If there is one topic personal finance bloggers absolutely love it is passive income. According to wikipedia, “Passive income is an income received on a regular basis, with little effort required to maintain it.” There are two key phrases in this definition that will help you define what passive income is to you.
Passive Income: What Qualifies According to You
The two things you have to define in order to know what qualifies as passive income are “regular basis” and “little effort required”. Let’s examine these one at a time.
This is the easier term to define for most people. When I think of income on a regular basis I think of paychecks. While passive income sources won’t give you paychecks you should probably be receiving income in the same types of intervals. This could be daily, weekly, biweekly, semi-monthly or even once a month.
Little Effort Required
This is the trickier one. Effort can be defined in many ways. The two things I think of when defining effort are how much time something takes and how difficult the task is. The combination of those two determine the level of effort required in my mind.
So how much time do I think should be involved in a passive income stream? For it to truly be passive I don’t think you should have to spend more than two to five hours per week. Anything more than that and I think you’re ventured into part time job territory. This number may be different to you and that is fine. We all need to come up with our own definitions.
Difficulty is the second factor. For an activity to be passive it has to be pretty easy for me. If it is hard to understand or causes me any stress at all then it doesn’t represent the easy passive income life many portray.
Now that you have your own definitions for what “little effort required” and “regular basis” you also have your definition for passive income. Let’s look at one of the most mentioned passive income instruments and see how passive they really are.
Dividend stocks can put off a nice income stream and for the most part the payments should be pretty regular. Most stocks pay quarterly with some paying twice a year or annually. I’d say this qualifies for the first part of my passive income test.
While you could spend no time researching and keeping up to date with your dividend stocks I advice against it. Jim Cramer from Mad Money on CNBC recommends you spend at least one hour per week per stock doing homework to ensure you keep up to date on your investments. This gives you the opportunity to keep up with the information that would help you make the determination of when to buy or sell your stocks.
If you were just going to have one stock this would qualify as passive income. However, having all of your eggs in one basket is never a good idea. Jim Cramer suggests you own a minimum of five stocks and a maximum of 10 stocks to be diversified. This pushes us awfully close to the part time job classification.
Stocks can be difficult to understand if you don’t have a financial background. They can also be stressful if they make huge moves up and down over short periods of time. Overall, the combination of time involved, knowledge needed to understand and potential stress put dividend stocks out of the passive income category to me.
Turns Out Passive Income Isn’t Always So Passive
If you listen to Jim Cramer it turns out dividend investing isn’t so passive for me. You may have a different opinion and that is completely fine. Wednesday I’ll be diving into blogging and rental real estate and applying my definition to see whether or not they’d be passive activities to me.
So what do you think about my definition of passive income? Do you agree or disagree? I’d love to see what your opinion is in the comments.