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What is Passive Income?
Passive income is income earned with minimal ongoing effort after an initial investment of time, money, or resources.
Definition
Passive income refers to earnings generated from assets or activities that require limited active involvement once established.
Key Takeaways
- Generated with little day-to-day effort.
- Often requires upfront investment or setup.
- Can complement or diversify active income sources.
Understanding Passive Income
Passive income is commonly associated with financial independence and long-term wealth building. While it may not be completely effort-free, it generally requires less continuous labor than active income earned from employment or direct business operations.
Examples include rental income, dividends, interest, royalties, and income from digital products. Many passive income streams require active management initially, followed by maintenance rather than constant involvement.
Understanding risk, sustainability, and scalability is essential, as not all passive income sources are stable or guaranteed.
Real-World Example
An individual purchases a rental property and hires a property management company. After setup, rental payments generate ongoing income with limited personal involvement.
Importance in Business or Economics
Passive income supports financial resilience and diversification. At a broader level, it encourages capital formation, investment, and entrepreneurship by rewarding asset ownership and long-term planning.
Types or Variations
Investment Income: Dividends, interest, and capital distributions.
Rental Income: Earnings from leased property.
Royalty Income: Payments for intellectual property use.
Digital Passive Income: Online courses, software, or content licensing.
Related Terms
- Active Income
- Portfolio Diversification
- Financial Independence
Sources and Further Reading
- Investopedia — Passive Income
- Internal Revenue Service (IRS) — Passive Activity Rules
- Corporate Finance Institute — Passive Income Explained
Quick Reference
- Earned with limited ongoing effort.
- Often asset-based.
- Supports income diversification.
Frequently Asked Questions (FAQs)
Is passive income truly effort-free?
No. Most passive income streams require initial effort and periodic management.
Is passive income guaranteed?
No. Returns depend on asset performance and market conditions.
Can businesses generate passive income?
Yes. Licensing, subscriptions, and royalties are common examples.
