Passive Income - The Basic Fundamentals

By Matt Castle

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What if I promised you money just for breathing? I'm definitely breaching the Top 10 of your friend's list in the next two minutes right? Thought so!

Technically, passive income, for all its recent publicity and buzzword status, is capable of doing just that. Passive income is income that pays you for doing nothing once you create or purchase an item that yields dividends and/or appreciates in value while you own it. Sounds too good to be true right? I assure you its real. So if you need a visual image to assist you, imagine Ben Franklin and the rest of the boys in green working for you instead of you working for them. In fact, almost all of us have at least 2 - 3 forms of passive income right now.

1. Checking Account

2. Savings Account

3. 401k / IRA

The first two probably pay you in the neighborhood of 1-4% depending upon the frugality of your bank, and the third are retirement accounts that everyone has the capability of starting. However, the first two are low yielding methods obtaining passive income if you have an egligible balance. Your retirement accounts are very powerful and critical assets to build for your future, but unless you're in your mid 60s those aren't going to give you any real benefit.

Lets identify some other sources of passive income that can generate a constant revenue stream that does not require much effort after the initial purchase of an asset or its initial creation.

1. Call your agent because you just won American Idol! That's right. You just landed a record contract and you are now receiving royalties from your new music contract. Granted, this could come from the record label since they might own the rights to it, but you now have income for the rest of your life for a few months work having America adore you.

2. You should probably sit down because your long lost uncle just left you 10,000 shares of ExxonMobil Inc. Apparently, uncle Frank moved west many years ago, and he remembered you while doing his estate planning. So you are now collecting a very nice cash dividend payout of from this mega oil company four times a year.

3. Got your favorite Paul Bunyon Halloween costume ready? Those 10 acres of woodlands that you replanted under a renewable resources movement 30 years ago is ready for harvest. Timber farming is a great investment and when calculated over its growth cycle (planting to harvest), and it has been shown to outperform most secured income funds.

4. Got your clipboard and accounting software warmed up yet? Time for my personal favorite: Real Estate Investing. Buying and holding real estate for rental income is one of the best, if not THE BEST source of passive income example available. It requires very little work to process the rental check, all the while your investment property is appreciating in value. Of course, you could have a nightmare tenant or have to do repairs, but in the long run its still a great investment. Therefore, you get a double bonus thanks to the positive cash flow from the monthly rent (rental payment is higher than mortgage payment) and a 5% - 20% annual increase in value depending upon your location.

Granted these are fictitious examples of acquiring income, but ask yourself how much would you have to work to obtain the dividends from these transactions. This is the great aspect of passive income: you sit back and watch the revenue stream roll in while you continue to further your primary career or pursue other interests like starting a family, writing a novel, or traveling abroad for 2 months for "self fulfillment." The truth is that it is very obtainable, and happens thousands upon thousands of times each day.

As if that didn't sound good enough, you can collect multiple streams of passive income and potentially after several years pass by your passive income could exceed your full time employment income. If this occurs, you have achieved a personal milestone that late night TV ads dangle in front of you but somehow never deliver. Not to mention, those extra funds come in very handy for paying unexpected bills, maximizing your 401k contributions since you have extra cash coming in from alternative sources, and an infinite number of places to spend that extra cash.

Matt Castle is a freelance writer specializing in personal finance and various investment strategies. Visit his blog at http://chronologyblog.blogspot.com for more articles and free advisory services.