What is passive income?

If you are interested in learning more about passive income it’s important to understand what passive income is first. So what is passive income? There’s probably no one answer to this question and the concept of passive income will vary depending on who you ask about it.

Some people say passive income are earnings which you get without having to work for them, others say passive income are earnings you get that require only some “little maintenance” work on your side. According to the U.S tax code passive income is an “Income that does not come from active participation in a business”…

It’s up to you to decide what you want passive income to mean, your definition might also change over time while you keep learning more about this fascinating world.

My definition of passive income

To me, passive income could be defined as:

“income that you receive on a regular basis generated by work/projects you did in the past and that require little effort to maintain today”

As you can see from this definition passive income is no magic formula that will allow you to just sit down and earn money, it’s not a method which will allow you to make “easy money” or “fast money” either. Instead it’s a business model which allows you to decide when you want to work the hardest and when you want to relax maintaining a regular stream of income.

Another way of looking at passive income

Here is another way to look at what passive income is (at least according to my definition).

Most people tend to look at how much money they are making per work hour in order to evaluate if they are doing good or not. The more you make per hour the better. That is the definition of traditional income. You can increase your price per hour if you get promoted or if your skills are in high demand, but the moment you stop working you also stop earning.

But how about if instead of looking at how much money you are getting right after completing that one hour of work you started looking at how much money per month that hour of work will make you in perpetuity? That’s what passive income is.

Imagine it takes me 3 hours to research, write and publish this article. Now imagine I display some ads alongside this article which generate me $1/month. The article is already written and published, and it will generate $1/month for a very long time without me having to put more time into it. In this scenario those 3 hours I put into writing the article will generate $0,33/month, in perpetuity.

$0,33/month might seem like a joke, but when you add “perpetuity” next to it it suddenly becomes a lot more appealing. I can work for 30 hours and I’ll be making $3,3/month (in perpetuity!), 300 hours and I’ll be making $330/month (in perpetuity!), 3000 hours and I’ll be making $3,300/month (in perpetuity!). And if you think 3000 is a lot, just consider for a moment that if you have a 9-5 job you are putting around 1700 hours into that job every year!