There is a famous cliché which states, “Money makes the world go round.” In reality, it does. We work to make money. We use the income we get from our jobs to buy necessities. But the money you will earn from your jobs is only as good as you are working. For this reason, you need to find other forms of income that will help sustain you when you are no longer working.
Money management entails ensuring that you have more money coming in than you have going out. This is vital if you want to find financial success. For this reason, you need to have continuous income aside from what you are currently making.
However which way you are making an income, it can fall into two categories, namely passive and active income. While there is nothing wrong with either of them, it pays to know the difference between them. Knowing the difference can contribute to maximizing your potential returns. In this article, we are going to delve on the following topics:
- What is active income?
- Examples of active income
- What is passive income?
- Examples of passive income
- Advantages of Passive Income
- Turning Income from Active to Passive
What is active income?
Active income is money earned as a direct result of the work you put in. It is income frequently earned by “trading time for money.” For most people, this is their only source of income which can be a risky position to be in.
With active income, you are doing something to receive an income. To earn money, you need to put in some kind of effort and energy. It is a type of income received from performing a service. An accountant who works to receive a monthly paycheck receives active income. For taxation purposes, active income is money received from business activities.
Active income is called as such because you have to do something to earn it. Even if you spend the whole day sitting in your station, it is still considered active income as you have to go through the process of getting to work and have duties to perform. Even if the work is not physically strenuous and not mentally challenging, it can still be considered “active” because it can be quite draining to go through the day in such a setting.
Active income is important because it allows you to earn an income quickly and consistently. However, active income offers the opportunity to make money in a short period of time. Eventually, it provides the means to build a passive income.
Examples of Active Income
Here are the common examples of active income:
- Salary
If you work 8 hours every day and earn a salary for yourself, you earn an active income. You trade your time and skillset in exchange for a set amount of money.
- Hourly Wage
Earning an hourly wage is one of the most common forms of earning an income. You can make an hourly wage delivering a pizza or by having a sideline. With hourly wage, you get an opportunity to work and earn overtime.
- Commissions
If you are in the sales industry, the commission you make is a form of active income. This type of income stream offers the most potential to make you a significant amount of money. For example, when a real estate agent is able to sell a home, they are set to make a set commission.
- Tips
There are many jobs that allow one to earn from tips. From serving at a restaurant, delivering furniture or serving as a caddy at a country club, you earn active income when you receive a tip.
- Consulting and Freelance Services
Being a consultant and freelancer are two of the best ways you can earn active income. If you have the ability to help a company improve in an area of their business and generate more revenue for them, a consulting job is something you can consider.
If you are a great photographer, videographer, web developer, graphic designer, or writer, you can become a freelancer and offer your services to clients. If you have a deep understanding of digital marketing, social media, logistics, or business operations, you could offer consulting services to companies that need help in your areas of expertise.
Advantages and Disadvantages of Active Income
Earning active income offers several advantages. For one, it typically carries lower risk. Aside from that, active income is more predictable. If you receive the same monthly wage you know when it is going to be received and can plan accordingly. Since you know that you will be receiving your salary every 15th or 30th of the month, you can allocate a certain percentage of your wages to items like mortgage repayments, utilities, food, clothing, and other expenses.
But the downside to that is that it may make you feel complacent which could prevent you from exploring other opportunities. Another downside is that it may also limit your earning potential. A freelancer who bills a client per article can produce only a limited amount of content per day.
Passive Income
Passive income is money earned from assets you control. It is money you put to work for you. Also, many consider passive income as money earned from activities you do for a short time but requires little else to maintain the income flow. While you may need some time and effort to create a website with affiliate advertising, after a while you don’t need to put in a great deal of time. Once set up, the money will flow continuously with little effort and oversight on your part.
With passive income, if you put in the work early on, it could sustain your lifestyle for a really long time. It is worth noting that passive income still requires some work on your part. The income may take years but if you focus, passive income may allow you to generate money while you sleep.
Examples of Passive Income
Here are some examples of passive income
- Interests Earned From Investments
This is the original and most powerful form of passive income. For this reason, contributing to a retirement fund is so important throughout your career. If you can invest enough money, you can live off the interest for the remainder of your life.
- Affiliate Income
Affiliate income is money you receive as referral commission when users click-through a specially-coded link on your website and make a purchase. Thousands of companies offer affiliate commissions for their products or services providing endless opportunities.
If you have a blog, affiliate advertising is one of the best ways to monetize it. You can make money from your blog by adding relevant affiliate links to generate large amounts of affiliate income.
- Display Advertising
Display advertising is another common form of passive income. It falls in the same line as affiliate income because it requires a website or blog to generate large amounts of monthly traffic to earn money. If you put enough effort in building a website that generates thousands or even hundreds of thousands of monthly pageviews, you are likely to make a huge passive income from display ads.
- Rental Income
If you can invest in a rental property, you can generate passive income from monthly rent checks. This is a high-risk form of passive income because of the large upfront investment required. If you can’t find a tenant to pay the rent, you won’t earn an income. Also, you have to maintain the property which can make rental income feel more like active income.
- Online Course Sales and Info Products
Course sales and info products is another great way of generating online passive income. Many people make six or even seven figures from this passive income stream alone. The key to your success is to build a large online audience which can take years.
With passive income, your physical presence and effort is not required in order to make money. A passive income stream provides you with money at all hours of the day. Passive income allows you to make money whether you are sleeping, on vacation, or watching television.
Advantages and Disadvantages of Passive Income
Passive income may seem like an awesome way to generate revenue but just like anything else, passive income has its advantages and disadvantages.
One advantage of passive income is that it can provide you with multiple income streams. You can write an e-book, start a blog, or create a website. The possibilities are endless as far as generating passive income is concerned.
With passive income, you can spend more time on other things. While working, you can do other things on the side like play golf, work out at the gym, and others. You can have more time doing things you enjoy. Even if you are not completely free, you still have more time doing other stuff.
Having passive income means you can be more flexible with your schedule. It means you don’t need to work 8 hours during the weekday when other people tell you to. Finally, passive income gives you financial security. You can control your financial future. Also, passive income gives you a steady income stream even if your main source of income is cut off.
A downside of passive income, however, is that it will take a while for your income stream to grow and start generating income. This is the reason some people quit their journey for passive income along the way. Most products that generate passive income have exponential growth. You need to hang in there. Another important downside of passive income you should consider is that no matter how much effort you put into it, there is no guarantee of success. You may have a nice and informative blog but it can still fail due to a bad niche or for some other reasons.
Why Passive Income is Better Than Active Income
Some people are already content with just having an active income. They are just okay with receiving their paycheck twice a month. But what if your source of active income suddenly stops? What if you get laid off from work? How will you make money? This is where having passive income comes in. Here are some reasons passive income is better than active income in every aspect.
No Payroll Taxes
Payroll taxes are classified as Social Security and Medicare taxes. Income you earn from your employment is subject to both social security and Medicare. With active income, you get the same benefits as the guy who pays less taxes than you. It’s unfair isn’t it? But that’s the way it works. As well, with passive income, you don’t have to pay taxes at all.
Lower Tax Scale
While passive income may also be subjected to tax, it is relatively lower than the tax deducted from your active income. Which rate do you want? 15% or 0%? 35% or 15%? 40% or 20%? The choice seems easy.
Depreciation
Some professions like real estate investors don’t get to enjoy the lower qualified dividends rate on their passive income but they get something as good and that is depreciation. Buildings are subject to depreciation but even so it gets favorable tax treatment. You have the option to defer taxes on them until you sell the property and the depreciation is recaptured.
Works When You Aren’t
One of the biggest advantages of passive income is that it works when you are not working. The more passive the income, the less work is involved. You may be on vacation on a remote island but your income stream is still working.
Capitalism
When you are earning passive income, you are like a capitalist because your money is working as hard as you do.
Scalable
Another benefit of passive income is that it is scalable. You don’t have to put extra effort to gain extra income. If you sell your book, for example, you can make $100 or even $1,000 without doing nothing. If you do speaking gigs and charge $50 per head, you can leverage your time and scale your potential income.
Passive Income Ideas You Can Consider
Whatever is the financial goal you want to achieve, passive income will help you with it. Most millionaires have seven streams of income. It doesn’t mean they have seven jobs. Most of them have figured out additional streams of income aside from their current source of income. Here are some ideas for generating passive income.
1. Earn money with daily activities
You drink coffee in Starbucks, do online shopping in Amazon and Walmart, watch videos, and answer surveys. These activities will help you gain points which you can convert and exchange for gift cards or cash back.
2. Make Your Car Work For You
Another daily activity that you can convert into passive income is driving.
If you’re already running, why don’t you pick up a passenger or two? Driving with Uber will get people to their destination and help you earn money. You can also advertise in your car to earn money on the go.
You can even earn money if you are on vacation, traveling, or just don’t use your car on a normal business day. With apps like Getaround, you can earn thousands of dollars by renting a car without using it. Plus, Getaround owners can get the best parking spots in town, a $ 50 monthly line of credit to rent the car they want, and $ 1M in basic insurance.
- Get a high-yield savings account
Online banking has started offering attractive interest rates that can help you make money from your savings. With Citibank you can benefit from your savings of 1.55%. This is not money for enrichment, but free money. And since there is no monthly fee, CIT Bank has a win-win situation.
Another option is the opening. Like CIT Bank, Discover offers competitive interest rates on its savings accounts. Discover’s biggest advantage is the lack of a minimum starting balance.
4. Rent a room
If you have additional bedrooms, you can put them up for rent through Airbnb. When a room is available, it is up to you to decide what the daily rate is and to set the rules for guests. A great way to earn money on vacation is to rent your entire home on Airbnb.
It may seem strange to leave your space in the hands of strangers, but luckily if something goes wrong, Airbnb will provide you with insurance for up to a million dollars. There is also a scoring system, so you can check the reputation of the tenants before letting them rent.
5. Invest in crowded real estate
For as little as $500, you can start investing in real estate through the Fundrise Starter Portfolio. You can take advantage of the greater flexibility of real estate investment funds (REITs) and generate high returns. The performance report shows that your initial investment can generate a return of 12.25%.
Another real estate crowdfunding platform is RealtyShare. It is similar to Fundrise, but the minimum investment is $ 5,000. With this platform, you can control more and choose properties to invest without depending on the performance of your entire portfolio.
If you choose any of these options, be aware that since they are private funds and not public stocks, you will not be able to easily liquidate your investments and use cash immediately. Your investment can range from six months to five years. However, depending on the investment opportunity you choose, you will most likely still receive a monthly or quarterly payment.