive income is produced from a steady channel of income without any material participation or active engagement of the person in it. Passive income, like active income, is normally taxed. Sometimes, interest and dividend payments are also counted as passive income. A person should check with IRS or a tax professional to see if this is the case. The two common examples of passive income are Limited Partnership Income (LPI) and Rental Property Income (RPI). `
According to Investopedia, “A Limited Partner is someone whose role in a business is limited to their capital investment.”
To exemplify, suppose an entrepreneur invests money in his friend’s restaurant to help him hire staff and maintain the furniture there. He does nothing else to run the restaurant but receives a profit share every month. That is called the Limited Partnership Passive Income.
Likewise, consider the case where an investor buys a home in a foreign country. He hires a property management company there to deal with the tenants and maintain the house. He obtains rent every month, although he does not personally oversee the house’s management. That is called the Rental Property Passive Income.
The perks of passive income are myriad. This is one of the most effective ways to improve a person’s financial situation, leading to their financial stability. One of the crucial benchmarks on the path to prosperity is financial security. To put it another way, if, by looking at your financial status, you can confidently say that you can brave and withstand a severe financial storm, you’re on the right track.
People who are eager to expand their wealth find passive income to be the most coveted, secure, stable, and beneficial aspect of personal finance. Passive income can help them achieve their financial goals in a variety of ways, from amassing tremendous wealth to ensuring a consistent inflow of money over a long period.
With passive income, it becomes much easier for a person to accomplish their financial goals. Developing some passive income sources that allow him to earn money at any time of the day, like investment in real estate or a business, will help him reach his goal much more quickly.
Passive income also grants an individual the independence of location in many cases. A person can live and work from wherever they want because they neither have to work from a single location nor do they have to work constantly to yield passive income. Hence, an individual can travel around the world as long as they have adequate passive income to support and maintain their lifestyle.
Increased financial margin is yet another perk of passive income. The more financial margin or space a person has between their spending and income, the smoother it will be to manage their finances. And, if a consistent source of passive income is being generated month after month, it will be a lot easier to create that financial margin. For example, a person’s total monthly expenses are $3,000. If he has an active household income of $4,000 per month, his monthly margin would be $1,000. It is good, but if he receives an extra $2,000 in monthly passive income, his life will get a lot easier.
All things considered, the amount of time and effort one can devote to passive income is unconstrained, i.e., passive income can be generated at any time of day or night. From bolstering one’s financial security to reducing financial stress, it is difficult for one to see a single disadvantage to producing passive income.