Do you know the difference between passive income vs active income? When it comes to building wealth, you must understand the different ways to earn money before you can be financially secured. And the most important concept to master is the two types of income source;
- Passive Income or Unearned Income
- Active Income or Earned Income
As an investor, business owner and someone looking to build wealth having a good foundation of understanding this concept can help grow your income.
So, what is the difference between active income and passive income?
Let’s Find Out!
What Is Active Income?
Active income is the ordinary income that requires active effort. Active income sources are the most common form of income that employees, freelancers, and some business owners earn through exchange of active effort in completion of a task or in exchange of time.
While active income is the most common source of income that most people make their living, there is a huge downside to this form of income.
“When you stop working, the money will stop flowing.”
Key Characteristics of Active Income
- Time-Dependent: Active income is tied to the number of hours you work. The more you work, the more you earn. However, this also means that your income is limited by the hours in your day.
- Task-Dependent: Active income is tied to the number of tasks you complete. The more task you can accomplish within the time, the more you earn. However, this also means that your income is limited by the hours in your day.
- Immediate Gratification: Active income provides an immediate influx of cash. You put in the effort, and you see the results in your paycheck at the end of the week or month.
Pros and Cons of Active Income
There are various pros and cons for generating active income, and the maim pros is having higher level of stability in the cash flow and immediate gratification, however the main cons are, limited growth potential and lack of freedom.
Here is a quick table listing the pros and con of active income
|Predictable and regular||Time-consuming|
|Skill development||Limited scalability|
|Steady cash flow||Vulnerable to job loss|
|Immediate gratification||Lack of time freedom|
|Networking opportunities||Limited potential for passive growth|
Examples of Active Income
You are earning an active income when you get a salary or monetary returns from completion of a task or in exchange of your time.
So, for an active income, if you want to earn more.
You’ll have to take on a part-time job or work overtime to get that extra cash.
Most traditional jobs will require you to work 9 to 5, either sitting in the office or working out in the field. At the end of the day, your payment 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 employees who finish an 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 though 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.
For active income, if you stop doing that certain task, money will just stop flowing into your bank account. Thus, these tasks you do to earn an income are called active income or earned income.
Earning active income by exchanging time for money:
- Doctors and Lawyers
- Common 9 to 5 Day Job
Earning active income by exchanging complete of a certain task for money:
- Offering Coaching Sessions
- Conducting Webinar Training
- Project Based Business
Rating Active Income For Wealth Generation
- Consistent Effort: 4/5
- Popularity: 5/5
- Income Growth: 2/5
Active income is a good way to earn an income, but it is not a sustainable way to earn income for wealth generation.
It requires high level of effort, very common way to earn income but have low income growth potential.
As there is a limit in the amount of resources you can exchange for money, it is the hardest way to build wealth.
What Is Passive Income?
Passive income is income earned even when we are sleeping or out traveling some exotic places. Basically, a passive income is an income earned by not actively working to earn that income flow.
And passive income is generally categorized into 2 forms:
- Investing: Earning passive income by letting money work for you instead of you working for the money.
- Passive Business or Building Money Making Machine: Earning passive income by doing work for a period of time so that for the next 1, 5, or 10 years, money will keep rolling into your bank account with very little effort on your part to maintain the income flow.
Each form 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!
Key Characteristics of Active Income
- Time Freedom: Passive income doesn’t require constant attention. You set it up, maintain it periodically, and watch it grow. You income is passively generated.
- Delayed Gratification: Unlike active income, passive income often takes time to build. It’s an investment in your future financial security.
Pros and Cons of Passive Income
There are different pros and cons for generating passive income, the main main pros are unlimited scalability and time efficiency, and the main cons are high initial effort requirement and risk associated with the potential returns on your invested resources.
Here are a list of the pros and cons of earning passive income.
|Financial freedom||Initial effort and investment required|
|Scalability (unlimited earning potential)||Risk associated with investments|
|Time efficiency (minimal ongoing effort)||Learning curve for managing income sources|
|Diversification of income sources||Income may be subject to market changes|
|Opportunity for early retirement||Requires patience for income to grow|
Types of Passive Income
The first form of passive income comes in the form of making an investment with your cash. This is a passive income built by letting money 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 do 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.
Passive Business or Building Money Making Machine
The next form of passive income is by doing something now that 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 of having this money machine is definitely worth it.
Once your money-making machine is built, it will generate income 24/7 even when you are sleeping or lying on the beach of Hawaii. You will earn money with little to no effort on your part to maintain the income flow.
Examples of Passive Income
There are many passive income ideas, here I’ve separated them into 2 common types so you can easily find one that suites you.
Investing as Passive Income:
- Dividend Investing
- Dividend from Real Estate Investment Trusts (REITs) Investing
- Income from Bonds
- Rental Income from Real Estate
Passive business as Passive Income:
- Selling Online Course
- Building Membership Site
- Ads from YouTube Channel
- Selling Stock Photo
- Selling eBook
- And many more…
Rating Active Income For Wealth Generation
- Initial Effort: 5/5
- Popularity: 1/5
- Income Growth: 5/5
Passive income required the highest level of initial effort, it is least common ways where people used to earn money, but have the highest income growth potential and a great way to increase your income.
This is the most common ways where the wealthy used to build wealth as it have no limit on the amount of wealth you can generate.
Difference Between Active and Passive Income
Comparing between active income and passive income, here are the various difference between them.
|Aspect||Active Income||Passive Income|
|Source of Earnings||Direct work or services||Investments or assets|
|Time Dependency||Tied to hours worked or tasks||Not directly tied to hours|
|Gratification||Immediate income||Delayed income|
|Scalability||Limited by hours worked||Offers scalability|
|Involvement||Requires active participation||Involves less day-to-day effort|
|Time Freedom||Typically lacks flexibility||Offers time freedom|
|Risk and Reward||Lower risk, potential cap||Higher risk, potential rewards|
|Income Diversification||Often limited to one source||Allows for diversification|
|Financial Independence||Covers immediate needs||Critical for long-term goals|
|Management||Active day-to-day management||Involves managing investments|
|Lifestyle Impact||Tied to 9-to-5 job||Offers lifestyle flexibility|
Active income and passive income have many difference in how it is used to generate income.
Active income is earned through direct work or business involvement, providing immediate financial rewards such as salary, wages, freelance work.
It’s dependable but time-dependent, often stemming from traditional jobs or active business participation.
While it covers daily needs, it may limit growth and flexibility, demanding ongoing effort and a set work schedule.
Passive income comes from investments or assets and requires minimal day-to-day management such as rental income and dividends.
It offers financial freedom and scalability but requires initial setup and patience.
Passive income diversifies income sources, reduces risk, and provides time freedom for pursuing other interests.
Choosing Between Passive Income vs Active Income
Both passive and active income can help you to build wealth, and combining active and passive income is a great choice.
- Active income offers you the opportunity to getting paid after you’ve completed a task, which is often immediate.
- Passive income on the other hand offers you great wealth building potential, but you will only get paid later at an unknown date.
However, if you are looking to build wealth, and become truly wealthy, considered passive income. Here are the 2 main reasons.
1. Time Limitation
With a limitation of just 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 stopping 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 to just having 24 hours to generate your income. By investing, or building your very own income-generating money machine, you can have more than 24 hours to generate your income every day.
With no limit cap of 24 hours to generate an income, your potential to grow your income has just become limitless.
2. Growth Potential
Passive income allows you to earn money while you sleep or just do 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. This makes passive income much superior to active income.
“Who doesn’t want to make money while they sleep, right?”
Why Most People Don’t Have a Passive Income Stream?
The 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 being lazy. But passive income actually means planning for the future.
Passive income needs time and energy to create and succeed.
- In investing, passive income is build with upfront investment and learning how to invest.
- In building passive business, passive income is to put in the upfront work in building the business itself.
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 prevent 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 for earning passive income nowadays is basically everywhere. Furthermore, the benefits of earning a passive income are simply endless.
Major benefits of passive income:
- Passive income gives you the freedom of time.
- Helps to ensure financial stability and growth.
- Can reduce your anxiety and fear of the future.
- Gives you the 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-year-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 with 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.
Fun Fact on Passive Income
The highest-earning YouTube star in the world is a 7 years old elementary-school kid.
He makes 22 million 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 the 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 about the potential earning power of passive income now?
Time To Start Generating Passive Income?
Active vs. passive income is a difference between 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 stages of your life.
Active income ensures that you are getting paid for all your work. Though there are limits 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 is 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 experienced 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.
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?
My Experience In Balancing The Time Invested In Building Passive vs Active Income.
The time you invest in your active and passive income can be different for 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 streams 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 exciting ride with lots to learn and explore. I am always amazed at how much I can learn each day.
Here are some resources that will help in guiding you to your success.
- Investing Books to Riches
- Business Startup Books
- Leadership Books for aspiring Leaders
- Sales Books to Wealth and Success
- Life-Changing Books to a Future of Success
- How To Use The Debt Lasso Method To Pay Off Debt (Debt Free)
- 21 Creative Ways to Save Money on a Wedding (Beautiful Wedding on a Budget)
- How Much Do I Need to Save For Retirement at 55, 60, 65? (Retirement Calculator)
- Kartra Review & Pricing: Best All-In-One Platform For Small Business
- Teachable Review: Best Online Course Platform For Course Creator (Free & Paid)
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