Passive Income: What it is and How You Can Take Advantage of it

There are basically two kinds of income: the linear income and the passive income. The linear type of income is probably the type most of us are familiar with.

If you're employed, working as a freelancer or sales person, you're probably earning linear income in the form of a salary, wage, fee or commission. Passive income, on the other hand, is the type of income that lets you continue earning even after you've stopped working.

Does that sound suspicious? It shouldn't be. The passive form of income has been in force for many years and thousands of people are already benefiting from it. In fact, it is such a great source of income that even financial gurus such as Robert Kiyosaki are promoting it. So what is it exactly and how does it work?

Passive income vs. linear income

Linear income is directly related to the number of days or hours spent to complete a task or an assignment. Let's say you spent 30 hours a week to work on your job. If you get paid $20 an hour, you will only receive $600 as payment for your efforts at the end of one workweek, minus the appropriate deductions. You cannot hope to earn more, unless of course, you work more hours.

With a passive source of income, you could produce a product that will sell and continue to sell even after the initial effort to produce it has been over for a long time. As to how long you could continue to earn from your passive income source, that will depend on how many times it will still sell in the future.

So is a passive source of income better than a linear income? That really depends. As long as you have a regular source of income and you belong to a high pay scale, then you probably have little to complain about regarding your linear income. Furthermore, linear income tends to be a more stable and reliable source compared to passive income which may not always generate the amount of income you expect.

However, in terms of potential, passive income beats linear income in many ways. For one, passive income requires only a single task or project to be completed. Once it begins selling, there really is no further work required. Once you have mastered the necessary steps to make each attempt at earning passive income, you can very well let this become your major source of money generation.

Types of passive income

There are several types of passive income that you can tap easily, provided you have the necessary skills and knowledge. These are:

Royalty

This is the type of income you earn from original work, such as a book, e-book, computer software, film, music and other types of video and audio recording. This usually comes in the form of a percentage off the selling price of a product.

Rental

Rental is another popular form of passive income and may be derived from any type of property such as a building, a house, an apartment, a vehicle or a piece of land.

Savings and pensions

These are also passive sources of income from which you can earn regularly. A savings account, for example, can pay you interest on a monthly, quarterly or annual basis while a pension can be a regular source of income after you have saved up a sufficient number of premium payments to qualify.

Dividends

Dividends, along with interests, are also passive income earned from sources such as bonds and stocks. They are sometimes also called portfolio income.