The Difference Between Active Income and Passive Income

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. I was part of this group. 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 there’s 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 explained these terms to millions of readers who finally understand how to grow wealth.

Here are the two different types of income:

  • Active income is money you physically work to earn such as a job. This is income for which services have been performed. This includes wages, tips, salaries, commissions, and income from businesses in which there is active participation. Typically, you’re exchanging hours for a money.
  • Passive income is indirectly earned such as interest from savings accounts or dividends. This income is derived from things like rental property, limited partnerships or other businesses in which you’re not actively involved.

Now, that you know the difference, I want you to understand there is nothing wrong with either income streams. In fact, you may want a combination of both. The more you understand these concepts the better equipped in maximizing your potential income.

Let me further explain active income. Active income is money earned when you’re doing some kind of work or required to devote a specific amount of time to receive money. The amount of money earned is based on the number of hours you put in. On the other hand, passive income is earnings that require very little of your time and effort. It continues to generate income for you. Essentially, passive income pursuits are making money for you.
Ultimately, you want to have more passive income streams.

The Difference Between Active Income and Passive IncomeWhy does passive income matter?

It matters because you want to achieve financial security or financial freedom. I define financial freedom as a stage in the Financial Wellness Roadmap where you control your time. You’ve accumulated enough wealth or generate enough passive income that your time is used as you wish and 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 stocks or visit your rental properties but are not actively engaged in the day-to-day.
Passive income is also great for those who wish to spend more time with their family or travel the world. Or you can choose to work because you just love your job but you’re not required to.
Again, having passive sources of income that is not tied to hours 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. My argument is for you to maximize the amount of money you make at your day job (like getting a pay raise) and make money passively while you binge-watch Netflix.

Examples of Active Income

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 example, you may need to write on your blog but the income generated from advertisements can continue to grow after the blog was written.

Why is important to have different income streams?

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 the 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. A side hustle is 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 but the main reason having side hustles is to achieve goals. David Carlson, the founder of YoungAdultMoney.com and author of Hustle Away Debt, wrote about eliminating debt by making more money through hustles. He shares dozens of side hustle ideas that have proven to help him and others achieve their financial goals.

The Bottomline Difference

You want to know how you earn and make money and the differences between passive and active income streams. Understanding these differences can help you prioritize projects that can generate income without working more hours. It’s quite alright to have a traditional job. In fact, there’s a lot of benefits to working for someone else or a large corporation. However, to achieve financial independence and eventually financial freedom, everyone should look into passive income and money making hustles.

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