The term Passive Income describes an income stream, which does not require other current work than collecting the income.
This is the manuscript for episode 7 of the podcast Success and Inner Growth. We discuss here the concept of Passive Income, why we need it, and ways to get it.
Income from Financial Assets
In most cases, the source of passive income is the price of capital. This means the return provided by a financial asset, adjusted for the risk involved and the inflation rate. Those assets could take the form of government bonds, shares, real estate investments or even an annuity.
Royalties for the Use of Intellectual Property
There are income streams linked to the ongoing benefits of work done in the past. Examples are royalties for using a patented process and brands including names, logos, etc. Other examples are fees for playing copyrighted videos and audios. Authors receive royalties every time, when one of their books is sold.
Social Benefits Provided by Government
Many governments provide passive income to people in need. Obviously, those social benefits must come in most cases with strings attached. They are meant to bridge times, where someone is not able to work, or is unemployed.
Pensions Guaranteed by Government or Public Institutions
Pay as you go pension schemes, guaranteed by governments, are common in Europe. They are also sources of passive income. They resemble financial assets, because they depend on monthly contributions accumulated over decades. But those contributions are not accumulated to build a capital stock, they are immediately paid out to current pension recipients. This means that the annuity granted at pension age does not reflect an underlying amount of capital. Instead government institutions determine the size of the pension. Government and parliament adapt the rules of this public pensions frequently.
Benefits Provided by Parents to their Children
Children belong also to the category of people, who cannot provide for themselves. We could then also classify resources provided by parents like food, shelter, clothing and education as a form of passive income.
Passive Income Is as Social and Economic Necessity
There is the moral need for a society to ensure that everybody can live a life in dignity, independent of age, health or any handicaps.
But this is also a matter of economics, because productivity varies widely during the human life cycle.
A small child has no own income, but it is so important that children are nurtured, and their needs are satisfied. I talk here about good food and health care, but also about emotional security and the proper mental stimulus.
From the perspective of the child all those benefits are passive income provided by the family. And, whenever a family does not provide the resources for their child, the development of the child is in grave danger.
Older Children and Teens
Older children and juveniles have already a limited potential for productive work. And way too often children are forced to use their potential to earn an income, instead of developing themselves. Such Child work depletes their energy and inhibits a child’s mental and cognitive development.
But a child working too hard too early will lose a big chunk of his or her lifetime productivity. This is a catastrophe for the child, and a big loss for the wider society.
Older people may have problems to function in some of the fast paced, highly structured and tightly managed work processes. But at least the ones who walked with open senses through life have a fast wealth of experience.
Due to his experience and the absence of the pressure to generate a daily income, a best ager might be able to raise red flags early, and to point out overlooked opportunities to the ones running the show today.
This is true in a context of business or volunteering. But the most valuable support for the following generation happens probably in the framework of families, where people know and trust each other for decades.
Private and Public Passive Income
Governments have a very strong incentive to organise benefits amounting to a passive income for people in need and for the elderly. But this invites a very dangerous attitude: “Why to bother? In the end, someone will take care of me.” The answer is:
It’s About Freedom
If you rely in the Western World on society and government for your and your family’s needs, they won’t leave you empty-handed. But the officials will say: we have the duty to act and fairly and with accountability.
They will penetrate your sphere of privacy and question your lifestyle. Expect questions like:
- You live in such big house. Is your wish to play piano whenever you feel enough justification for that expense?
- News subscriptions for a hundred dollars per month? We have such nice government sponsored radio and TV shows. Do you really think you can waste so much money to second-guess the truth?
- And this fresh food every day? Wouldn’t a frozen pizza be just good enough?
- This expensive medical treatment? Wouldn’t the usual medicine be enough? It costs only a fraction but provides almost the same benefits.
Here comes the bottom line: With your own money, you decide what’s good enough. With government money. the government decides.
How to Develop Your Own Passive Income Streams?
For centuries there was one obvious way to develop passive income streams: accumulate enough financial assets. The interest or dividends paid on the assets would generate the needed income.
When approaching retirement age, one could use the assets to buy an annuity from a strong insurance company. Now, even the need to manage the assets was gone.
But in today’s world of very low or even negative interest rates, such a strategy becomes difficult to execute and risky. Without accumulating interest, it becomes much harder to accumulate a capital stock. And then comes the next problem: How can an insurance company keep the promise of a steady flow of cash, if only very risky assets generatea return on capital assets.
Passive Income Independent of Financial Markets
So, it would be nice to develop passive income streams, which do not depend on capital markets. The world of intellectual property and royalties provides such opportunities.
Another advantage of intellectual property is, that it cannot be taxed before it is monetised. In future the governments will strive even more than today to raise the cash they need to pay for the social benefits and pension they promised to everyone. With the pressure to raise more funds rising, the temptation for the governments to tax the nest eggs of the “rich” away to pay for the promises to the “poor” will only grow. But nobody can measure, let alone tax or confiscate your knowledge.
Building and Monetising Knowledge
Information and Knowledge
The world is full of information, and most people suffer from information overload in one way or another. But we if make this information usable for those who can benefit from it, we turn information into knowledge. And a good body of knowledge is like a gold mine. Building and monetising knowledge will be the topic of the next episode of Success and Inner Growth.
Episode 8 will discuss specifically how to accumulate a valuable body of knowledge, and some ways to monetise it. It will be ready by the end of October. I look forward to seeing you again with episode 8.