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Investing for beginners: 5 Reasons to consider passive income investments.

Investing for beginners:  5 Reasons to consider passive income investments.

Passive income investments are those investments that yield an income without having to involve yourself in the day-to-day activities of managing that investment or business. What makes it passive is the fact that you are not directly managing the business or investment. There are many reasons why someone would want an extra – and passive – income stream, including the freeing up of time, reduction of stress, pursuit of happiness, ability to travel and the achievement of financial independence.

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What is a passive income investment?

Most people believe that a passive income investment would be the purchase of shares that yields a dividend. The dividend would be an income for you, but the fact that you don’t materially participate in the running of the company means that it is a passive investment. It is interesting to note however, that the IRS does not consider this to be a form of passive investment. They call it a portfolio investment and treat it differently from a taxation perspective.

IRS definitions: The IRS considers three different forms of income for taxation purposes: active, portfolio and passive.

  • Active income is what everyone understands to be a regular job. You exchange your services for a wage or salary and you are materially involved in the business. For the most part the income is predictable and carries less risk than other forms of income. This includes the bus driver who took you to work, the barista who served you coffee and the accountant who does your taxes among many others. For the most part they are trading hours for dollars.
  • Portfolio income is earnings from dividends paid out by corporations, interest earned on your investments and capital gains. A capital gain occurs when you sell something that you own for a profit, like your house or your shares in another business. The IRS treats these forms of income favorably when it comes tax time. Dividends and capital gains are taxed at a lower rate than active income and is not subject to Medicaid or Social Security withholding.
  • Passive income are earnings derived from a rental property, limited partnership or some other enterprise in which a person is not actively involved. Income earned in this way is taxed like active income except that you can take deductions from expenses that were incurred in the creation of this passive income that reduces your tax obligation. For example, if you took out a mortgage to purchase a rental property you can deduct the interest on the mortgage from the earnings that the property generated. Or if you incurred expenses in the up keep and regular maintenance of that property you would be allowed to deduct these expenses against your rental earnings.

Why do you want to have passive income?

Why do you want to have passive income?

1. Reduce your stress and anxiety about the future:

Imagine how you would feel if you have a second income stream that was truly passive? Meaning that you earned income no matter what you did day in and day out. Now imagine that this second income stream all by itself was enough to pay your monthly expenses.

How would not having to worry about how to pay the bills at the end of the month help to reduce your stress levels? How would that impact your primary income stream? With a significant, extra source of income you could afford to be laid off in times of uncertainty. You could afford to get sick and have to take time off. You could even take time to look after a loved one that has fallen sick.

2. Gives you the freedom of time:

As John Wooden said “Don’t let making a living prevent you from making a life.” Time is really our most precious asset. Once it is gone you cannot get it back or make any more of it, unlike money. When you decouple the requirement to trade hours for dollars (as you do for your source of active income) you gain freedom.

Once your passive income exceeds your everyday expenses then the struggle to put food on the table and a roof over your head is much easier. You suddenly have the freedom to change jobs, travel to new places, start a family, whatever. Best of all you are well on your way to total financial freedom.

3. Allows you to pursue happiness:

So many of us have to work for a living instead of pursuing something that we love to do. When your passive income stream grows to become sufficient enough to look after your needs, and then some, you can begin to really go after the things you love to do.

Do you love to travel and see new things and new places? You can do that. Do you like to create art? Or just take the time to look at it? You can do that. Ever wish you knew how to play a musical instrument? You can do that. Are you lucky enough to have experienced a vocation or calling to do something? You can go and do that. Ever wish you were a better person? You can go and pursue that. The whole world opens up in so many different ways once you no longer have to figure out how to pay the bills.

Investing for beginners:  5 Reasons to consider passive income investments.

4. Live and work from anywhere in the world:

Having a truly passive source of income means that you will earn income no matter what you do, even when you are asleep. This means that you can literally live and do what you love from any location you desire.

Imagine the places you’ve heard about or seen on TV but never had the wherewithal to visit. With a significant source of passive income, you can do that. You don’t need to be tied to a geographic location to earn a living.

5. Financial stability and independence:

When you check out of the rat race you suddenly have the time to investigate and further strengthen your financial stability. You will find that you can even grow your sources of income. Not living paycheck to paycheck will allow you to really dig deep in your due diligence of where to invest your money and achieve financial clarity.

Having enough money doesn’t mean that you won’t have any problems or troubles, but it does mean that you will have the time and resources to tackle those problems in the best way possible. It becomes easier to focus on your goals when you are not pulled in so many different directions. You can do that.

Conclusion: To be perfectly honest, there are as many reasons to generate additional passive income investments as there are people. Most people become astonished at the amount of time it takes to earn an active income versus a passive income. Creating passive income investments requires that you investigate often multiple ideas and proposals and not every one will be appropriate for you. But don’t give up because the benefits of a passive source of income are multiple, varied and long lasting. Ultimately, they are benefits that everyone is striving for all time. You can do that.

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