Active VS Passive Income: Everything You Need to Know

Active VS Passive Income

Active income is what you get working from 9 am to 6pm. In other words, it is the income that require your engagement, time, attention and complete focus. Sources of active income include a job, career and selling a product or service in exchange of money. On the other hand, passive income is where you don’t have to fully focused or provide much time. It is the income that you can earn even when you are sleeping. Some of the famous modes of passive income include dividends on stock, rental earnings from real estate, return on investments in equities or companies and earning from social media platforms such as YouTube.

Which One is Better?

You might have heard that whether to focus on active income or passive income. However, the answer is not that simple because it depends on your circumstances. But the rule of thumb is that you should first focus on active income, save a bit of amount then you’ll be able to invest and make passive income streams. Let’s take an example, you are earning nothing, how will you be able to invest amount in passive income streams. Therefore, it is recommended to first start earning a good sum, save at least 20% from this amount for a few years and then start investing in passive income sources.

You should also remember that you must have passive income streams to get rich because as you start aging, you will not be able to work as hard as you are doing today. Multiple sources of passive income will allow you to overcome regular expenses and save for future. If you want to read How to Get Rich, I have also written a blog on it.

Modes of Passive Income

A lot of people say that you should go for this and that to get passive income. But this article discusses proven sources of passive income that helped billionaires to get there. Most of these sources are usually quoted in different books like Rich Dad Poor Dad by Robert Kayosaki, The Richest Man in Babylon by George S Clason and Unshakeable by Tony Robbins. These sources include:

Stocks or Shares

It is the most commonly used source of passive income. But you should be aware that “stock market is a tool that transfers money from the impatient to the patient”. It means that before investing in the stock market, you must have enough knowledge to make profit. However, stock market can provide passive income either through capital gains (increased prices of shares compared when bought) or dividends (a percentage of profit declared by the company for stockholders).

Real Estate

Considered the most profitable form of passive income, real estate is a proven way to get good profits and exceptional passive income but only if you have a good sum to invest and enough knowledge to execute transactions. There are two ways in real estate similar to stock market. The first is capital gain where you buy property, hold it and sell at an increased price. Real estate also provides passive income through rental earning where you buy a property and rent it. There is also a third way of earning that is Hold and Sale (where an investor buys a damaged property, get it repaired and sell at profitable prices).

Equity Financing or Venture Capitalism

Equity financing or venture capitalism usually take place at large scale. Under this strategy, experienced industrialists invest money in small or potential companies needing finance and ask them for a certain percentage of profit. In other words, they invest money in businesses, helps them to grow and take a certain amount from the profit.

Final Thoughts

Apart from the source you decide to make passive income stream, it should be kept in mind that enough knowledge and ample saving are key to good profits. Without active income, you cannot generate passive income streams.