Passive Income: The Secret Key to Your Long Term Success

True wealth is something difficult to define--it cannot be reduced to personal liquidity, nor is it as simple as living a life of total leisure. Although these two concepts are related, being “rich” is also not the same thing as being “wealthy”. In our lifetimes, the majority of middle-class Americans will find it more possible to be part of the former category rather than the latter. Since most of us who earn income use it to pay off mortgages, health insurance, and student debt loans, most of the income that we generate goes directly to cover our other expenses.

For this reason, some of us will find it difficult to save money over time, while others who are exceptionally frugal will begin to slowly build their savings. If you are an avid saver and part of the second group, the money that you accumulate is a direct function of your ability to forgo purchases and save. Regardless of which group you belong to, these strategies alone will not free you from a lifestyle of active earning until you are “rich enough” to retire. Transitioning toward accrued wealth and a more flexible lifestyle requires a separate financial planning strategy entirely.

The secret of what separates the rich from the wealthy is that the rich have to work for their money, whereas wealthy people make their money work for them.

Even more so than money, time is a precious commodity that we don't have enough of. Because time is finite, your ability to save is directly related to earning a high income and forgoing discretionary spending. If you want to effectively earn money without increasing your salary or taking habitual spending cuts, passive income may be the key to your success.

What is Passive Income?

Unlike active income, passive income is money that generates its own returns over time without a substantial time investment. While active income (like a salaried job) requires a trade-off with time (meaning that you have to sacrifice more time in order to generate more income)--passive income only requires an initial upfront investment that pays returns down the road. The only time required from you is the time you spend making your initial investment, and any time you allocate towards cultivating it. Either way, this time commitment is substantially less than what is required from active income, and it will make the difference in bolstering your savings account.

As most middle-class Americans are busy balancing their time, energy, and expenses, their savings are dictated almost entirely on forgoing purchases. For this reason, it is nearly impossible for them to break through and become wealthy. In contrast, their wealthy peers are able to pull ahead of the pack because they effectively invest their extra money in sources of passive income without depleting their existing time or resources. To be clear, passive income does require some amount of time and capital investment. However, strategic investors are able to multiply their assets by using passive income as the foundation for their wealth. With the proper tools and know-how, anyone can emulate their success with passive income.

While it might take some time after the initial investment before one starts earning passive income, this money will eventually reduce the amount of time or energy spent earning active income by building up your savings. When we rely solely on our active income, it becomes easy to get trapped in a cycle of living from paycheck to paycheck. But passive income allows you to free yourself from the expectation of producing an income in order to finance your expenses. Moreover, passive income continues to pay out long after the initial investment, so it is possible to reduce the amount of time you spend working while still earning money!

To be sure, creating a passive income flow requires work. In order for it to work, you must do your own research, invest your own capital, and cultivate your investment over time while expecting little return in the first few years. If you are willing to take these measures and invest in your future wealth, you will find that (if properly done) the benefits will outweigh the risks.

Consider the Benefits of Passive Income

If you are debating whether or not a passive income strategy is right for your needs, consider three of its primary benefits:

1. Passive Income can be the foundation for your financial security and growth

Relying on active income alone to cover your expenses as well as your discretionary purchases can be a stressful and risky endeavor. While it is wise to put aside as much money as you possibly can for a “rainy day”, sometimes this strategy seems to undercut our ability to live and enjoy the moment. Having a passive income investment is a surefire method that enables you to put aside money for your future savings, while not being tethered to the unrealistic expectation of saving every extra dollar you can in the present. In order to truly augment your personal wealth, you have to invest in sources of potential income that will pay for themselves over time while requiring relatively little effort on your part. A perfect example of this strategy in practice is real estate investing. If you have managed to save some of your income over the years, you may have enough capital to invest in a home or an apartment that you could rent to others.

By owning real estate, you are able to collect overtime while putting in less effort in the long run than if you had to take up another salaried position. The money that you then earn from your passive real estate investment can go directly into your savings or can be used towards another passive investment that can help you further multiply your wealth. Smart investors closely follow multiple different markets and have a diversified investment strategy so their passive income isn’t depleted by isolated market volatility. In other words, if you invest in multiple properties within a similar geographic area but distributed across socioeconomic divides, you can almost guarantee that you will collect passive income from one of your holdings even if the others are not necessarily performing well. With the money that you earn from your passive income, you can invest in your own future.

Moreover, passive income allows you to strengthen other key areas of your financial plan. Because passive income supplements your overall savings and therefore reduces your need to dedicate all of your time and resources toward earning an active income, you can allocate your extra time to exploring ways to strengthen and improve your financial stability. In the process, you can also improve your financial literacy by researching tax regulations, stocks & bonds, and other forms of investing. All of these components, when balanced, contribute to a well-rounded financial strategy that will bring you closer to a life of wealth and leisure rather than a life of constant work and stress.

2. Passive Income affords you the freedom and opportunities to work from anywhere

One of the benefits you will observe as you earn returns on your passive investment is that you can transition from earning active income to living off of your passive earnings over time. By acquiring money from your passive investment, you no longer have to sacrifice all of the time that you formerly had to in order to earn income. Your savings account should be substantial enough where you can transition into either retirement or semi-retirement. Moreover, as you continue to multiply your passive income, you will be afforded the flexibility to work from anywhere in the world. Given the state of technology today, it is technically feasible to manage your investments abroad--meaning that a passive income strategy can enable you to live and work in your dream location anywhere in the world.

The amount of time that your passive investments will make available to you will also enable you to enjoy more quality time with your family, friends, and loved ones. Those who rely totally on their income to finance their lifestyle may find that they are constantly pressured to “keep up”, and this drastically reduces their work-life balance. By having more free time, you can improve your relationships and yourself--and this will bring you years of fulfillment that you may have otherwise missed out on.

3. The financial security that comes with passive income gives you peace of mind and reduces your anxiety about the future

The amount of financial volatility in the last several decades has had marked effects on not only on our country’s mood but also on our individual well being. Following the economic recession in 2008, consumer confidence reached pitiful lows as families lost their savings almost overnight. As working-class individuals and families went bankrupt, their faith in the future was left in ruins. This lack of security is one of the worst feelings, and it is a consequence of inadequate financial planning. The effects of financial insecurity are so profound that they affect other aspects of our lives, including our physical and mental health. When we lose our security about the future, it is impossible to place ourselves in the present. And if the anticipatory anxiety about your own financial ruin isn’t bad enough, the resulting lack of personal connection you share with others is a recipe for social isolation and strife.

Although these issues affect us all at some point in our financial lives, they are largely preventable through proper financial planning. Passive income is one of several elements of a balanced financial plan, and it can be particularly effective in casting away your fears about the future. By its very nature, passive income allows you to set aside income that you gain from alternate investments rather than your active source of income. That way, in the event that you lose your job, you will continue to have a steady source of income that could keep you afloat. The resulting security that you gain by earning a steady source of passive income will enable you to better connect with others, and abandon your worries about the future. As you begin to develop your savings through passive income, you may find that the lack of stress will translate into vitality in other areas as your life. As you gain more energy and become motivated, you can finally work toward the future that you have always wanted to build.

Perhaps the greatest gift that passive income can give you is not wealth at all, but the freedom of choice. When you have the luxury of added income, you can open yourself up to endless possibilities about how and where you can work, how you would like to spend your spare time, and how you would like to prepare for your future.

Of course, it ought to be said that investing in sources of passive income is no small task. It requires much work on the part of the investor to properly research the assets that are right for their needs, and move toward their goal with persistence and focus. However, if you decide that passive income could suit your own or your family’s needs, there are steps that you can take. First, decide on how much money you can set aside for a side investment by discussing your options with your accountant or financial advisor. Then, do your research to determine what investment options are available to you. Be sure to do plenty of research online about the best options within your price range and location. Finally, no matter how discouraging the process can be, it is important to stay motivated, and work to achieve your goal!

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