What is passive income?

Money for nothing, clicks for freeTime is money, as the old saying goes. But there’s more than one way to earn a buck. Most everyone is familiar with the traditional model that involves you exchanging chunks of your life for a paycheck, also known as “active income.” Fewer people are familiar with the notion of “passive income,” or money earned from investments, rental property, intellectual property, and other sources that require minimal time once they’re up and running, but still get you paid.Be cautious owning tech stocks in 2024 | Smart Investing Passive income isn’t just a 21st-century notion. In fact, the model goes back millennia. In ancient Egypt, wealthy landowners rented acreage to tenant farmers—and it was much the same story during the eras of the Roman Republic, the Roman Empire, and feudal Europe. Perhaps unsurprisingly, property rental remains a mega-popular passive income strategy, and it continues to be true that establishing passive income streams tends to require an initial investment. But there are some more innovative ways to earn a low-effort paycheck—it turns out that Thomas Edison has a lot to teach us. More on that below.By the digits 1.6%: Current average dividend yield of the S&P 5004.8%: Average rate of annual home value appreciation in the US over the last 36 years, per economist Robert Shiller5%+: Annual interest rate you can currently get on your savings from various online banks20%: Current maximum tax rate on qualified dividends, which is lower than most income tax brackets$34: Average hourly wage in the US405,000: Number of people following the passive income subreddit, making it among the top 1% of most popular boardsClocking outSeeking a break from the 9 to 5The fantasy of leaving one’s 9 to 5 gig is ubiquitous. Who doesn’t daydream about drinking a final happy hour beer with work pals, dragging Slack to the trash, and breaking free once and for all from the time-for-money paradigm? Passive income streams can also act as a safety net in uncertain times, helping you weather economic storms brought on by political instability, massive technological change, or some magical combination of both those things. But if you’re not keen on becoming a landlord, or simply don’t have the spare capital to scoop up a whole apartment building, you can still dip your toe into the passive income waters via investing in dividend stocks or dividend-focused ETFs, high-yield bonds, and/or peer-to-peer lending. Even a simple online savings account pays in excess of 5% annual interest these days, depending on the size of your balance. Allow some time for your initial money to compound, and you may realize healthy passive income in the years and decades to come. If all else fails, there’s always publishing or patenting some of your very own IP. Consider Thomas Edison’s 1877 invention of the phonograph, which exemplifies leveraging intellectual property for passive income. Edison patented and strategically licensed the tech to companies like Columbia and the North American Phonograph Company. These licensing agreements allowed him to earn royalties for every phonograph machine and record sold, which helped him build a $12 million fortune (or $242 million today) by the time he died in 1931. “The value of an idea lies in the using of it,” he famously said, and the same goes for your self-published minotaur erotica sold for $3.99 a digital pop. The potential for earning money from patents today largely depends on the industry and tech involved and can still lead to big cash, but you may need the legal funds to enforce your claims in court—i.e., start-up capital may be required here, too. Sigh. Maybe just stick to the minotaurs. You’ve got a good thing going there.Quotable“The only real asset you have is your time. The hours of your life.”―Vicki Robin, Your Money or Your Life: Transforming Your Relationship to Money and Achieving Financial IndependencePop quizWhat is a common form of passive income? A. Hourly wages from your Quiznos jobB. Income from your work as a freelance Vibes ConsultantC. Selling ersatz vintage tees on EtsyD. Dividend payments from Apple stock Find the answer at the bottom!Brief history 3,500–500 BCE: In the agricultural economies of ancient Mesopotamia, landlords rent land to struggling peasant farmers. The system remains in place for a couple millennia and arguably right up to today.1878: Thomas Edison takes out a patent on the phonograph, setting himself up for years of big passive-income bucks.1986: Joe Dominguez and Vicki Robin release Your Money or Your Life as a set of cassette tapes, a pioneering financial-education program that focuses on passive income earned through high-interest bonds.1992: Your Money or Your Life comes out in book form, proving immensely popular, selling millions of copies over the next 30 years, and even earning a shoutout from Oprah.2003: Barclays launches one of the first dividend-focused exchange-traded funds (ETFs), making it easy for passive income seekers to buy a basket of high-performing dividend stocks.2022: In a profile celebrating the 30-year anniversary of the publication of Your Money or Your Life, Vicki Robin tells the Washington Post that the book’s original environmentalist message got lost in the shuffle.Fun fact! The Roman Emperor Nero is famous for many things—mostly murder—but he also imposed a tax on urine in an especially inventive, if not absurd, form of passive income. The tax was later reinstated by the Emperor Vespasian, who said blithely of the money the tax generated that “pecunia non olet,” or “money doesn’t smell.” Watch thisThe ancient Roman guide to passive-income streams Money doesn’t smell, no matter its origins. Just ask some Roman emperors whose passive income stream, in the form of a urine tax, illustrates a vital financial truth, as explained in this video.PollWhat’s your own most innovative passive income idea?Renting out your snowblower Training squirrels to fetch changePublishing YouTube content about how to earn passive incomeGive us a peek into your entrepreneurial brain.💬 Let’s talk!🐤 X this!🤔 What did you think of today’s email?💡 What should we obsess over next?Today’s email was written by Catherine Baab-Muguira, who covers money and culture for outlets around the world (and actively listens to Madonna at the gym). It was edited and produced by Morgan Haefner (who feels pretty passive about New Year’s resolutions).The correct answer to the pop quiz is D., Dividend payments from Apple stock.


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