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Passive Income

January 25, 2019

Why Are Passive Income Streams Important?

All things considered, time is our most valuable resource. We are all given a finite amount, and, unlike most resources, it cannot be recovered. To maximize the potential of this precious resource, we must be wise about how we invest both our time and hard earned money.

Building passive income streams can be one of the best investments of both - eventually leading to financial freedom and greater control over your time.

Make money while you sleep

One of the greatest benefits of a passive income stream is that it requires very little effort to maintain and it generates automatic income. In contrast, active income streams often involve the direct exchange of your time for money. Most of us have to work to make a living. However, if we can only produce income while actively working, we leave ourselves exposed to the threat of being unable to earn in the event of an incapacitating injury or illness.

If you don't find a way to make money while you sleep, you will work until you die.

Warren Buffett

If your goal is to achieve financial freedom and have greater control over your time, the more effort you put into expanding passive income streams the better. Not to say that this process will be easy nor require a short amount time to get started.

No matter which passive income strategy you choose, you will likely have to invest significant amounts of time, earning little income in the beginning. But, keep in mind that after initial setup each income stream will continue producing income with little or no involvement, and in some cases, the underlying asset will continue to appreciate as well.

Diversify your portfolio

There are many ways to build passive income streams. Whether you are using your skills to make money online, investing for rental income, or in dividend stocks, you will be hedging your portfolio against more risky investments. However, the riskier investments typically have the potential for higher returns, so you likely wouldn’t leave them completely out of your portfolio either.

The key is finding a balance to protect and maximize your portfolio value and sources of passive income are great at helping you achieve this.

Diversifying your portfolio is a staple of good investment practices. You wouldn’t want to put all of your money in stocks because values can fall over 30% in a few months. By contrast, you wouldn’t want to place all of your money in bonds, even though they are less volatile. Your returns will be significantly lower than they could be if combined with investments in stocks.

Experience shows that is best to have a mix of both, along with other asset classes like real estate. By also investing in non-correlated assets like farmland, which has historically increased in value when stock market values drop, you can provide balance to your portfolio and protect your overall earnings.

In the end, the more you diversify your portfolio the less you expose yourself to risk. The right passive income streams are great tools for this because they typically offer low volatility, higher total returns than your standard "safe" investment, and generate income without active involvement.

Compound your earnings

The beginning of any passive income strategy is building a savings plan and sticking to it. Once you have a realistic idea of how much you need to make to cover your expenses, you can begin to look at additional income as fuel for the machine. This also gives you an idea of how much passive income will be needed to achieve your financial goals.

As you continue to receive income from your day to day job and passive income streams, you can reinvest what you don’t need for your expenses to continue compounding its value. This takes discipline and dedication towards your goal, but over time is one of the greatest values of this strategy.

The goal is to reach financial freedom, or the point at which you make enough passive income to cover all of your expenses. Not to say that passive income vehicles are the only way to get here. In fact, your investments should be diversified to protect you during different market cycles as mentioned above. However, having steady income outside of your primary job that you can use to make money while you sleep is a distinct advantage.

Conclusion

Passive income streams are crucial to your portfolio because they can generate predictable income with little maintenance, diversify your portfolio, and increase your overall cash flow. Remember, those who are the most successful are those who have the most control over their time. The more work you put into building passive income streams, the more control you will have over your precious time in the long run.

Learn more about the impressive diversification properties of passive farmland investments.

Note: The information above is not intended as investment advice. Analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and disclosures.