Income is the money you receive through investments or labor, typically on some form of a consistent basis. While that may seem like the whole story, there’s a lot more to it, and many people don’t know that their earnings fall into two categories: passive and active income. But what do these words mean, and what kind of income should you be earning? This article will review the differences between passive and active income to answer those questions.
What Is Active Income?
Active income typically requires some form of physical or material participation in exchange for earnings– money. Active income is critical for developing a solid foundation for building your overall wealth and is likely the income you’re most familiar with. Examples of active income are salary and hourly wage, tips, commission, and consulting work. These forms of earning are dependent on the work that you do, and without the product or service you provide, you don’t earn income in return.
What Is Passive Income?
Passive income is money made doing little to no labor in return for money, which serves as regular supplemental income so you can essentially become your own boss. You may want to work towards passive income to earn money while focusing on hobbies or continuing to earn active income. Some examples of passive income are display advertising and affiliate income, online sales, investment interest, and rental income. In fact, one of the most common and compelling reasons people become landlords is to earn passive income through collecting rent. While being a landlord is work, if done right, the amount of money you make through rent more than makes up for the work you put in.
What Are the Differences Between the Two?
The most significant difference between passive and active income is stability; active income is more consistent and easier to obtain than passive income. Passive income is more susceptible to trends and can take quite some time to build. For example, say you invest in commercial property, and the current tenant sells a popular vitamin or supplement. If their product loses popularity and the business goes under, they can’t pay rent, and you lose money in return. Active income is safer as it ensures a more consistent income stream.
What Kind of Income Should You Work Towards Building?
In truth, you should work towards building both passive and active income; passive income can’t survive without your active income to uphold it. If you don’t have the active income to start investing in property or starting a business, you can’t begin earning active income. And if you start earning passive income, you need a backup plan to ensure you have money to fall back on.
While you can diversify an investment portfolio to have that backup plan, not everyone wants to devote their lives to investing and keeping up with the work that comes with it. Earning both active and passive income means you have more time and resources to focus on your life, family, and hobbies while still having the safety net to do so.