What's the Deal with "Passive Income?"

Income from labor is earned income. It requires your participation, effort, and energy. If you decide to take a year off, your earned income ceases. Earned income is how most of us receive money. Our alarm wakes us in the morning, we have our cup of coffee, we take a shower and get dressed, and we drive to work. We put in our day and we drive home. Every couple of weeks, we get a paycheck. This is the earned income cycle.
Earned income is an exchange of time for money. Through education and experience, we can increase the value of our time and will be compensated accordingly. Even high-powered attorneys or surgeons who make hundreds or thousands of dollars an hour, still exchange their time for a paycheck. The minute they stop this exchange, they stop earning income.
Financial independence breaks this cycle. It replaces earned income with passive income. Passive income includes the following sources of income :
" Investment income (e.g., dividends, interest)
" Rental real estate income
" Royalties
" Licenses
" Partnership and business income (if you don't have to work or manage anything to receive it)
Passive income is the Holy Grail of personal finance. Why? You don't have to trade your time for it. Passive income gives you the freedom to do what you want. Earned income is a chain that restricts what you can do and when you can do it. Passive income liberates us from 9-5 jobs and two-week vacation limitations.
Contrary to its name, accumulating passive income is not a passive endeavor. Accumulating the assets to generate passive income requires skill, education, and diligence. You can't expect to sit back and have massive amounts of passive income deposited into your bank account every month. Generating passive income from dividends and interest requires you to select, and monitor the appropriate investments. Rental income requires purchasing and maintaining commercial or residential real estate. Royalties and licenses require the development and sale of a product. Partnership and business passive income, like investments, requires the careful selection of investments and monitoring them diligently.
There are two important advantages to passive income. First, passive income doesn't take as much effort to generate. To earn a salary, you have to put in 40 or 50 hours of work a week. Generating the same amount of passive income takes a fraction of the time.
Second, you can outsource what little time it takes to generate passive income to somebody else. You can hire a financial advisor to select and monitor your investments, an accountant to monitor your royalty and license fees, and a property management company to collect rent and fill vacancies. This is an advantage that just doesn't exist with earned income. Can you imagine hiring a temp to take your place at work?