Understanding Passive Income and how it can help you make your life better!

A friend once shared that he is now earning passive income through multi-level marketing. He said he does nothing but share his business and when he gets someone to sign up, he earn money. Like him, I used to think that this is a passive income, but the true test of a passive income is when you ask this question, "if you stop working/sharing/talking will you earn anything?" If the answer is "eventually" or "no" then it is not a passive income at all. It is still an active income because you need to be "active" for the income to continue to flow.

You might be a beginner in personal finance and you don't know what an active or passive income is. By definition, an active income is any income coming from anything where you need to be physically be involved to get that income. A good example is salary and business where you have to be there for it to run. Passive income on the other hand, is any income coming from anything that does not need you to be involved for you to get the income. A good example of this income is returns on a business investment, interest, mutual fund, and equity investment.

Simply put, active income needs your activity while passive does not need your activity.

Why is this important and how this concept will help you in your personal finance? Think about it what will happen if the income that does not need you to be present will exceed your expenses?

Let me ask it in another way, what if you put money in the bank and the interest from your money in the bank will be able to pay off every single expenses in your life?

The result is called Financial Freedom. You don't have to work to pay your bills. You now can work because you are passionate about it.

Now, the bank will probably not give you the result that you need. Right now, banks are giving 1% a year of interest and the government actually take 20% as tax. :-) 

Plus there is this thing called inflation which eats the value of your money. We will talk about this later. :)

You need a better investment vehicle if you are putting your money in the bank.

One such vehicle is what is called a VUL or a Variable Unit Linked. This is a life insurance that yields interest on the side because part of it is invested in equities, bond, or both.

Here's less than 2-minute video that quickly explains a VUL:

May your passive income grow that it exceeds your expenses.

Cheers!

Investing Personal Finance