In this article, we’ll discuss Active and Passive Income, why you need them and how you can use both to your advantage.
Active income and Passive income are the two ways people earn a living to cater to their daily needs or for the future. Among these two income streams, active income is the most common way by which most people make their money; especially through their regular 9 to 5 jobs; whereas a few only earn their income passively.
However, you need an active income stream to have the financial resources to invest in making money passively.
WHAT IS ACTIVE INCOME
Active income is money earned from full time, part-time performing services such as freelancing or a business that require the individual’s constant presence and involvement. So when there is no active work or engagement in the business, no income will be generated.
Having an active income stream is the most ideal way of generating an income faster and more consistently; that is why it is mostly advised to opt for an active income stream and then use the money to invest in Passive income Streams. This is because most passive income streams take some time before you will start earning from them.
Examples of active income types include salary, wage, tips and commissions. Most active income earners receive money daily, weekly, biweekly or monthly depending on the nature of the job.
- Salary: Salaries are income earned from 9-5 or part-time jobs. With this type of income, employees actively trade their time for money. For a guaranteed fixed amount of money. Once the employee stop working the income flow also stops.
- Wages: Wages are normally paid hourly or daily. Examples of jobs that pay wages are being an Uber driver, delivering services, etc. One advantage of being paid hourly or daily is that the employee can make more money by working overtime.
- Tips: A tip is money received from a satisfied customer to the employee based on the quality of services provided. Tips are usually additional money to the employee’s salary. An example is when a customer money to a waiter in a restaurant to thank them for their services.
- Commissions: Commission is the compensation paid to an employee for driving a sale of a product or service. Examples of jobs that offer a commission-based payment are automobiles, real estate and affiliate Marketing. Commissions are calculated based on the price of the product or based on a percentage of the total sales they make. That means the more products or services an employee can sell, the higher the amount they receive.
Examples of Active Income Sources
- Working at a 9-5 job
- Being a freelancing
- Providing Consulting Services
- Doing Delivery Services
Why It Is Important to Have an Active Income
One importance of having an active income stream is that, it helps you earn a consistent income quickly for your daily needs and survival. Most people often invest a portion of their primary income in other businesses or side hustles to diversify their income streams.
WHAT IS PASSIVE INCOME
Passive income is income generated from a business, an asset or any other enterprise which does not require the individual’s active participation. Most Passive income sources require little to no effort to start and maintain to generate income from it. Developing a way to generate passive income provides many benefits. It is also the easiest way of growing your wealth to become financially free. With the additional income, an individual can expand the wealth-building base so that it is easy to retire early. Also, most people use passive income as a backup plan in case they lose their day job.
Moreover, earnings generated from a passive income stream come with a lot of tax benefits. Some of which are reducing their income tax liabilities and not paying Social security and Medicare on their income.
Examples of a Passive income Source
Below are some of the examples of passive income streams that can make you money while you sleep.
- Interest Earned from Investments such as Stocks and Retirement Fund: Most people grow their wealth by channeling a portion of their income into investments such as the stock market, a retirement fund, index funds and Cryptocurrency. Investing in a retirement fund is a great way of earning a passive income for retirement. For instance, if you contribute consistently to a retirement fund like Roth IRA, your investment will compound into a huge sum of money for you to live on after retiring. Also the earlier you invest into a retirement fund the more money you will have to live on after your retirement and it also allows you to retire early.
This type of investment is only for the long term, which means if you decide to take your money out early, you’ll possibly be faced with heavy taxes and fees.
Another example is receiving dividends from stocks. This can also provide a steady income stream from company payouts. However, you need to do a lot of research before investing in the Stock market. Failure to do so can result in a loss of your investment, especially if you have no idea of what you’re doing.
- Investing in real estate: Investing in Real estate is another great way of generating consistent recurring passive income. You can invest in real estate by buying a property and renting it out to tenants or using it for Airbnb. Even thou investing in rental properties generates passive income; it will require your time and effort to market it, keeping up with maintenance and managing the property unless you decide to hire a property management company. This will would also reduce your income as you’ll have to pay the property management company from your rent payout.
Additionally, one advantage of buying a property is making more profit from the property appreciating with time; that is if you decide to sell it off. However, investing in real estate requires a huge upfront cost.
Also, another way to invest in Real Estate is investing in a real estate investment trust (REIT), which pools your money into properties. Even thou this might sound like a great option to buying the property, it is unpredictable as you do not know if those in control of the property and your investment are managing it well.
- Being a silent partner in a business: Another way of making money passively is by investing in a business to become a partner even thou you will not be actively involved in the business. This form of investment will generate consistent recurring income for you as a partner. Also, if the owners decide to sell the business, you are likely to get a share of the money. However, this also comes with the risk of losing your entire investment if anything should happen to the business.
Other Passive Income Ideas
- Another way of making money passively is by selling digital products such as online courses, eBooks and downloadable templates. One main advantage of selling digital products is that you make the product once and sell them multiple times.
Why it is Important to have a Passive Income
Passive income is a great way of making money work for you. Having a passive income allows you to be financially independent and live the life you desire, whether travelling around the world and spending more time with your family and friends or being able to pursue your passion.
ACTIVE INCOME VS PASSIVE INCOME AND HOW TO LEVERAGE BOTH INCOME STREAMS TO GROW YOUR WEALTH.
One common way Active income differs from passive income is, that making money from a passive income stream may take some time if not years. This is because some passive income streams take a longer time to build and grow before you start earning from them. However, it ensures a consistent income long term. Other types of passive income streams such as contributing to retirement funds do not generate a regular income but accumulate into a large sum of money long term.
Active income on the other hand allows you to make money in a short period however income flow stops when you stop working on the job, unlike passive income streams which do not require your active participation to make money even though it may require some time and efforts in the initial stages.
How to Take Advantage of Both
Unfortunately, most people only focus on earning an active income to cater for their daily needs and they refuse to invest in passive income streams. This is not to say that, having an active income is not good but knowing how to use both to your advantage. Active income is needed to have the financial resource to invest into a passive income stream. The more you earn from your active income sources the more you can invest into more passive income streams. Most people also tend to quit their day jobs when they start making more money from their passive income streams than they were earning from their regular jobs. Others also take up a job that aligns with their passion even if it pays less. The main goal with passive income making money works for you and not the other way around to attain financial freedom you desire.
Also Read: 10 Online Businesses You Can Start With A Little Or No Money
FINAL THOUGHTS
To sum up, having an active income stream, serves as the foundation for you to invest in and build your passive income streams. So instead of focusing on one, leverage the two forms of income to build the life and future you desire financially.
