Passive Income – What Is It and Why Should You Use It to Diversify Your Portfolio?

Cash is cash – that much is always true. But income generally refers only to capital that a business or person acquires by providing a service or which is gained from an investment. There are different types of income that can grow your personal wealth. Broadly, we can distinguish between three forms of income: active, passive, and portfolio. Colloquially, this is referred to as "you working for your money", "your money working for you" and "building your net worth with investment assets" – i.e., bonds, cash, and stocks. But more distinct definitions for the three types are necessary to understand how passive income works.

Portfolio Income – Investing in Dividend-Paying Assets

You set up a financial portfolio to grow your wealth. Investments in stocks, hedge fund investments, and stock investments all have one goal in mind: paying dividends to increase the amount of money in your savings account. Another way to expand your portfolio revenue is to give out loans that are paid back with interest. But getting into those ways of investing usually comes with an exceptionally high barrier of entry – the stock market, and that is a messy place for new investors.

Revenue from your portfolio is taxed at a relatively low level as you don't need to pay Medicare or Social Security taxes on it.

Accruing dividend-paying assets can be relatively easy; you just have to look in the right direction. And, to put it simply: You have already looked in the right direction: CARL is an easily accessible, reliable service for getting into the hedge fund investment game – allowing your money to grow all on its own. Whether you are an entrepreneur looking for a new investment opportunity or a stock market veteran – CARL provides you with the tools you need to choose a quantitative investment strategy that fits your wealth-building goals, giving you the freedom to pick long-term as well as short-term solutions.

Get started with CARL today!

Passive income is defined as earnings from a rental property that is maintained by an external contractor, as well as earnings that come from being a limited partner in a business or other passive involvements. Guidelines set up by the IRS specify whether a specific taxpayer is a recipient of active or passive income. The degree of material participation is crucial in determining which type is at play. It's also important to know that a passive loss can be claimed against passive income when doing your taxes.

Colloquially, the term "passive income" describes regular earnings that don't require any (or only a small amount of) active effort by the recipient of that income. To be on the safe side, confer with a professional tax expert before submitting your taxes.

CARL: Your investment head start

For most passively earning revenue sources, you have to put in some initial expenditure or effort, which will redeem itself over time as the cash starts coming in. A classic example of this type of revenue is earning interest on capital sitting in a savings account. How you earned that initial investment is up to you, but it will start to grow on its own once you have it. Investing with CARL is a great way to start building future passive income. Use dividends from quant investment to diversify your portfolio with an additional savings account, for example.

Active Income Means Putting in the Work

Any income-producing activity involving material participation is defined as active income. This means you are actively engaged in performing a service that generates revenue for you – be it tips, a fixed salary, commissions, or salaries. Receiving a paycheck is the most common example of this type of income. For self-employed people and (part) owners of businesses, a certain set of criteria have to be met for their income to be considered active and thereby subject to different taxation rules.

To qualify as an active income stream, at least one of the following criteria must be met. If a taxpayer

• works 500+ hours for the business within the span of a year,
• handles the most significant share of work for the business or
• works 100+ hours over a year and is the main work hour contributor of their household,

their income is active by definition. Passive participation – i.e., being a silent partner who only has a financial stake in the business – is considered to constitute passive income. 

Financial stability is critical for every aspect of your life, and it is an important milestone on your way to accruing wealth. Passively earning and having a steady, regular cash flow plays a particularly important role in achieving financial stability.

Personal finance thrives on passive and portfolio income as you don't have to put in hours and hours of your time to accrue wealth.

Two of the most significant benefits of passively earning funds from investments are having more time and experiencing lower stress. You can rely on your income streams to provide you with reliable, budgetable resources. Once the amount of money you make via a passive income is enough to finance your personal lifestyle and your fixed monthly and quarterly expenses (like a mortgage or insurance costs), you're golden! It allows you to spend your time on the things you enjoy without worrying about making enough money for a living. Being financially stable in this way also helps to cushion any sudden costs that may crop up due to things like unexpected healthcare expenses.

Additionally, diversified portfolio that combines more than one investment strategy (such as investing with CARL with other income streams, i.e., from passive earnings) factors in different levels of risk to build a safety net. Should one investment fail to achieve its financial goals, you still have other active, portfolio, and passive incomes to support you.