Taiwan from Phoenix, AZ, asks Dave for some ideas on generating passive income. Dave advises Taiwan not to get involved with get-rich-quick schemes, and explains the term "passive income."
QUESTION: Taiwan is a social worker in Phoenix, AZ, who has been through Financial Peace University. He’s calling in to ask Dave about two or three options to generate some “passive income.” He’d like to find a way, other than rental properties, to make more money.
ANSWER: “Passive income options” is a term that sometimes comes from things like nothing-down real estate seminars. It’s a phraseology often attached to get-rich-quick schemes, and I want to make sure you’re not thinking about dabbling in anything like that.
Passive income is pretty simple; it is income off of investments. It’s money you set aside, and it makes you money. There’s not any other income that is real passive income. Now, if you wrote a book and got royalty fees off it, some people call that passive income.
I wrote a book years ago called The Total Money Makeover, and I get royalties off that. But the people who would call those royalties passive income didn’t follow me around working my tail off to sell that thing. To me, it wasn’t “passive income;” it was a business. Technically, the government would call it passive income, but they don’t have anything to do with reality.
I only invest for passive income in two things — real estate, for which I pay cash, and good growth stock mutual funds. Active income usually takes the form of a small business idea and/or your career. That’s income that you, yourself, are literally creating. That’s how I look at this stuff. Some people may have different views on it, but I like to keep things simple.