Passive income: What is it and why is it important?

Heard the expression ‘passive income’ but not sure what it means? Find out what it is and why it’s so important.

In life, we don’t often have time for everything we’d like to do. You could be someone with a permanent sense of wanderlust. Or an entrepreneur with a brilliant new idea to pursue.

Time always feels limited, however, no matter who you are – and what you dream of doing instead of what you actually do. But that’s when having a passive income can make all the difference. 

Trethowans
Trethowans

It can be the gateway to everything you wish to do and achieve in life. From buying your first house to enjoying a long and luxurious retirement, there is so much you can do when you set up a passive income.

There doesn’t have to be a limit to the amount you earn either. You can literally earn thousands of dollars in a month. But what actually is it – and how can you get it?  

What is a passive income? 

How does this sound: earning an income that calls for no more than a little effort to maintain for however long you choose? In the United States, the Internal Revenue Service describes a passive income as having two main sources – “trade or business activities in which you don’t materially participate” or situations where you provide a rental service.

The scope, then, is quite broad. And, while it may sound too good to be true on paper, it isn’t in reality. Or, at least, it doesn’t have to be. From renting out your spare room to trading the global stock markets over breakfast, there’s no restriction on how you earn a passive income. Yes, there can be risks involved. And, yes, it can be a waiting game. But you can make it work.

The best part is that it doesn’t have to take up much of your time. 

Why is a passive income important? 

So, why is it important to create a passive income stream? Well, time is not something you’re able to save and accumulate – unlike money. Once it’s gone, you aren’t getting it back. And it means you’ll spend less time doing the things you love – and more time earning the money to pay for them. It’s quite a disproportionate balance in the grand scheme of things.

The billionaire investor Warren Buffett once summed it up like this: “If you don’t find a way to make money while you sleep, you will work until you die”. That’s pretty much the bottom line of what it means to have a passive income – the ability to earn while you’re sleeping. 

And that could be from the movement of the markets, uploading photos to a stock website or allowing advertising on your personal blog, for example. These are all activities where you do not have to be actively engaged to maintain your profit-making potential. 

It’s not necessarily all about having the money to do all the things you want to do, either. By creating a passive income, you can help reduce stress or anxiety you might have around your personal finances.

It can make sure you’re covered for a rainy day or give you the freedom to indulge without worrying about your bills. Or it could simply help you enjoy your life more.

After all, time is precious.