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What is passive income and how can you generate it?

Your day job requires you to work and pays you a salary, or if you are self-employed you earn some income. This is economic compensation that you get as a result of your work related activities during the course of your working day. If invest this salary or income into instruments that will earn investment income for you, you can create passive sources of income for yourself.

As the name suggests, passive income is not something that is linked to your activities that earn you your primary income. In effect, your money works for you to earn more money for no incremental effort on your part apart from the act of investing. This concept is similar to idea of compounding of capital you probably learned as a school student in your Maths class.

The following are examples of passive income:

• Rental Income: You can buy a property for investment purposes and rent it out thereby earning rental income
• Dividend Income: If you invest in shares or mutual funds, you might receive dividend income if the instruments pay out dividends
• Interest Income: When you invest into a bank fixed deposit or buy bonds, you can get interest income
• Capital Gains: If you sell an asset that has appreciated in value since the time of your purchase, you can create a capital gain for yourself
• Windfall Gains: Some games of chance, where legal, like say buying a lottery ticket, might result in a windfall gain that has nothing to do with your skill level

Rather than consuming all your salary today, you should first make an investment, however small it might be, so that you can over time create passive income for your self. Once you have made this investment, then you can use your salary towards consumption-oriented expenditure.

This might not always be easy, and depends upon the state of your personal finances and your family situation. Also, if you are just starting out your career, you might not have the flexibility to invest immediately. On the other hand, if you are in your middle age or planning your retirement, your key goal should be to use your income from your peak earning years to create passive income towards funding your retirement.

Even if you start small, the idea is that you should start creating passive income for your self. This is one way that you achieve financial freedom and flexibility. So work hard, and invest smart.

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prakash said : 29/12/2009	i want buy a property for investment purposes and rent it out thereby earning rentalincome