What is passive income, rental income & cash flow
What is Passive Income
Passive income is the money you make without actively employing your skillset. Active here is the operative word and means that generation of that money is not dependent upon you allocating your time and skills towards that end. That said, you do need to initially invest your time, skill, and money to create such sources of passive income.
What is cash flow
Cash flow is any (monthly, quarterly, or yearly) inward flow of money in return for your investment i.e. dividend-yielding stocks, a rental property or monetized content, etc.
Therefore, cash flow is just another name for passive income. However, there is one fine detail that also needs to be kept in mind. The way investments in assets generate positive cash flow; likewise, taking upon liabilities will cause negative or outward cash flow on a daily, monthly, quarterly, or yearly basis. Refer to all the examples we gave in assets vs. liabilities. The liabilities like a car, home, subscriptions, etc. cause an outward or negative cash flow in the form of maintenance, upkeep, taxes, monthly fee.
We can go on talking about what passive income and cash flow are and how you can generate it, but without real-life examples it means nothing. So, we directly move to present you with some examples of how passive income is generated.
Rental income is an example where the investor can generate monthly passive income. If you rent your property, it will generate you a regular passive income in the form of rental. Such property can include real estate, vehicles, industrial equipment, etc. In case the same property was under your own use, you will need to spend money regularly in lieu of maintenance, upkeep, taxes, etc. – making it a liability rather than an asset. However, if the same property yields you an income beyond your expenses; it becomes an asset generating passive income or positive cash flow.
Various Passive Income Generation Options
Stocks and shares are other examples where some companies share profits on a quarterly or yearly basis – also called dividends.
If you are investing in stocks, do it after due diligence and research on the company, you are investing in. If you cannot perform the required research and want to remove all these hurdles of research, luck, and uncertainties; you can simply invest in an index fund that diversifies your investment across all companies in the index.
Another unorthodox approach to creating passive income is through creating something that adds value to someone’s life in any form. While you do it, there are platforms available to allow the monetization of your service to the masses. Such platforms include blogs, YouTube channels, or Instagram accounts that can act as an influencer, a digital product (like eBook or website template or a computer utility, etc.), or a physical product that you can patent/copyright.
The beauty of these income streams is not that they add a small or large sum into your pocket. The beauty lies in free time and energy that they free up for you to dedicate towards whatever you are passionate about or whatever drives happiness your way. As the author of “The Millionaire Fast lane” MJ DeMarco puts it, money literally grows on trees but you have to plant and nourish the right type.
All these passive income sources are the money-making trees that you can plant for yourself and your future generations.
The way passive income or positive cash flow (through investments in assets) helps with building wealth; negative cash flow (piling on liabilities) will surely hamper your financial freedom. So, all you got to do is: evaluate your purchases. Are those assets or liabilities? Will they cause a positive or negative cash flow? As you start answering these questions to yourself, you will be well on your way to financial freedom and wealth accumulation.