Why is passive income such a big deal?
In general, there is a lot more of awareness (and talk) of passive income — and passive-income producing investments — than there used to be. Yet, many people still don’t fully appreciate the critical benefits it provides — and the urgent need for it. Why is it so important? Why is it so vital to lock in as early as possible? Here’s why:
Changing Income Dynamics
Passive income changes the dynamics of your income and expenses. Passive-income investments aren’t just for later on, for retirement, or the extreme long term. Generating additional income now elevates earning potential, and that can turn the tide in your favor when you go to balance your bank account each month. It can help you find the finances to both pay the bills and live a little.
Income When You Can’t Work
Most accept that there will come a day when they will need to retire. At that point, passive income is a must for covering living expenses. Yet, we never really know how soon that day will come. Almost 70 percent of the U.S. population stops working by the time they are 65 years old. Many retire much earlier, which may become more popular as tech replaces more and more jobs. At some point, all of us will probably need time off work due to health issues, injuries, or family emergencies. How will you keep the money coming in during these down periods? Passive income can close that gap and deliver money while you are sleeping.
Real estate comes with many organic tax benefits, breaks, and write-offs. However, once you get started, you’ll realize that active income from real estate (i.e. flipping houses) can be taxed at very high rates. Tax rates on passive income and long-term capital gains can be much lower, which makes a big difference in net gains. Buy-and-hold investors can also use vehicles like 1031 exchanges and self-directed retirement accounts to pay even less taxes.
Life is short. Studying and working for 65 years in the hopes of surviving in retirement doesn’t make for much of a life. Unfortunately, most people have less than $100,000 in their savings as retirement rolls around. It is very difficult to retire and live comfortably with such a small amount of cash. Passive income means you’ll be able to live, travel, and spend your time wherever you like — without being tied to an expensive location or commute for one of those old-school jobs.
Passive income is a great succession planning tool. Many wealthy individuals are more interested in passing their income on to support their heirs, rather than stockpiling a big nest egg that they may wind up blowing.
Securing and generating passive income is important and necessary. However, not all opportunities and investments that claim to create passive income really do (like being a DIY landlord). Make sure you look for truly passive investments.
How do you achieve passive income? Let me know in the comments below!