Passive income is defined as the ability to earn money whilst not being actively involved. Doesn’t that sound like the dream, hey?
But is passive income really possible? And if so, at what cost?
I have been on a journey to transition my earnings into a totally passive income. But the reality is, this is a hard endeavour to achieve success with. Unless you are born into considerable wealth, most of us need to graft to make ends meet.
And so living off a passive income is merely a pip dream – akin to that of a huge lottery win.
I have a full time business (in the food sector) that is extremely long hours and very physically demanding – as far from passive as you can get.
But that doesn’t stop me working my way towards this seemingly impossible dream. And here are the 3 ways I believe it is best achieved.
Debt Free
Most if not all sources of passive income will first require some form of investment. You’ve probably heard the saying ‘you need to spend money to make money’ before?
Well, never a truer word said when talking about passive income. The purest form of this income source is interest payments on cash investments. This form of passive income can pay you for years to come, and will largely depend on the size of your investment.
But before you can even begin to think about investing, you need to ensure you are debt free.
And why is this you ask?
Well, debt is more expensive than any income you will receive – in nearly all circumstances. Therefore, paying off your debt is the first step to financial wellness. And this needs to happen before you can consider generating additional income.
Smart Investing
Once your debt is cleared you will then have the opportunity to explore sources of passive income. And this is where it starts to get exciting.
But not all sources of passive income are created equally – and in fact some are just damn right scams. Therefore, you need to be smart.
Investing is a smart way to go, but you need to do some careful research into the markets you wish to invest, and the possible returns that can be generated.
I have invested across multiple platforms in multiple asset classes. This diversification in portfolio offers the greatest chances for success.
You can always get started with a low cost index fund – which gives you access to some of the worlds largest companies in one single investment.
Calculated Risk
When trying to improve your financial health you will need to make decisions that can often carry associated risk.
This in of itself puts many people off, and they never put their money to work for them. This is totally understandable but may not be the smartest approach to your finances.
In order to get on board the passive income gravy train there will be an element of risk involved – the key to success is make sure the risk is calculated.
But what do we mean by calculated risk?
Essentially, only put in what you can afford to lose, but make sure the return is worth the risk. For example, if you want to invest $1000 into a low cost index fund, you will be aware that the worst case scenario is you lose it all.
This is very unlikely, but could happen.
So you want to make sure the estimated return on your investment is worth it. If you like the idea of potentially getting 10% back over 2 years, and you can stomach the possible loss, you have made a calculated risk.
The road too passive income is a long one, and takes time to figure out what will work you. But starting your research and education now is the best way to a financially healthy future.