Passive Income vs Active Income – The Ultimate Guide

When looking at bringing in money, there are two ways that you can initiate an income stream. It will either be passive or active. These are not unheard of terms for most people, but they are not always clear to those who are outside the world of business and investment. Before deciding which is the best way to make your money, understanding what each term means is important so you are able to build the most profitable financial scenario possible for your particular life situation.

The basic definitions of passive and active income are straightforward. Traditionally, passive income has been making money through stocks, bonds, and real estate that all require capital gain income you already own. However, passive income can also be defined as creating an online business or obtaining an investment that requires little capital and the work(sweat equity) that has been done beforehand. Passive income is an income stream that needs very little ongoing effort to continue to draw a consistent income and show promising results for financial freedom. Active income is different. It is income that you get for doing something such as performing a service or selling goods. Wages, salary, bonuses and tips are all different types of active income. These require something to be done in a specific time period for payment and can provide a steady cash flow based on the amount of work you do.

These are just the basic definitions of passive and active income, so more information is needed to have a complete understanding. It is important to know what each type of income is and understand how it works so you can make the best financial decisions for you, your budget and your current and future lifestyle.

Passive Income

Many of us would love to have a consistent passive income. Lots of money coming in with little to no heavy work or sweat equity involved. It has been called the holy grail of income, which makes sense since it only takes some effort at the frontend with the hopes to be able to relax and enjoy the income from the investmenton the backend. It can often offer a steady income for months, years and even decades into the future. The more work that is done at the frontend tends to offer better income in the times ahead.

While passive income sounds enticing, do not think it does not need some work for it to be successful. There is planning, staging, buying and elbow grease required to generate a passive income in the future. You either must put in capital, or sweat equity early on. While most of us do not have an excessive amount of extra capital sitting around, the sweat equity invested can be significant. However, the work is done at the front end rather than throughout. Once you are set up then you can have the benefit of a steady income stream without too much further sweat equity investment.

Passive Income Examples

1. Interest from Investments – Interest is a traditional, old school way of earning passive income. There is nosweat equity involved. Interest is a strong form of passive income that offers good returns if the investor retains their investments long-term. The perfect example of this is contributing to a retirement fund early in life and throughout a career. Contributing money to stable medium-risk investments and adding to it on a regular weekly or monthly basis offers the investor income for the rest of their life when they are no longer working. Making the right investments and holding them long-term can turn into an extremely comfortable income that can be relied on in later years.

An example of this type of passive income is as follows: Invest consistently and in a fairly aggressive style beginning in your 20s to build up a strong portfolio. Creatinga stable mix of investments with just the right amount of risk should then leave you with enough capital that you can live off the interest alone when you retire.

A portfolio worth a million (yes, that is very realistic) offers an annual income of $100,000 if you get a 10% return. Obviously, the markets and the return rate play into the final numbers. The actual amounts can vary but by consistently investinga set amount of money into a retirement fund,it will be able to ride the highs and lows of the market with a balanced outcome after years of investing. The only effort that needs to be put into this passive income is the one where you deposit money and where that money is invested.

There is no sweat equity needed other than having the money to invest and deciding where it goes. Once that is done, you sit back and watch it generate passive income over the decades. Disciplined investment over the years offers a retirement lifestyle that will be comfortable and financially stress-free.

2. Rental Income – This type of passive income needs both investment and possibly sweat equity depending on how much capital you have to initially invest. To make good passive income in real estate,it usually means there is a high upfront capital investment cost. The property must be bought, be in good repair and then rented and maintained. If a buyer does not have the capital to use beyond buying the property, then there is a lot of sweat equity needed in making sure it meets code and is ready to rent out.

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Renting and maintaining the investment unit also needs to be done and can add to the sweat equity cost if there is no capital to have someone else do it. While this seems like active income, it is really more passive once the unit is rented out and if it is kept in good repair. The active income part tends to be frontend.

3. Sweat Equity Passive Income – The first two examples of passive income needed substantial capital to get them up and going. Not everyone has that kind of money to put into investments or real estate. Although this is not the ultimate guide to online passive income opportunities, these are a good start that’s worth looking at. These are passive incomes that need sweat equity rather than lots of cash to get them off the ground.

a. Affiliate Income – This income is great for those who are working online in any way. It is money that is received by using specific advertising on a website. It is a click-through link that has a special code that will trigger commissions for products and services sold when a person uses it. With so much of business now happening online, this is a good way to get extra passive income simply by having the right links in the right place on your site.

If you are a blogger, then this is the perfect way to get an increase in income. Having a large online audience from a blog, social media site or sales site means that having relevant affiliate links can get you more money. It will happen once you have done the work of building site traffic and then finding those who want to place links on your site. It’s all easy money from there. There’s sweat equity needed to write the blogs, get followers, increase traffic, partner with affiliates and maintain websites but the links themselves are passive income and do not take effort to maintain.

b. Display Advertising – Similar to affiliate income, display advertising can be an easy passive income. If you have a blog, website or social media account that gets large amounts of traffic, then this is a great way to go. If you have a big number of page views, then display ads and click-throughs are perfect. If people see something on your page that looks interesting and you are a reliable resource, then they may search further with a click which can trigger a sale. Every click and sale means money for you without doing a thing with the advertisements.

As with links, display advertising takes some sweat equity to set up. Your blog, website, or social media account all need followers to make advertising successful. Building up your personal brand takes work and teaming up with advertisers takes some networking. Sweat equity is important but no money is needed. A good way to make income without a large investment of capital.

c. Building an Online Presence – The reason sites like YouTube or Instagramaregreat is that they generate passive income without a huge financial investment. Digital income aside from affiliate and display income comes from producing something that can then be used or referred to in the future. This includes items such as creating online courses, informative videos, unboxing, music lessons and more. Once something is online, you have already done the work and the income should come in if people are interested.

The important factor to have this type of income to work well is that you mustbuild an online audience and have a talent or information that is desirable. There are always people who will want to listen to music, learn something or find out how to fix or create itemsso figure out how to get them to follow you and share the things you love and know how to do. Launch a channel or website that has good content and garner an audience for lots of hits. The front end work is heavy but getting it to go live and by refreshing the content you can have a great passive income over the years without a lot of financial commitment.

The Benefits of Passive Income

While any extra income is nice, passive income is helpful when you need extra money or if you have spent a lifetime working for active income. Active income means your physical presence and extensive effort is needed each and every day just so you can have money. With a passive income stream, you get money no matter what else is going on. If you are on vacation, working another job or just living a busy life, passive income allows that flow of money to continue no matter what else you are doing or not doing.

The biggest issue you need to be aware of with passive income is that building it takes time. The front end work can be substantial, be it through investing capital or sweat equity. Long term investments, building up audiences and followers along with getting into rental real estate can all pay off well if you have the ability to start early and wait it out for results. Patience and early hard work will yield rewards when you need it down the road. A lot of early active work will create a great passive income in the end.

Active Income

Active income is fairly straightforward to understand. Anyone who has worked for an employer at some point in their life has gotten it. Whether it was a salary or an hourly wage, both are active income. Active income gives people money relatively quickly. You do the work and then you get paid. No worries about upfront capital or sweat equity to build for the future. You often need active income to build passive income.

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Without active income, there is little ability to make long term investments. There is a need for money to be invested or a lifestyle sustained. Active income is needed when you are building followings, writing blogs or creating online courses. You need to work hard for active income to keep your bills paid while you are aiming to build your future passive income. Passive income can rarely happen without earning some active income. It takes work but active income will support you while you get prepared to live off a passive income.

Active Income Examples

1. Salary – Working so many hours a week and getting income for that work is called a salary income. You are earning active income by doing something and being paid for that work. You are trading your personal skills, education and time for money. The amount of money is agreed to before you begin work so you and your employer understand that you will complete certain tasks at a certain time and they will pay you a set amount of money for that.

2. Hourly wage – This is the most common form of active income. It can be made whether someone works a few hours a week as a delivery driver or full time at a factory or other job. It can be a part-time job done on top of a salaried position. This type of income is beneficial as it allows the worker to be paid for overtime which salaried employees do not usually get. It also allows for tips if it is a job where the employee is serving. There are various ways to make extra money with an hourly wage.

3. Commissions –This is a tougher way to make active income, but when you are good at it, you can make substantial amounts. Commission is something you get when you are in sales. It can be set up as a percentage of sales, a sales target and can also be combined with a salary or an hourly wage.

Real estate agents are a good example of commission income. When they make a sale of a home, they make a commission. This commission varies depending on if they are the selling and buying agent or if they have negotiated a certain percentage when contracts were signed for their services. Either way, they get a set amount when a house sale closes. If they sell a home for $400, 000 and have a commission of 4%, then they make $16000 on that one sale.

Commission is flexible as seen in real estate but can be more difficult to attain than other forms of active income. Commission can be problematic in times when marketplaces are on a downturn. With Covid-19, it was difficult for many on commission since businesses were shut down or stalled so there were decreased sales opportunities and therefore no commissions. Both lean and boom times will affect commissioned sales. If you are talented at sales though and in a field that you love, commission can make you a lot of active income and you will have an ability to smooth out the numbers no matter what the economy is doing.

4. Tips – This is an active type of income that is usually paired with hourly pay. However, it can affect an hourly wage as employers tend to reduce the amounts of that wage since the employee is making money through tips. Tips can apply to servers, cooks and bussers at a restaurant, caddies on the golf course, hotel staff, food delivery or movers. There are lots of instances when tips come into play as active income.

5. Freelanceor Consulting Services – This is the type of active income that is great if you have a skill set that is marketable to companies. Having skills and the knowledge to help companies get better and grow a specific area of business can be very profitable. When you have a solid understanding of marketing, social media, analytics and market demands, then the ability to consult with companies on improving specific areas is profitable. Do a good job and then your consulting business grows by word of mouth and generates even more active income.

Freelancing means that you work for yourself. If you are a stellar photographer, videographer, web builder, graphic artist, writer or have another talent,then you can hire yourself out for those who need those particular skills. Photographing a wedding, doing family portraits or building a website for business are all skills that will increase active income as the demand grows from those who are looking for that particular skill set.

The Benefits of Active Income

Active income is going to get your dreams off the ground. It allows you to have income coming in quickly and with regularity. In contrast to passive income, you do not have to wait to have a spendable income. You can make money over a short period of time and it offers a solid way to move forward with planning how to begin to make passive income. It is a significant building block in how you set yourself up for a successful lifestyle with no monetary worries.

Passive versus Active Income

If you want to know which is better, most will say it’s passive income. If you can make money without having to do much,there are not many people who would not go for that. Income generated through previous work while you do less is great.

However, active income tends to be the way to get to that end dream of passive income. There are always going to be some costs that need to be met whether it is money to invest in real estate or stocks or money needed to sustain your lifestyle while you work on creating a foundation for your passive income of the future. While passive income is the most enjoyable for many people, the active income is needed to get to them to a point where they can enjoy only a passive income. Both types of income have substantial benefits in supporting your lifestyle.

Final Thoughts

Passive income vs active income both have their pros and cons. They both are needed if you want to be financially secure down the road. Passive income needs capital, sweat equity or both and active income can offer some of that. Not everyone has the investment capital to make a big contribution to gaining passive income. However, with some planning and due diligence, people are able to work hard, create active income for investment or sustaining a lifestyle while getting set to get their passive income lined up.

Realistically, it should not be passive income versus active income. It should be learning how to use the active income to attain passive income. Whether you want a traditional path to passive income or are going to invest a lot of sweat equity, including active income in the plan is important not only so you have money to invest as needed but so you can maintain a certain lifestyle if you can not afford to invest capital. We all want passive income but need a good plan to get us there.

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