Passive Income Defined - Part 1 !

Are there such thing as totally passive income ? As in you do absolutely Nothing and money comes to you ?

To earn fix deposit interest, you will actually have to walk right up to the bank, go through all those paper work, spend some time there to open an account. When you want to use the money you earn from the interest, you will have to go to the bank again to withdraw it. Not exactly as 'absolutely nothing'.

So many may argue there is no such thing as total passive income. But then again, that is only a matter of definition. Although it is a good thing to believe there is no Free lunch in this world, but the true definition of 'passive' is NOT "No effort" at all. It actually means 'with minimum effort'.

So Passive Income is a type of income you obtain repeatly with minimum effort.

In finance world ( NOT personal finance ), passive income is instinctively associated with rental income. This is the main reason why most people carry on the miss conception of property investment as a passive income vehicle into personal finance. This is another article but in short, rental may become a passive income but property investment is NOT.

So what does Minimum Effort actually mean ? Generally there are a few responds;

1. Do Once: Like the Fix Deposit example, you only do some work once and then enjoy the monthly interests without any more work needed. Hence the effort is minimum in long run.

2. On the way anyway: Collecting monthly rental income is relatively an easy task especially when you have a good tenant and the property is just next door. So you were just passing by anyway, collecting extra income while doing other things is really neglectable effort and therefore considered as minimum.

Minimum effort is when you FEEL like not doing much. Guess what, you will most likely feel like that when things are smooth and great going.

For example, when opening a fix deposit account the traditional way, you may actually feel cumbersome of all the paper work and may be frustrated that you have to repeatly mention the same information. Only when the account is finally opened and the interest starts to come in, you feel it was just all just minimum effort anyway.

So minimum effort has a Time factor.

The effort of collecting rental income may become not so minimum anymore when the tenant starts delaying payment; No one answer the door bell and you have to make a few more trips. Partial payment, broken items, wall repaint and other not-so-smooth-going experience may change your effort to not-so-minimum anymore.

If this so call 'minimum effort' or 'passiveness' is so subjective to experience and highly affected by the cycle of good-bad times.

No wonder when someone shout certain business can generate passive income, the other person will say no and yet both of them have very good points supporting their views. Its because they have different 'feeling' and may analyse the business at different time points.

Among all these uncertainty of feeling and potential changes over time, how can we reliably determine if an investment can provide passive income and if its worth it or not ?

Luckily in MalPF, there is a measurable way in defining 'Passive Income'.

... Read Part 2 ...