Why Passive Income is Important

What is Passive Income?

Passive Income is generally defined as a stream of income earned with little or no ongoing effort needed from the individual receiving the passive income in order to grow the stream of income. Passive income is income that is not proportional to the time you physically put into acquiring it. Active income (typically one’s regular job or additional part time jobs) is a direct exchange of your time and skills for money.

Examples of passive income include royalties earned from stock photography or from a digital course you create. In both cases, the content, whether self hosted or on a larger website, generally require little or no maintenance or additional financial investment to maintain the source of income.

The intriguing thing about passive income is that it can be generated literally while you are sleeping, freeing up additional time for hobbies or allowing you to increase your earnings by performing some other form of work while still generating previously established streams of passive income.

An example of this would be a person working a 9–5 office job where they are paid a fixed salary. This same person also receives regular passive income from an eBook that he wrote on gardening over two years ago. The office job requires direct effort to produce the agreed upon amount of income. The employee, whether hourly or W2, is trading their time for money.

Why is Passive Income Important?

There are many articles dedicated to exploring the various ways to make passive income. But many fail to consider the underlying question — why is passive income (as opposed to active income) important?

The answer is actually a fairly simple relationship between time and money. Time is the most valuable commodity. There are only 24 hours in a day. Time is the greatest equalizer because not a single person can have more of it. It can never be recreated or re-spent. It exists once, then it’s gone. And that’s precisely why passive income is so important — because time is more valuable than money.

Unlike money, which can be earned, saved, spent, invested, squandered and lost, we can’t tuck away minutes on a clock. We can’t expect dividends on seconds or hours in the bank, or invest the time that we didn’t use on something else. Considering that most of the free world needs to work for a living, consuming much of the time they do have, this precious commodity needs to be prioritized.

Passive income is one of the most important strategies that that the rich utilize to get richer. It’s how you detach your ability to earn from the limited time that you have in a day. With passive income, you make money while you sleep. You also make money while you’re awake. It’s automatic and simply keeps coming in.

“If you don’t find a way to make money while you sleep, you will work until you die.” — Warren Buffett

However, creating a passive income stream is far from easy. It takes an enormous amount of effort and investment of your time with very little return in the beginning. It involves an overall sense of frustration and an enormous learning curve. Still, it’s one of the most worthwhile investments of your time that you could possibly engage in.

As the chart below illustrates, any amount of passive income earned is exponentially more valuable than the equivalent amount of money earned through traditional work (trading time for money).

$100 in passive income per month may not sound like a lot. However, to generate the equivalent of $100 in monthly passive income, you would need to have $30,000 invested earning 4%. This 4% return is fairly conservative when compared to the historical average annual return of the S&P 500, which is around 7% (after inflation).

While passive income might not be the answer to all of your immediate financial problems, it is a pathway to success and most certainly the foundation for wealth and financial independence.

When you’re not stressed out focusing on just making enough money to pay the bills and you’re no longer living from paycheck-to-paycheck, there’s a mental clarity and an emotional catharsis that sets in.

You become free to spend your time doing things you actually care about. You can spend more time with your family, focus on improving your health, have the freedom to escape a job you hate, or pursue a creative passion that you otherwise would relegate to the few hours of your free time on the weekend.