Author: A. Annika Smith

If you search the internet for "passive income", you may find a
definition or two, but mostly, what you find are web sites
trying to sell you on the passive-income-flavor-of-the-day. It's
frustrating, I know. I don't know about you, but before I jump
into any opportunity or even before I take a trip, I like to do
my research. That being said, there are a lot of good
opportunities out there. But before you start spending money,
let's discuss what passive income is and, most importantly, what
it isn't.
Webster's dictionary defines passive income as "of, relating to,
or being business activity in which the investor does not have
immediate control over income". I don't think that tells the
whole story. Passive income is money that you receive over and
over again without having to do much work (notice I didn't say
"any work"). It is different than earned income in that you are
not receiving money for your time (like you would a job). But
depending on the passive income stream that you choose, you may
in fact have immediate control over your income. But I'll get to
that later.

Why would you want passive income? Well, like Robert Kiyosaki
explains in his book "Rich Dad Poor Dad", that is the main
difference between the rich and the middle class. The rich
invest their money in various passive income streams. When their
passive income exceeds their expenses, then they are financially
free. "Financially free" simply means that you do not have to
have a day job to pay your expenses. And you are "free" to then
do whatever you want!

What Passive Income Isn't

Before I go into telling you what passive income is, let me
first tell you want it isn't. Passive income is not the same
thing as "residual income". Residual income is money that you
receive on a regular basis after having done work once. The best
example would be TV sitcoms. Some actors get "residuals". Actors
get paid for filming the show. Afterwards, some actors get paid
each time the show repeats. Sales people that sell services,
subscriptions, or renewable products (like insurance) sell that
item once and, providing the customer renews, will get a
commission off of each renewal. Royalties from the sale of books
and music are also residual.

Many say that multi-level-marketing or network marketing sales
provide you with passive income. Guess what? That's residual too.

If you have a small business or are self-employed, even if you
are making a lot of money, this is NOT passive income. If you
receive a salary from your business, that is earned income.
There is a way to turn this into passive income, however -- so
stay tuned.

You know, I have to say that starting your own web site cannot
be passive income. Whether you are selling a product (such as an
eBook, seminar or other information) or a service, you still
have to market your web site. You will have to do this
regardless of whether you are selling your OWN products or have
the rights to sell other's products. Marketing your web site is
work, simple as that. But it's not a job. And once your
marketing efforts start taking off, you can make a lot of money
with little additional effort. But that is residual in my book,
not passive.

What Passive Income Is

Passive income is a lot of things. The first thing that comes to
mind, and also, I believe, the most popular example is real
estate. If you own investment property and are getting a
positive cash flow from a house, commercial property, or
apartment, that is passive income. If you rent rooms in your
house, that's passive income too. You only have to set this up
once, and then the income comes in month after month. Interest
income from savings accounts, CDs, and money-market accounts are
passive -- the bank pays you for keeping your money in those
accounts. If you have a web site with banner ads or Google
Adsense ads, that can be called passive as well.

If you invest in any business, but don't manage it, your profits
are considered passive income, exactly what Webster was thinking
about when he wrote the definition.

What about business? Well, that depends on how you set it up.
Rich people create businesses and set up a system that the
business follows. That way, if the owner goes on vacation for a
month to Fiji, the employees follow the system and the owner
still gets the profits. Any business will of course start out
with a lot of work, but if you take the time to set up a
business so that it gets reproducible results (exactly like a
franchise), those profits become passive. And, according to the
IRS, any salary you get from your business is considered
"earned" but profits are considered "passive". It is vital when
starting a business to check with an accountant and an attorney
to set up your business that financially benefits you the best.

What else can be considered passive income? How about
self-storage facilities, parking garages/lots and dry cleaners!
They all require some time to start up, but once they are set
up, you collect money over and over again.

Residual vs Passive Income

Residual and passive income are like siblings. They are both
very similar and most people really consider them synonyms. What
does it matter, anyway? They are both excellent ways to get
money in your hands month after month after month without
trading your time or your freedom. How can it get better than
that?

Reality Check

Beware of anyone that tells you that there is NO work involved
in passive income. Passive income does not mean no work! If you
are going to invest in a business, a stock, or a real estate
property, you will have to do your research (this is called "due
diligence"). Research is work! You will also be required to
manage your investments, to check up on their progress and make
changes as necessary. That's work too!

The good news is that research and management is only a
part-time endeavor. And most of the time, that work can be done
from almost anywhere, including on a beach in Fiji.

Let us not forget the FUN factor. I'm sure there are some of you
reading this who like, even love their jobs (if you still have
one). Some of you have your own business-- and congrats to you!
But most of us are in jobs just because we need to feed our
families and pay the bills. Looking into passive income streams
and investing your time and money can bring you many, many
returns. Researching for and implementing your passive income
plans so that you can live your dreams is FUN. Getting money
every month, week, or even every day is FUN. And trying out new
strategies and managing your money -- when you have some to
manage -- is FUN.

I hope I've done my job and given you the passive income basics.
If you have any questions or thoughts, feel free to contact me
through my web site I'd love to hear from you!

About the author:
Annika Smith is dedicated to teaching others how to be not only
financially free, but also wealthy and happy