Active Income Vs. Passive Income: Why You Should Know The Difference

Active Income vs. Passive Income

We all enjoy making money. There’s no doubt that watching money roll into our bank accounts is one of the great pleasures in life. Yet, have you ever considered how there are different types of income?

The biggest decision to make is whether to go for active income or passive income.

If you have never considered this issue before then it is time to understand the advantages and disadvantages of active income vs. passive income.

What is Active Income?

Active income is the type of earnings that most workers traditionally make. This is money that you work for each month. It can be your salary, commission, or income that you make from a business that you run.

What is Active Income

There is no denying that this is a satisfying type of way to earn cash. The work that you do is reflected in the amount that you collect each pay period.

However, there are some downsides to this too. For example, there tends to be a limit on how much you can earn. After all, there are only so many hours in a day. If you earn an hourly amount or commission, you may be tempted to work incredibly long hours in order to boost your income. This, of course, comes at the sacrifice of your free time.

This brings us on to the next point in our look at active income vs. passive income. You should never rely wholly on one source of income. Active income, by its very nature, requires you to work consistently.

The additional risk, is that if you stop working for some reason, your income stream dries up. Whether it is due to illness, retirement or some other factor, active income relies on you staying employed.

What is Passive Income?

Passive income is an intriguing concept that’s becoming increasingly attractive as people search for an alternative way of life. Have you always wanted to retire young? What about living a relaxed lifestyle by the beach or to travel more? Then passive income could be your key to doing this.

This is sometimes described as “making money while you sleep.” Your income will keep stacking up no matter where you are or what you are doing. It’s for this reason that it’s considered ideal for someone who wants to live an alternative lifestyle rather than the daily 9-5 grind.

By its very definition, passive income is money that you collect each month without actively working. With this method, you might put in a little bit of effort. Or you might not need to make any effort, instead relying upon something that you previously set up and just left running.

In terms of the amount of money that you could receive, this varies widely, just as it does with active income. While some people receive only modest amounts of passive income to boost their salary, others have retired early based entirely on what they earn in this way.

There are numerous different ways of earning money on a passive basis. You may receive rental income from a property or dividends from stocks. Equally, you could pick up monthly profits from a blog or from YouTube videos.

Other interesting ideas include affiliate marketing and schemes that bring you commissions on customers long after you have signed them up.

It is also worth mentioning that this approach can help you to earn more than with the traditional route of working for an active income. This is because your financial success isn’t limited to the number of hours that you can work. Instead, you control your time and your income. Sounds ideal, right?

Active Income vs. Passive Income: Which One Suits You Best?

Now that we have seen the truth about active income vs passive income, it’s time to decide which one best suits you.

For some people, this is an easy decision. This is typically the case when the person knows exactly what they want from life. If you have clear hopes and dreams for the future then it should be relatively simple to see how can be achieved with either of these different methods of earning cash.

What if you aren’t yet clear on how you want to live your life? Perhaps you like the idea of passive income but aren’t sure how you would cope without the stability of a fixed routine? Alternatively, you might feel that you want to experience the different ways of living and working before settling on one.

If you aren’t sure that trying both approaches is the only sensible way to settle any lingering doubts.

How to Get Started on Making a Change

It is safe to say that most people come to this question from a similar background. If you are considering the matter of active income vs. passive income, there is a good chance that you are currently working hard to earn money on an active basis.

If this is the case, then switching to passive earnings can seem like a deliciously tempting idea. That said, making a big lifestyle change like this clearly needs a lot of thought put into it. But don’t over think it. There is no harm in starting to create passive incomes streams even if you do plan to keep working.

Remember, passive income isn’t built overnight. You will likely need to gradually build up sustainable earnings before you consider completely giving up your active source of income.

If you want to change your life for the better get started right away. It won’t be long till you see the benefits.

C. James

C. James is the managing editor at Wealth Gang. He has a degree in finance and a passion for creating passive income streams and wealth management.