Do You Define Passive Income Wrongly?

How do you define passive income?

You may be ever heard that income is categorized into two types which are active income and passive income. Active income is the income that you earn by working, if you stop working then your income stream will stop too. 

Passive income is contrary to this one. There's a myth that passive income is the income that you earn without working. 'Make money when you're sleeping' is perhaps what you always heard about passive income.

However, if you really think passive income is something like 'make money without working' and 'money floods in your bank account while you're sleeping on your bed', then this really is a huge misunderstanding.

This is how I define passive income

The definition of passive income that I personally like the most is:

"You can earn lots of money with only onetime work."

You only have to spend some times on an onetime work, then the work becomes a money generator, and money will generate by itself. This revenue is changeable and increasable - it grows as the time goes by and can become multiple times bigger.

For instance, in this month the revenue is 500$, it turns higher to 800$ next month, and in the next following month it becomes 2000$. And this revenue will eventually become 10000$ after one year.

If you compare the passive income with the 9-5 job then you'll understand better the concept. 

After working in an office for a whole day, you earn income for that particular day of working. Everyday's income will accumulate to the end of month and you get paycheck from your boss.

In other words, your income depends on how much work you have done. If you only work for one day then you only generate one-day-income. 

Passive income is the income that you can generate from a done work and it has capability to grow bigger. For instance, an author spent 500 hours on writing a book and publishing it, although 500 hours is a long time for a work but once it is done it can generate constant loyalty income for him. 

Initially the conversion rate of revenue for 500 hours may be even lower than a part time job in seven-eleven. However, as the sales of the book increase the conversion rate increase too. You plant first and harvest later.

For example, one of the richest authors in the world has written a book named 'Harry Potter' which portrayed the adventure of a boy when he's learning magic in magic school to be a magician. This author is the British novelist J.K. Rowling. She doesn't only earn money from the loyalty income but also the revenue from selling the license for films. This is a perfect example of passive income.

2 characteristics must have in your passive income business

For passive income business whether it is able to bring you long-term revenue I would judge is it has the characteristics as below:

  1. You have to work for a while at initiate phase and within this phase doesn't bring you revenue.
  2. After the initiate phase, you build a solid foundation and you only have to spend some time on it but it generates big income. Sometimes (not necessarily), even though you don't care and don't work for days and months but it still brings you revenues.

For instance, imagine that you want to build a highway with automatic payment toll gate. Your revenue will generate from the toll gate - the more the cars pass by, the more the revenue you'll earn.

The first characteristic, you have to spend lots of energies, times and money to build this highway. During the construction phase there is no vehicle allowed to pass by, therefore, you don't have any revenue. 

You have purely expenses when building the highway. Anyway, vehicle will pass through the toll gate once the highway is done, your toll gate will help you to collect money (toll fee) automatically. The only work you have to do is the maintenance of your highway and the toll gate.

The second characteristic, even though you don't manage and care your highway, your toll gate will still help you to collect money. Although your highway didn't undergo maintenance, it doesn't have problem for car to pass by. 

Maybe your highway has some pot-holes and cars are not able to drive smoothly on it, this causes your car traffic to decrease. And some toll gates may fail to function due to some problems and this leads to reduction of your income. But your toll gate will still help you to collect money, your income is still alive. 

However, if you don't care and conduct maintenance for your highway and toll gate then your income will probably drain out eventually.

Well, besides the characteristics above there's still one last characteristic you should concern, that is, it must be able to bring you long-term passive income ( at least longer than one year, 3 years and above is the best). If the passive income is short-term income then it probably isn't compatible with characteristics mentioned above. 

Therefore, if someone told you that he wanted to introduce a business to you which is 'you don't have to do anything' or 'earn even you sleep', then you can examine the business with these two characteristics. You can even ask him straightly about how much the time have to invest in and the cost needed. So then you'll know is that the business genuinely a passive income business model.

Photo credit: WanderingtheWorld

About the author

RIO YEE

Rio Yee is the Founder of WealthyLoveLife and is super passionate about helping people change their mind and take action to improve your important areas in life such as dating & relationships, personal finance and productivity.

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