Do you like to see your money grow?
Money management 101,
“Ensure we have more money coming in then going out of our pocket.”
With the increase cost of living, everything get much more expensive every single day.
For us to maintain our current living standards, we have to constantly look for ways to grow our income. This can be in the form of a pay raise, change of job, or even doing a side hustle.
“Since, there are so many options to choose from, which option is for me?”
Before we choose what method should we use to grow our income. Our first step should be understanding where our money come from.
This may sounds simple, but without a good foundation of understanding this concept, growing your income will be next to impossible.
2 main ways to grow your income:
- Active Income / Earned Income
- Passive Income
But what are the difference between active income and passive income?
Let’s Find Out!
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What is Active Income?
Active income is simply the income we earn through active effort. This is the most common form of income where most employee, freelancers and some business owners earns. Active income is the most common way most people earn their income.
“When you stop working, the money will stop flowing.”
So, if you want to earn more?
Simply take on a part time job or work overtime to get that extra cash.
Most traditional jobs will required you to work 9 to 5, either sitting in the office or working out in the field. At the end of the day, your pay will be calculated by the time you spend in the company, or the work you’ve done for the company.
You can be one of the best employee who finish a 8 hours task in just 5 hours. And spend the next 3 hours just walking around, chatting with your colleagues distracting them from their work, or simply enjoying a cup of coffee at the café next door. Or simply sitting in the office all day just staring out in the window. In both cases you are still earning an active income.
Even thought it may not be a physically strenuous job, like the construction worker working under the hot Sun at the construction site.
For an active income, you have to be actively doing something to earn that income. Even if it means just sitting on your desk.
If you stop doing that certain task, money will just stop flowing into your bank account. Thus, these task you do to earn an income are called an active income, or earned income.
Examples of Active Income:
- Doctors and Lawyers
- Common 9 to 5 Day Job
- Project Based Business
Consistent Effort: 4/5
Income Growth: 2/5
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What is Passive Income?
Passive income are income earn even when we are sleeping or out travelling at some exotic places. Basically a passive income is an income earn by not actively working to earn that income flow. And passive income are generally categorized into 2 forms:
- Investing: Earning passive income by letting money work for you instead of you working for the money.
- Money Machine: Earning passive income by doing work for a period of time so that for the next 1, 5, 10 years, money will keep rolling into your bank account with a very little effort from your part to maintain the income flow.
Each forms of passive income when done correctly can bring you hundreds, or even thousands of dollars monthly or even daily. Yes, you read that right, thousands of dollars daily! Ka-Ching!
The first form of passive income, comes in the form of making an investment with your cash. This is a passive income build by letting money to work for you day and night. Usually it is done by investing in dividend generating stocks, or simply renting out the spare room of your house.
You are basically letting your investment doing all the work for you. The initial investment of your money will allow income to be generated passively with little to no effort on your part. Perfect for retirement.
Examples of Passive Income:
- Dividend Investing
- Dividend from Real Estate Investment Trust (REITs) Investing
- Income from Bonds
- Rental Income from Real Estates
The next form of passive income is by doing something now which will helps you to generate an inflow of income in the future. This form of passive income requires you to have an initial investment. You’ll need to invest your time and energy to build the income generating machine.
The time and effort to build this form of passive income can be huge, but the benefit from having this money machine is definitely worth it.
Once your money making machine is build, it will generate you income 24/7 even when you are sleeping, or lying in the beach of Hawaii. You will earn money with little to no effort on your part to maintain the income flow.
- Selling Online Course
- Ads from YouTube Channel
- Selling Stock Photo
- Selling eBook
- And many more…
Initial Effort: 5/5
Income Growth: 5/5
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what is better passive or active income?
Both passive income and active income are great to have. Because both types of income helps to grow your finance.
While active income is getting paid now and passive income is maybe getting paid later.
Only one type of income will truly make you rich and successful. Do you know which?
Yes! You are right!
Passive income is what makes you rich.
Here are the 2 main reasons,
“Why passive income is better than active/earned income?”
1. Time Limitation
With a limitation of just having 24 hours. If you focus solely on active income, your limit of growing your income without sleeping or eating will be just 24 hours.
You can be earning a 5-figure, but there will always be a ceiling, a limit of how much income you can earn actively.
If you only have an active income, it means you cannot have the luxury of stop working. Because once you stop working, your income stop coming in and you will soon be out of money.
On the other hand, passive income doesn’t limit you of just having 24 hours to generate your income. By investing, or building your very own income generating money machine, you can have more then 24 hours to generate your income everyday.
With no limit cap of 24 hours to generate a income, your potential to grow your income have just become limitless.
2. Growth Potential
Passive income allows you to earn money while you sleep or just doing stuff you like.
Having a passive income will give you the freedom to choose if you want to work and the benefit of having no limit on the growth potential. These makes passive income much superior to active income.
“Who doesn’t want to make money while they sleep, right?”
Why you might not want to have passive income?
The one biggest problem with passive income is that it can take a massive amount of work upfront to create. Many people have an impression that passive income means, ‘do nothing and be lazy’. But passive income actually means to plan for the future.
Passive income needs time and energy to create and succeed.
Passive income is not strike rich quick solution, but a way to becoming rich slowly through your initial investment of your effort, time and money.
The time and energy that is essential to create passive income simply prevents many who are unwilling to make the initial sacrifices. This prevents them from having a passive income.
Why it is easy to start earning a passive income?
The amount of opportunities of earning passive income nowadays is basically everywhere. Furthermore, the benefits of earn a passive income is simply endless.
Major benefits of passive income:
- Passive income gives you the freedom of time.
- Helps to ensure financial stability and growth.
- Can reduces your anxiety and fear of the future.
- Gives you option to pursue the things you love rather than what pays the bills.
- Lastly, it gives you the ability to live and work anywhere in the world.
Everyone, including that 10 years old kid next door can earn a passive income if you are willing.
There are just too many opportunities nowadays for us to earn a passive income.
Some YouTubers as young as 7 years old made a fortune online by playing toys in front of a camera. You can create your own videos by sharing your opinions with others on topics you like.
With dedication, you can create these amazing streams of passive income that will keep flowing into your bank.
The highest-earning YouTube star in the world is a 7 years old elementary-school kid.
He makes 22 millions a year passively.
Yup, USD$22,000,000 passive income per year…
Now… let that sink in…
Although, you might not make a fortune with YouTube like that 7 year old kid. This example shows an immense potential of how much you can earn from passive income.
If a 7 year old can do it, so can you!
Are you excited with the potential earning power of passive income now?
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Key Take Away
Active vs. passive income is a difference of getting paid now and maybe getting paid later. Both types of income are great at building your finance. Both active and passive income are required depending on the different stage of your life.
Active income ensure that you are getting paid for all your work. Though there are limit to the amount of active income you can earn. Having the comfort of knowing you will get paid at the end of the day is definitely good.
Every passive income idea may, or may not work. Some may earn you hundreds or thousands of dollars every month or even every day. There are always a chance you will never get paid. After all the hard-work of working for weeks on your passive income project, you may just end up with a big fat $0 in income for months.
(I too have experience my own share of $0 income for months, it is a truly painful experience.)
To be able to get the food on your table today, you will need active income. But to be able to get the food on your table and live a life of freedom tomorrow, you will need passive income.
Balance is the Key
Initially, when we are still starting out, we will need to focus more on increasing our active income. But as time passes, it will be probably a great idea for us to start building our passive income.
This passive income can be in the form of investing, or building a money machine.
But how much time should we invest to build our passive income?
Time invested on building Passive vs Active Income.
The time you invest in your active and passive income can be different between each individual. This ratio can be changed from time to time during your journey of wealth building.
Here’s my current time split on developing each income:
- Active Income: 80%
- Passive Income: 20%
Like many of my readers out there, I am at the beginning of my financial journey. Thus my current time split is weighing more on the active income. But eventually as I develop each of my passive income stream and let time do its wonders.
Each of my passive income streams will allow me to have more time available to develop new passive income streams.
My target time split between active and passive income in 5 years time:
- Active Income: 20%
- Passive Income: 80%
The financial journey is a long a exciting ride with lots to learn and explore. I am always amazed at how much I can learn each day. It excites me to be able to share any financial tips and the things I learn along my journey that may help you in your financial journey too. This is simply an amazing and fun ride.
“Friendship is never anything but sharing.”
By Elie Wiesel
Question: “Do you think your friends will love to read about this as well?”
Part 1: Active Income vs Passive Income
Part 2: Easy Passive Income Ideas
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Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions. You should always ask your financial adviser or lawyer for any financial or law related advice.