Money Psychology

The Amazing Psychological Benefits of Passive Income – Money Psychology

September 21, 2022

How do you feel when your phone buzzes and upon checking you get the ‘You have received X amount of money from an unexpected debtor’ message. Or ‘your account has been credited by X amount’?

It is a very similar feeling to the one you’d get when rearranging your closet and running into an unexpected wad of cash right?

This feeling can be likened to what one experiences once their chosen stream of passive income starts bearing fruit. It often creates this buzz and sense of limitless possibilities when it comes to personal finance.

In his book Psychology of Money, Morgan Housel states that the ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

What is Passive Income?

Passive income is defined as money one earns in a way that demands little to no daily effort to keep running. Simply put, it means generating income without having to attend to the venture on a constant basis.

It could be an online project that rakes in money through ads and views, or even income from a rental property.

There is a common misconception that making passive income work is easy, however, the truth is that during the initial phase, it may demand a high initial investment in both time and money.

According to Anna Johansson – A columnist for Entrepreneur.com and the Huffington Post, setting up a reliable system to earn passive income boosts your emotional well-being.

Her argument which links passive income to emotional well-being has been backed by several peer-reviewed research studies as we will explore later on in this article.

So how exactly does passive income boost an individual's emotional well-being? What is its psychological impact?

Reduced Stress

For one, establishing a steady stream of passive income has been linked to reduced stress levels and lessened anxiety.

John Rampton – an entrepreneur, investor, online marketing guru and startup enthusiast, opines that having a source of passive income in place will definitely reduce the financial stress in anyone’s life as it helps one manage their fear of the future by helping them achieve financial freedom and stability.

This ties in with a Capital One Credit Wise Survey which singled out finances as the leading cause of stress (73%) - more than politics (59%), work (49%) and family (46%).

One can then make a case for passive income being a key contributor when it comes to reducing stress and anxiety levels.

Having extra incoming streaming in at regular intervals means one isn’t counting the days till the end of month's salary, thereby eliminating any mounting worries over bills and expenses.

Read Also: 14 Common Money Worries and How to Deal with Them

Freedom is Coming

Financial freedom is the ultimate dream for most people. The ability to have enough money to buy the most important resource (time) means one can then focus on things or activities that bring them joy or happiness.

Passive income is viewed as a vital step when it comes to realising this dream. According Gianna Thomson, certified financial planner and a Commonwealth superannuation expert, financial freedom is when your passive income (from your own business or assets) exceeds your expenses thus allowing you the freedom to achieve your ideal life.

Be it indulging in your favourite hobby, building your dream business or going on a philanthropic spree, financial freedom gives you the ability to pursue any or all of the above.

This can be achieved by creating passive income streams. This translates to having regular cash flow coming into your bank account without having to trade your time for it.

Abraham Maslow – the famous American Psychologist best explains the impact of passive income on one’s emotional well-being.

In his hierarchy of needs chart, he states that once the fundamental needs of people, such as food, shelter, and security are covered, people then aspire towards the complete expression of their true inner potential, whether cognitively, physically, or creatively.

Where Creativity Thrives

According to personal finance experts, passive income allows one an avenue to channel creativity in a field they are passionate about.

Passive income streams not only ensure that you are always earning, but they also make any job more interesting and less stressful by allowing you to channel your creativity into a fulfilling venture.

According to Psychology Today, creativity is defined as the ability to generate new and unique ideas, connections, and solutions to problems. It is a core part of the human drive to foster resilience, spark joy, and provide opportunities for self-actualisation.

Therefore, by using passive income as a way to exercise your creative juices, you intentionally expose yourself to new experiences and learning. This plays a key role in developing your capacity for divergent thinking and making new and lasting connections.

We can then argue that having a way to channel our creativity and gaining financially from it is a win-win scenario as it not only helps in the drive towards financial freedom but leads to self-fulfilment as well.

Fosters an Abundance Mindset

When actively involved in a steady passive income stream, instead of seeing your life through the lens of survival, one begins to see exciting new opportunities.

This automatically aids in the realisation of an abundance mindset as opposed to the self-sabotaging scarcity mindset.

In a book titled Scarcity, Mullainathan & Eldar examine the concept of scarcity in detail by asking two pertinent questions;

What happens to our minds when we feel we have too little?
How does the context of scarcity shape our choices and our behaviours?

They then go on to show that a scarcity mindset not only creates a physical limitation but that it greatly affects our thinking and feeling.

On the other hand, Stephen R Covey in his best-selling book The Seven Habits of Highly Effective People, states that an abundance mindset favours personal and spiritual growth.

Psychology professor Carol Dweck backs this theory by going on to say that individuals who embrace an abundance mindset tend to be more equipped to deal with stressful situations and believe in their ability to generate more successful outcomes.

Therefore, by creating a sustainable passive income stream, we are inadvertently laying the seeds that will eventually equip us with the tools to handle any form of financial stress.

Provides a Platform for Growth

When you get to bring in extra cash at the end of the month without much fuss, personal and financial growth is inevitable.

For example, the extra cash gives you the freedom to pursue your dream career, take more holidays if you wish, and invest in yourself among many other possibilities all geared towards your happiness.

Instead of worrying over power tokens, rent and money for basic necessities, one is now free to focus on things that will help them grow and prosper over time.

WRAPPING UP

Although it may be unwise to attach one’s happiness and identity to money, it’s hard to deny the fact that financial wellness tends to go hand in hand with emotional well-being.

By developing a passive stream of income, one greatly boosts their chances of enjoying a healthy, balanced lifestyle.

It’s no easy feat by any measure, as it takes an enormous amount of effort and exertion of your time with very little return in the beginning. But it’s worth it in the end.

No items found.

Eddy Mwanza is Creative Consultant living and working in Nairobi, Kenya. His areas of focus are Content Creation, Creative Writing, Research and Photography. When he is not writing in his favorite coffee shop, Eddy spends most of his time reading, cooking, and traveling. He is also a sports fanatic. Connect with Eddy on LinkedIn.