Aside from our regular jobs, there are now many other ways of earning some extra income. Making the most of our savings, managing the assets we own, or even relying on our talent and skills can all be a good way of earning what is known as passive income.
Sara has loved history since she was little. She even chose to become a teacher to pass on her knowledge to her students. A few months ago, she decided that each year, during her holidays, she would visit a different country to see first-hand where many of the events she taught at school actually took place.
However, when she began to draw up a budget and plan her first trip, she quickly realized that she would need more money than she had anticipated and so she began to think about how she could earn some extra income to complement her wages as a teacher.
After exploring various avenues, Sara was struck by the idea of passive income, as a way of earning some extra money. Although this form of income has always been around, there are now many more ways of earning it as technology rapidly evolves.
What is passive income?
It is essentially money we can earn on a regular or recurring basis without a significant commitment in terms of time or work, as is the case of the active income we earn from our regular job. While some money or effort will normally be required at the outset to set up the source of passive income, once you're up and running, it will require little to no further input.
Whatever the goal we want to achieve with our passive income, this avenue offers a number of benefits, such as instilling a savings culture, giving us an extra source of money so that we don't have to rely on wages alone, or allowing us to cope better with those curve balls life sometimes throws our way.
This will certainly have a positive impact on our financial health or that of our household. In addition, passive income is an option open to a large number of people as there are various ways of going about it.
What are the most popular forms of passive income?
Going back to our first example, Sara must look at a number of factors – both personal and professional – in order to make the right choice when attempting to achieve her financial goal, which, in case you forgot, is to earn additional income from other sources to fund the trip she is planning.
Some passive income options she might choose:
Mistakes to avoid when it comes to passive income
For this way of earning extra money, there are a lot of myths and misinformation going around that could ruin your chances of achieving your financial objectives or even cause you to give up.
Many people think that they will see immediate results, but that is a mistake. You need to set reasonable and realistic deadlines right from the outset before the income will start flowing. Consistency is one of the keys to success.
Another mistake that should be avoided is thinking that the “passive" bit means not having to do anything at all. As explained above, while this type of income does not require the same level of effort and dedication as that of a traditional job, it is very important – especially at the beginning – to do the legwork needed to make the project profitable.
Remember also that passive income does not mean easy money, as writing an e-book, painting a picture or recording a course calls for skills that not everyone has. The same goes for the money that we invest in the financial products or that we use to buy the flat we want to rent out, as time and effort would almost certainly have been needed to amass that money.
Do we need to declare passive income?
Broadly speaking, passive income qualifies as an economic activity subject to taxation, because it is essentially the provision of a service or the sale of goods – virtual or physical – in exchange for monetary remuneration. However, it may be exempt, depending on what the legislation of your country has to say, or you may be required to pay tax on the basis of factors such as the value of the returns obtained or the frequency of the activity.
If you would like to learn more, this article (in Spanish) on the Tu Futuro Próximo website (a blog produced by Santander Consumer Spain) provides further information on what financial freedom means and how you can achieve it through methods such as passive income.