How Passive Income Can Contribute to Long-Term Wealth Building

Financial security is a goal we all strive for. Passive income, which is money earned from assets, can offer an option for individuals with a long-term investing goal. Whether through dividends, rental income or investment returns, passive income has the potential to help create long-term financial stability.

Building passive income requires dedication and solid financial strategies. Not only can it give you the opportunity for more financial freedom, but it also can set up a legacy of wealth for your family. By investing in well-managed, income-generating assets, you’re not just planning for your own future, you’re giving future generations a solid foundation to build on.

Key terms to understand about passive income

What is passive income? At its core, passive income is a type of earning that requires minimal ongoing effort to maintain after the initial investment of time, money or resources. It’s essentially money you earn while not actively working for it on a day-to-day basis.

Common types of passive income can include:

• Investment dividends: Regular payments from stocks, mutual funds or exchange-traded funds.
• Rental properties: Income from leasing real estate to tenants.
• Interest earnings: Money earned from savings accounts, CDs or bonds.
• Royalties: Payments from intellectual property like books, music or patents.
• Business investments: Profits from businesses you own but don’t actively manage.
• Digital products: Earnings from online courses, e-books or apps you’ve created.

Usually, passive income earnings come from assets that increase in value over time. However, not all assets are created equal. So, before discussing how to generate passive income, it’s good to get clear on a few key terms.

Assets: In terms of a pure definition, an asset is something you own that has value. However, when it comes to wealth building, not all “items of value” are equal. For example, consider a car that you own. This item has value, but you’re not going to grow your wealth from owning your car. Why? Because your car’s value declines over time.

In contrast, wealth-building assets do one or both of the following: 

• They may put money in your pocket.
• They may grow in intrinsic value.

That takes us to our second key term, intrinsic value.

Intrinsic value: Simply stated, this is the price of your asset. If the intrinsic value of your asset increases over time, that means the amount of money someone is willing to pay for your asset is going up. This increase is called appreciation. For example, if you have a piece of property that you purchased ten years ago for $10,000, and you are now able to sell at $100,000, the intrinsic value of that property has appreciated.

When an asset you own is worth less now than when you bought it (like your car), that means its intrinsic value has gone down—a process generally called depreciation.

When you own assets that have the potential to grow in intrinsic value, they can increase your financial position over time. When you own assets with the potential to increase in intrinsic value over time and put money in your pocket such as dividends or rental income, that’s when you have the potential to begin building wealth.

How to get started with passive income

As listed above, there are several ways to build passive income, including investing in real estate, investing in the stock market or even starting your own online business. The right approach for you depends on your financial goals, risk tolerance and investment strategy. Talk with a financial professional about the tools that might work best for you.

Additionally, annuities may provide a guaranteed income stream in retirement, making them a stable source of passive income. If you’re interested in building a passive income stream while helping to ensure your family’s safety long-term, a financial professional can help. Learn more about annuities from Ameritas. Annuity guarantees are based on the claim paying ability of the issuing company subject to its terms and conditions.

Long-term impact of passive income

Receiving passive income marks a turning point in financial freedom. This new income stream can help make other things possible – a new career, a new lifestyle or even education to help you explore an entirely new field. You can reinvest your proceeds to purchase more income-producing assets, or you can use them to pay for new purchases without incurring debt. However you use it, passive income has the potential to make an impact on your financial future.   

Importantly, while it can be very tempting to sell your income-producing assets to pay for something else, understand that by selling your income-producing assets, you may be sacrificing your future wealth-building potential. In addition, there may be adverse tax consequences and other risks involved in selling an asset too early. Passive income investing is not for everyone and comes with the risk of loss, including your original investment amount. Once again, consult with a trusted financial professional to ensure you’re making the best choice for you and your future.

This article is for informational purposes and is not intended to nor should it be considered investment advice.

Representatives of Ameritas do not provide tax or legal advice.  Please consult your tax advisor or attorney regarding your situation.  

In approved states, annuities are issued by Ameritas Life Insurance Corp. In New York, annuities are issued by Ameritas Life Insurance Corp. of New York.