I have heard and read both wealth and passive income defined and used in all kinds of ways.
A common recurring theme I have noticed is the discussion of both in conjunction with one another, often in discussions with the premise of using passive income to building wealth.
Although the intention is noble, the context within which these terms are used and tossed around as if they mean all kinds of other things has been a bit bothersome to me. So this is a very brief attempt to clarify some points and explain the relation between the two.
Wealth refers to an abundance of resources, often times money, often as a result of accumulation of assets overtime. Passive income is income from activities you are not actively involved with. You can earn passive income while you are engaged in day to day tasks like breathing, eating, sleeping and playing.
The reason the two are discussed in conjunction a lot is because wealth is often correlated to your ability to maintain your current standard of living or lifestyle (because of the resource accumulation discussed above).
In the event you are not or cannot work actively, passive income is how you can maintain your standard of living, and thus either maintain or add to your wealth. Passive income is also a good way to expedite building wealth, rather than relying solely on income from actively working for money, or trading hours for dollars.
Some examples of passive income are interest and dividends from your investment portfolio. These monies keep coming in as long as you are invested in securities that award them.
This money comes in without you having to work for it so that you can maintain your standard of living. That is why financial planners preach investing a chunk of your earnings during your working years in retirement plans like the 401k and the IRA.
Sure there are other ways of building wealth as well such as investing in real estate. However, income from investment portfolios is by far the most common and popular form of passive income.
So what’s the point here? The point is that it is beneficial to establish passive streams of income, especially in your earlier years so that you can benefit from it in your later years when you are no longer able to work (or work as much). You do want to retire at some point don’t you?
I review my finances in depth annually. I have noticed a significant increase in the pace at which my wealth or net worth is building since establishing multiple streams of passive income. The more streams I establish, the faster the rate of growth.
So whether you choose to generate passive income through starting a side business on the side, investing in real estate, establishing a niche content website, or one of several other options, passive income is definitely the key to building wealth and hence your lifestyle.
This post was meant to keep things simple without getting into the debate whether true passive income exists to begin with.
You can read a more detailed definition of passive income in my post titled passive and residual income here.
Here is another post on building wealth with passive income from another angle.