When we talk about financial independence, we often emphasise how important passive income is. Passive income makes money for you without effort. However, it can actually be worth more, dollar for dollar.
Photo by Chris Potter
As personal finance blog Dividend Mantra explains, active income (that is, your usual salary) has a lot of associated costs that come with it. It costs your time and effort, sure. But you also pay taxes on your active income. You have to pay for fuel to get to your job, the home you’re tied to near your work, and plenty of other costs. Passive income doesn’t have any of those problems:
Second, there’s no associated costs with the passive income. No lunches with co-workers, no uniforms, no dry cleaning, and no transportation costs to and from work.
Third, financial independence grants you geographical independence as well. You’re no longer tied to one particular spot. How much would you pay your employer (or give up) to work from home? To work from Spain? To work from the mountains in the summer and the beaches in the winter? To work from… anywhere? What’s the value in that?
You’ll stay pax taxes on passive income, but depending on how you structure it, those can be lower. Of course, passive income is harder to generate sometimes. Investing, starting a side business, or owning rental property are hard to do. Especially if you don’t have much to start with. However, they’re goals worth working towards. Arguably, it’s more important than simply boosting your base salary.