This blog is intended for educational purposes only. None of these posts are meant to give legal or financial advice. If you need advice you should consult an appropriate professional.

Thursday, March 26, 2015

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!

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