passive income vs capital gains

Investing for Passive Income vs Investing for Capital Gains

When it comes to investing, there are two main schools of thought: investing for passive income or investing for capital gains. Most people only focus on capital gains and neglect the financial freedom that comes with investing for passive income. In this article, we will explore the differences between these two types of investing and help you decide which is the best option for you!


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What Is Passive Income?

Passive income is a type of income that you earn without actively working for it. This can come in the form of interest from investments, rental income from property, or even royalties from intellectual property. The key to passive income is that it is a consistent stream of earnings that you can rely on regardless of your current employment situation.

What Does Investing For Passive Income Look Like?

When it comes to investing, there are many different options available. However, not all investments are created equal. For example, investing in a dividend stock is a popular choice for those looking to invest for passive income. This is because these companies offer a consistent stream of dividends that can be reinvested back into the fund to generate even more income.

If you’d like you can also withdraw that money to pay for your monthly bills. This will help free up your time so you can focus on other things, like your career or spending time with your family. Rather than working for money, or hoping that you can arbitrage a trade, you are investing in an asset that produces income without it having to be sold. Like clockwork, every month you get a check and can plan your finances better.

Another option for investing in passive income is to purchase a rental property. This can be a great option if you have the capital to invest and are willing to put in the work to manage the property. While it is not as hands-off as investing in a dividend stock, it can still provide a consistent income stream that can be used to pay for your monthly expenses.

Even your car can become an asset that produces passive income. By investing some time to list your car on a peer-to-peer rental platform like Turo, you can earn money every time someone rents your car. This is a great option if you have a paid-off car that you don’t use often. By being creative with your investment choices, there are many different ways to generate passive income.

The key to investing for passive income is to choose an investment that best suits your needs. There is no “right” way to invest, but there are certainly wrong ways to go about it. For example, investing in a penny stock may seem like a good idea at first, but if the company goes bankrupt, you will lose all of your money. This is because you are investing in the hope of capital gains rather than a steady cash flow.

What Capital Gains?

Capital gains are the profits you earn when you sell an asset for more than you paid for it. This can come from stocks, bonds, real estate, or other investments. Capital gains are often associated with taking on more risk because there is no guarantee that the asset will increase in value.

The problem with capital gains-based investments is that they can remain stagnant for years or even decades without producing any income. Now, you can make some quick flips here and there but you’d have to be actively trying to time the market. So if you’re looking for something more hands-off, investing in passive income is the way to go.

Why Passive Income Leads To Financial Freedom

When your passive income is above your expenses, you’ve reached financial freedom. For example, let’s say you make $80,000 per year and your expenses are $20,000. If you were to invest the full $60,000 into rental properties that have a positive cash flow (more income from rent than expenses such as the mortgage, maintenance, etc) you could effectively be raising your income without additional hours worked. 

If you were to make even just $500 per month from that investment, you’d have $500 coming in each month from doing nothing other than investing your money.

Now, you can even diversify your passive income streams by investing that $500 monthly rental income alongside the $60,000 from your salary into other passive income streams such as dividend stocks. 

The next year after that, you can invest in yet another asset class that produces passive income, and so on. This is how you can slowly but surely build up your passive income to the point where it can replace your day job and lead to financial freedom.

Reinvesting Your Passive Income & Staying Consistent

By reinvesting your passive income, you can compound your returns and accelerate your path to financial freedom. For example, let’s say you invest $60,000 per year from your job and $6000 per year from investing in rental properties. You’d now be able to purchase yet another rental property sooner because of that extra $6000. 

After that property produces income for a few years, you can purchase another rental property, as the cycle repeats except at an accelerated rate.

It’s important to stay consistent with your investing strategy even when things are going well. It can be tempting to spend your newly found passive income but if you want to reach financial freedom, it’s important to keep reinvesting that money. This is how you can build a solid foundation for your future and ensure that you will be able to live the life you want on your own terms.

Wake Up To Volatility or Wake Up To Passive Income?

The goal of investing is to reach financial freedom and have the ability to live life on your own terms. You can achieve this by investing in passive income or capital gains, but passive income is a much more reliable path to take. With passive income, you’re not subject to the whims of the stock market or other volatile investments. Rather, you’re investing in something that will provide you with consistent cash flow month after month, year after year.

Even if you were to wake up to a positive portfolio, the gains aren’t realized until you sell the assets. So if the stock market crashed tomorrow, you could still be in for a rude awakening. With passive income investments, you’re not as susceptible to these sudden market changes because you’re not selling the asset, you’re just collecting the passive income each month.

So if you’re looking to invest in financial freedom, investing in passive income is the way to go. You’ll be able to sleep soundly at night knowing that your investment is working for you even when you’re not.

Speculative Value vs Real Returns (Time Is Money)

With passive income-based investments, you’ll receive real returns regularly. This is in contrast to speculative value-based investments such as stocks where you’re investing in the hope that the company will do well and the stock price will go up. If the company tanks, so do your investment. With a passive income investment, you’re investing in something that will provide you with actual returns regardless of what happens in the stock market.

Even if your passive income investments don’t completely cover the cost of your expenses, it gives some breathing room for you to take a few days off. Imagine if you were to make $100 per day and you work 20 days out of the month. With just $500 in passive income, you can take 25% of the month off!

This is how you can begin to enjoy your life while still investing in your future. By opening up your time for even just a few days per month, you can invest that time in yourself to learn more about finances or improve your skills to make more money.

With passive income, you are not just receiving money regularly, but you are receiving your time back as well. And as we all know, time is money.

Assets Can Be Either Passive Income Producing or Capital Gains Oriented

The intention and goal you have when investing should be taken into account. A property can be a flipper upper or it could be a buy and hold that generates rental income. The key is to know what you want out of the asset to make the best decision. The same can be said for other assets such as stocks. You could trade them or you can hold them for dividends and not worry about the fluctuations of the stock price.

The Bottom Line

So, there you have it. These are the key differences between investing for passive income vs investing for capital gains. Which one is better for you depends on your individual circumstances but if you’re looking to achieve financial freedom, investing in passive income is the way to go.

By reinvesting your passive income and staying consistent with your investing strategy, you can reach financial freedom sooner than you think. So, what are you waiting for? Start investing for passive income today!

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