Do you know that making money and earning money are two different things? The words are often used interchangeably, but they support two vastly different lifestyles. This difference can mean more or fewer hours working or having fun.
When most people think of money, they’re probably only thinking about having more of it, not necessarily about the different way so making money. I was part of this group. And I believed the only way to have more money was to work more hours.
As I learned more about creating wealth and controlling my time, I discovered a difference between making money and earning money.
I also learned the concepts of active income and passive income.
Active Income vs. Passive Income Defined
In Robert Kiyosaki’s bestselling book, Rich Dad Poor Dad, he shared two concepts to millions of readers about growing wealth. It was a revelation for many who only saw money as something you earn through activity and not passive means.
Now, here are the two different ways you can make money.
What is Active Income?
Active income is money you physically work to earn, such as the paycheck from your job. This is income for which services have been performed. We know this income type as wages, tips, salaries, and commissions. Additionally, if you own a business in which you actively participate falls in this income type. Just remember, active income is made whenever exchanging hours for money.
In short, active income is money earned when you’re doing some work or required to devote a specific amount of time to receive money. Typically, the amount of money earned is based on the number of hours you put in–more hours often means a higher amount.
What is Passive Income?
Passive income is indirectly earned, such as interest from savings accounts or dividends from stocks. Additionally, income is derived from rental property, limited partnerships, or other businesses where you invested capital but are not actively involved.
In short, passive income is earnings that require very little of your time and effort. It continues to generate income for you. Essentially, passive income streams make money for you without depending on your time and active effort.
Now that you know the difference, I want you to understand there is nothing wrong with either income stream. In fact, you may want a combination of both. The more you understand these concepts, the better equipped you are in maximizing your potential income.
Why does passive income matter?
It supports your efforts in reaching financial independence. What is financial independence? I define financial independence as a stage in the Financial Wellness Roadmap where you have accumulated enough wealth or generated enough passive income that active work is completely optional.
Passive income may still require some of your time, but the return is not dependent on the amount of time you devote to it. For example, you may still read and research dividend-paying stocks or visit rental properties, but you are not actively engaged in the day-to-day.
Also, passive income is great for those who wish to spend more time with their family or travel the world. The less time or activity you need to make money, the more time you have on other things.
To reiterate, having passive sources of income that are not tied to hours of work frees you to pursue your passions and serve your purpose.
Active and passive income streams
You can have a mixture of income streams, and the choice is yours to make. You can approach income streams in two steps: 1) maximize the amount of money you make at your day job (like getting a pay raise) and 2) make money passively while you binge-watch Netflix or sleep in
Here are some examples to consider:
Examples of Active Income
- your full-time job or part-time work
- driving others or delivering packages
- cleaning homes, providing care or babysitting
- completing online surveys
Examples of Passive Income
- make money through blogging
- royalties from a book
- rental property income
- dividends from investments (stocks and funds)
- profits from business investments
There’s an argument that passive income doesn’t truly exist. I would agree that passive income streams still require some of your time. For instance, you need to write an article for your blog, which requires time and effort. But, once written, that article could generate income from ads and affiliates well into the future without additional effort.
Start a side hustle for active and passive income
Having different income streams can give you peace of mind. You’re less reliant on one job, and in the event, you lose that job or your work hours are cut, you have other income sources to pay living expenses.
In Chris Guillebeau’s bestseller, Side Hustles: From Idea to Income in 27 Days, he writes about the importance of having a side hustle in addition to your day job. His definition of side hustles is similar to how I define passive income. You’re required to devote some time to the hustle, but you’re not limited in the amount of money made based on active participation. HIs book’s thesis is on using some time to build side hustles that aren’t dependent on time-for-pay exchange.
Chris defines a side hustle as a skill or an interest turned into an income-generating business. Basically, side hustles will help you weather the storm of financial uncertainties.
In other parts of the interwebs, bloggers define side hustles differently. Often it’s associated with activities such as driving for Uber or freelance writing. However, the common reason to have side hustles is to achieve goals. So, what are your goals?
David Carlson, the founder of YoungAdultMoney and author of Hustle Away Debt, wrote about using side hustles to eliminate debt. His approach often shows how active side hustles can help achieve financial goals sooner. In his book, he shares dozens of side hustle ideas that help him and others achieve their goals. And interestingly enough, a few of those active side hustles can turn into passive income streams.
The Bottomline Difference
You want to know the differences between passive and active income streams. Understanding these differences can help you prioritize side hustles to meet specific needs. Do you want to pay off debt sooner? Choose an active side hustle. Want to secure your financial future? Devote time to building passive income streams. Ultimately, the goal for you is to generate income without having to exchange more hours for money.
Now, one thing about working a traditional job. There’s a lot of employee benefits to working for someone else or a corporation. You don’t have to quit your job and start a business. Many may talk about the benefits of entrepreneurship, but most entrepreneurs spend more time with little pay (especially in the early years) compared to working for an employer.
Your best approach is to create an income strategy that uses a mix of active and passive income.