One Person's Passive Income Is Another Person's Active Expense

Passive income is a wonderful thing.  It really does give you freedom in a system where almost everything is transacted in money.  Receiving passive income is the side of the equation you want to be on.  For example my electric bill is a largely passive income to my utility company but an active expense for me.  In that case it would be better to be the electric company.  Who can do that though?  I would like to focus on three types of income that are passive to the receiver and active to the payer:  interest, rent, and dividends.

Interest is the cost of borrowing money you don't have.  How many of us can pay for an education, car, or house with cash?  Not many.  So what do we do?  We borrow from our friendly well-dressed banker.  But borrowing comes with a cost, and that cost is interest.  The lender wants the spread between interest charged and interest paid to the depositor to be as big as possible.  The spread along with fees are how lending institutions make their cash.  As a payer you're most likely paying interest and principal with income earned from a job.  As the depositor all you have to do is let the money sit and earn interest although the interest rates of the last 7 years or so have been pathetic.

Rent is something I pay right now for the apartment I live in.  I haven't owned anything as of yet in my life.  It is a goal of mine to own in the next 5 years though.  Most people go to work everyday or most days to make money to pay their rent.  They once again use active income to give someone else passive income.  It's almost like a balance sheet of sorts.  One side is active the other passive.  There's nothing wrong with renting.  It's a lot less hassle than owning.  I have found though that landlords oftentimes don't want to fulfill their end of the bargain which is wrong.  If you're going to be a landlord be responsive and respectful of your tenants.

Dividends are my favorite.  If you own a stock that pays a dividend you'll get some kind of cash every quarter even if it's $.18 (I got a paper check for that amount once).  Dividends are active in 2 ways.  People in the company you own have to get up and go to work to make you that profit.  Also customers have to pay for the products or services the company peddles, and they're most likely paying with active income.  So buyers and workers.  On the other side of that equation are owners.  Aim to be more of an owner over time.  You'll own a small piece of the means of production.  My goal is to live on dividends alone at some point.  Not easy to do by any means!

Interest, dividends, and rent are passive to some and active to others.  For me being a landlord is on the horizon in the next couple of years I hope.  I think it would be very satisfying to offer someone a nice place to live at a reasonable price.  How rare that is!  Try to figure out ways to receive more passive types of income as you age.  These aren't the only 3 of course, but they are 3 of the most popular and achievable.  Happy hunting!

Keeping Your Head Up

These are difficult times we live in.  Jobs are hard to come by, and if and when you get one it very well might be low paying, part-time, and dead end.  That's the situation a lot of people are in so don't feel bad if that's you.  Just to pay for the basics these days is hard much less trying to get ahead.  We don't really have much choice but to try though.  Here are some things you can do to make life a little smoother in these topsy-turvy days:  keep your expenses low, avoid debt at all costs, and build dividend income.

Keeping expenses low is the key to being free in this money world.  Unless you can be totally self-sufficient (which is nearly impossible) you'll need some kind of money to survive.  The more money that goes out every month however the more you need coming in.  Most likely it will be coming in from a job you work for an employer.  Those are hours of life you and I are trading for money to pay our bills.  This concept is called keeping your overhead low.  Businesses do it, why not you?  With low overhead, let's say $1000-$1500 a month you can survive on even low wage jobs.

Debt is a burden!  It limits your freedom.  The problem is the vast majority of us don't have the cash lying around to pay for a house, car, and education among many other things.  So what do we do?  We borrow.  The people that have the money loan it to us through an intermediary called a bank.  Remember you don't own anything until you have clear title to it.  I have avoided all debt like the plague since I was in credit card debt in the 90's during and after college.  It can be a very limited life because you have to pay for everything up-front.  It's nice though not to owe a soul any money.  Strive to be a debt free person in a decade or less.

Of all my hair brain schemes dividends have been the only form of passive income I've consistently and dependably been able to build for myself.  I'm always open to other ideas, but for me personally dividends from stocks have been the best thing going.  I started dividend investing 11 years ago and now have $150 a month in dividend income.  That's discouraging when I think about it.  Why bother right?  Believe me I've had those thoughts.  I figure though any passive type income is better than none.  We're taught zilch about this type of thing in our education system so I still figure I'm ahead of the pack.

Don't blame yourself if you're out of work or not doing as well as you think you should.  Jobs are going the way of the dinosaur as are traditional pension plans.  I'm in a low paid job right now that is way beneath my abilities, but I'm doing the best I can.  Remember to cut yourself some slack on your way to being sound financially.  Money is a pain in the butt really.  I wish we didn't need it for everything, but we do.  Therefore follow these basic guidelines, and your life should be better.