The Mighty Encyclopedia
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What is passive income?
The definition of passive income is revenue that’s generated in a way that doesn’t involve significant or ongoing labor, energy, or time to earn or maintain. In other words, it’s basically what’s referred to as “making money while you sleep.”
With very few exceptions, most passive income still requires some work, but it can be relatively hands-off (say with money from an inheritance) or require a burst of upfront effort before passive income is generated (i.e. creating a membership website).
Developing passive revenue streams is important for a number of reasons: First, it’s a great way to establish financial security for yourself or for a business. Passive income is also important to grow and scale a business: Having a steady trickle of passive revenue coming in to cover costs can allow time and energy to be actively directed toward efforts that add value to and grow a business, like creating content and developing additional features in response to member feedback.
What is the difference between active and passive income?
Almost no income is truly passive. A degree of work goes into any sort of income in a capitalist economy. However, as opposed to passive income, which requires little to no effort to generate, active income is earned by hands-on work that requires a significant degree of time and energy—think wages and tips.
Of course, very few income streams truly require little to no work. As a real-world example, if you renovate a house yourself to flip and sell it, you’ve made active income from the time and energy—the active work—you put into the renovations. If you renovate a house to rent it, then you’ve opened up a passive income stream from the rent money coming in each month.
What are some examples of passive income?
- A membership model for an online community that has paying subscribers.
- Revenue made from people signing up for an online course you made last year.
- Making money from referral commissions from affiliate links in your content.
- Income from display ads on a well-performing blog.
- Income from interest on a high-yield savings account or stock dividends.