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Explained: What is passive income and how it differs from active income


Passive income is earning for which you are not trading your time, effort and energy.

Explained: What is passive income and how it differs from active income
Authored by Arpit Arora
Passive income is earning for which you are not trading your time, effort and energy. It comprises earnings which are derived via various means based on skill and system contributing to the cash flow of income.
In simple words, it is a positive inflow of money without putting much effort to earn it. Portfolio Income (Passive income from Wealth management), apart from income from E-book, E-courses, Affiliate marketing, YourTube monetization, etc. are commonly considered ways of Passive Income as it does not require a lot of effort to earn it, or so it may seem.
Passive income is supposed to require little to no effort in order to earn and maintain else it would be called Active Income if you put a considerable amount of time and effort into it.
Active Income means you are doing something in order to earn that income such as time traded for money i.e. doing a job for salary, running a business for profits, taking up a task on freelance for remuneration, etc. The next thing that comes into the picture is the purpose of earning that income. Active Income is usually what we use for meeting our everyday expenses and most of the population is dependent on that for their livelihood which should not be the case as it may become a hurdle in following your passion.
You may or may not like your current job profile, position, organization, work environment, business, etc. and still be continuing to work because your livelihood depends on that. Also, active income being the only source of income for many becomes a ship heading for a wreck as soon as it faces a storm. Now having a source of income that could take care of your expenses would give you that financial freedom you always wanted in order to follow your passion freely.
There are various sources of Passive Income such as Peer-to-Peer Lending, Affiliate Marketing, E-courses, Display Advertising, eBooks, YouTube Channels, etc. but these all require some kind of skillset and require you to devote regular time to it, defeating the definition of Passive income. They are mostly semi Passive as they require continuous effort on the side. Although, there are some ways using which you can earn Passive Income without any skills simply by using your existing wealth.
Those are:
Rental Income via Real Estate
Rental Income is a great way to get cash inflow monthly. There is not much effort that you have to put into this other than owning the property. This has become easier in this Internet Era as people can find properties easily to both invest and rent. The property could be anything starting from a commercial, warehousing, industrial, or residential depending on the location and demand of rent for the same.
Equity income is money earned from stock dividends, which investors can access by buying stocks that have declared dividends, or by buying funds that invest in dividend-paying stocks. This income is more prone to volatility than any other income source. This source also pays an additional return component to Capital gains. There are many funds that focus on high dividend-paying companies which help investors to get short term income as well as long term growth,
Debt Investments
Debt investments represent a loan from which you expect to receive a return of your principal with interest, from as simple as the money in your back to, P2P lending (Peer to peer lending) is a part of this category. There are various risk and secure ways in debt investments depending on the risk appetite and return expectation of the investor. Safe ways of Passive Income from debt instruments include PPF, PF, NPS, government-based NCD (Non-convertible Bonds), etc. while more aggressive ways are also available to invest via corporate bonds of NBFCs (non-bank financial companies).
Investing in Gold has also generated Passive Income for a lot of people lately, especially in the past 5 years. Investing in Gold Bonds is a new style of investing which can fetch from 2.5-2.75 percent yearly interest income, which is at par with the bank interest on many national banks to date. This is a unique way to not only enjoy the benefits of investing in Gold digitally but also getting interested to do so.
Many people consider using the traditional style of investing in insurances as a part of their tax deduction and buy insurance plans which start paying yearly income back to them after a certain time. The most interesting thing about this is that the investment is tax-free and so is the income received from it, hence making the arrangement very lucrative for the individual, especially in the high tax bracket.
REITs & InvITs (real estate investment trust & Infrastructure investment trust)
This new-age style of investing is suitable for an aggressive Passive Income seeker who wants to invest in projects of larger corporates and get a periodic return on the same. India is slowly getting a lot of such financial instruments and they are rapidly gaining traction.
With yields in double digits in some cases, they offer a high-risk high return avenue and that on a periodic basis like rentals but without having the hassle to buy a piece of land.
Arpit Arora is Passive Income Coach, and Founder at AskTheWiseGuy. Views are personal
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