What does passive income refer to?

Passive income refers to earnings derived from investments or business activities that require little to no ongoing effort to maintain. This type of income is often generated through sources such as rental properties, dividends from stocks, or interest from savings accounts. Unlike active income, which comes from direct involvement and effort, passive income allows individuals to earn money without the continuous, hands-on work typically associated with a job or business operation.

The concept of passive income is significant because it emphasizes the potential for financial growth and stability without the need for constant labor. As individuals build passive income streams, they can work towards financial independence, allowing them to focus on other interests or pursuits without being solely reliant on earned wages. This understanding is key in personal finance as it encourages investment and strategic planning for future earnings.