What is Passive Income?

Today’s Saturday Selection is the first from our newest addition to the network, Passive Income MD. In case you missed it, he was introduced on Monday, although he’s been actively blogging on passive income and related topics for at least a year and a half.

So what is passive income? It can be tricky to pin down exactly what qualifies as “passive,” so I’ll let someone more qualified than me give you a working definition.

This post originally appeared on Passive Income MD. So, PIMD, what exactly is passive income?

 

Definitions of Passive Income

 

The term “passive income” gets thrown around a lot these days. Every online guru claims to have the secret to making millions in your sleep. But the fact is, “passive income” is not always easy to achieve and is actually a pretty loosely-defined term. It can be different depending on who you ask and at what time of day.

For example, a quick internet search turns up the following definitions:

“Passive income is an income received on a regular basis, with little effort required to maintain it.” – Wikipedia

“It’s all about working hard now so you can reap the benefits later.” – Pat Flynn, Smartpassiveincome.com

“A passive income stream is one where, once you’ve done the initial investment, there’s little or no upkeep to that investment required to maintain the income stream.” – The Simple Dollar

While I believe each of these definitions has a place, let me begin by giving you my own definition.

For me, passive income is income that is not proportional to the time you physically put into acquiring it. In other words, “time in” does not equal “money out.” Put even more simply, you eventually get more than you put in.

 

Income that is not proportional to the time you physically put into acquiring it.

 

Passive Income is About Freedom

 

With all the different forms of passive income, this definition serves as a way to measure whether a certain method is worth my time. When in doubt, I simply put it up against this last statement to see if it fits the criteria.

Now, I’m a realist. I realize nothing in this world is handed to you. I know that creating streams of passive income is neither easy nor immediate. None of this is a “get-rich-quick scheme” (unfortunately). It takes time, smarts, and guts, but the payoff is well worth the investment.

How do I know this? Because I’ve met people who’ve achieved this. Strangely, however, almost none of those people were medical doctors. As a physician seeking the best methods of passive income, this is a gap I’m actively attempting to bridge for myself and others. Ultimately, it’s all about the freedom to do what you want with your time.

 

halona blowhole

pof: i want to go back to hawaii!

 

Passive Income and Retirement

 

When I seek these methods of passive income, I’m looking for reliable streams that pay out on a monthly, quarterly, or yearly basis. That way I can begin to replace part of my own income immediately. . (To see what some of these ideas are, see 10 Perfect Passive Income Ideas for Physicians.)

You see, I am on the path to a very gradual retirement. I’m not looking at a date thirty years from now and saying, “Boy, can’t wait to get there and begin enjoying my life!”

Quite the contrary–-I’ve committed a good amount of time to medicine, and I’d like to continue my practice as a doctor. But I also want to have more flexibility in life. I want to be able to spend more time with my family and have time to pursue other interests.

Ultimately, passive income is best described as a tool rather than a scheme. It isn’t about quitting your day job so you can enjoy life, it’s about giving you the freedom to enjoy your first passion – medicine – more fully. It can provide a work/life balance that most physicians in this day in age only dream of.

 


You're still not using Personal Capital? That's how I track the PoF portfolio.

 

So let me hear it from you. Are you interested in passive income? Do you have your own definition for it? Feel free to share.

17 comments

  • I like Pat Flynn’s definition of passive income. In 2009-11, I got on the iPhone app gold rush and wrote a bunch of iPhone apps. Once they were in the App Store, people paid $1-2, which over years, eventually netted me a five figure sum. All the hard work is upfront, and you collect the dividends over time.

    I would consider blogging to be passive income, although it might not seem like it. Each article that is published gets read initially by a bunch of regular readers, but traffic to the post can continue to flow years later through search engines (or syndication, in the case of this post). If the value of the blog is proportional to its number of views, then the hard work to write each post pays off months or years later.

    • I think there are three types: Passive, Active, and the Combo Platter!
      Blogging is a combo IMHO. It seems a lot less passive to me than my other investments but I agree you can benefit from “residual income” going forward – unlike when we trade an hour of time for a wage earned.

  • Great read. This is the best definition of passive income I’ve seen. I too would love to have more flexibility later in life, even though I’m only a resident lol.

  • I have to agree with The Simple Dollar – passive income is income derived from an investment of capital, not labor. If the income results from your labor and ingenuity, even partially, it’s not passive. Dividends, interest, and rent are the typical kinds of passive income. To me, even MLM is not passive. Far more labor than capital investment is required.

    • I think passive income always takes some amount of labor (time & energy), just stacked heavier on the front end. Even smart and effective investment of capital should involve a significant amount of research and reading before jumping in, as well as readjustment here and there. When it comes to rental income, I’ve found the amount of labor involved comes in seasons.

      • I agree that any smart investment decision should involve research, but my point was that your “work” should not produce “income”. To be truly passive, the income you receive needs to result from the deployment of your capital, not your efforts. At least, that’s the way I look at it, not that anybody else has to agree! 🙂

        • Makes sense to me and of all people, you know that arena well (smart deployment of capital). Like I mentioned, different definitions for everyone and I definitely appreciate yours. For me, the key is not whether there’s any labor, it’s whether the amount of labor and compensation are completely linked. Work and take action smartly, use your ingenuity in some cases, and the payoff comes afterward in the form of steady income.

  • Pat L.

    After 35 years of ‘collecting’ properties (during the days of 18% mtgs) I sincerely appreciate & enjoy the exponential gains of Passive income & the power of Compound Interest on the notes we hold. (We have also helped a lot of young kids eventually own a home).
    Many of my Engineering colleagues laughed at my long hours of rehabbing & financial folly & swore I would never ‘make money’. But I was able to retire at 49 & we still enjoy accumulating properties. Most of those that doubted us are still working to afford retirement or are working part-time to maintain a very compromised lifestyle.
    I recently hired another live-in maintenance man for our farm & 6 units & could not believe the number of 55+ men who have absolutely nothing but an old vehicle, just a few tools & poor health.
    Our kids joke that all we do is hang out with fellow investors (one is a Vet) for breakfast, lunch or dinner & travel too much. Our attorney of 20 years said we should write a book on what we have experienced.

  • Loves me some passive income! I’d consider our real estate portfolio passive, except when I’m dangling off a ladder, clutching onto the gutters for dear life to remove leaves every fall.

    Ultimately I expect our stash to produce passive green via index fund returns that we limit 4% extraction year over year.

  • You see, I am on the path to a very gradual retirement. I’m not looking at a date thirty years from now and saying, “Boy, can’t wait to get there and begin enjoying my life!”

    This!

    As you know I went part time recently and this sums up my strategy. Gradually increase my passive income and/or side-hustle income from things I really enjoy, while simultaneously decreasing my hours at my regular job. So far I’m finding it a fun journey!

  • Very good idea, doc. Let the money flow in while at your sleep.

    Can I categorize good health as a passive income? Once I’m healthy, I don’t need to spend any money and time dealing medical bills. That would be a huge saving. Wait a moment, would that would hurt doctor’s business? I hope not. Just a thought.

  • hatton1

    To me the ultimate passive income is dividend, interest, and capital gains that I get from an investment portfolio. If the portfolio gets big enough then you can quit worrying about your day job.

  • PIMD,

    Maybe you need to come up with a term “partially passive” income, or something similar.

    I do agree that the up front work put in (for example, on our websites) and maintainence of work does mean it isn’t truly passive. However, if substantially more work is put in up front (with little money being made) and then a lesser amount of work put in to maintain (and then more money is generated later with less work), then this does seem to be passive… Just not completely!

    Partially Passive Income or maybe Predominantly Passive Income.

    TPP

  • Blogging seems similar to real estate investing – tons of work initially, becoming more passive over time. Most real estate investors initially put in sweat equity, from property management to small repairs, cleaning, painting, etc.. Because taking on all of those duties, instead of paying someone else to do them, is usually the difference between generating cash flow every month and being in the red. I sometimes chuckle at blog posts aimed at beginning RE investors that suggest that they hire a real estate investment dream team, including property managers, contractors, accounts, lawyers, etc… Um, yeah…kind of tough to pay all those players and generate positive cash flow, especially in the early years. Anyway, it is all that land-lording action that takes the “passive” out of the investment process. BUT, with ever-rising rents and appreciation, RE investors should be able to quit their active management when the returns are strong enough. Or, they can 1031 work-intensive residential rentals into a couple of triple net commercial properties – super passive – while still enjoying the income and the tax benefits that only real estate investment affords. Is there an exit strategy like that with blogging?

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