The work we do to earn our living takes up a large percentage of our waking hours. People all over the world need money for survival. The majority of the people work actively to receive income inform of wages and salaries. The issue with active working is that you only have limited hours in the day that you can actually work. There is a better approach. You can deploy your money, skills, experience, or services to work on your behalf, and you get compensated from these vehicles.
Active income is a form of income that you receive through direct application of efforts, you need to show up, get up, and be involved directly in order to get paid for your services. This income includes tips, wages, salaries, commission, and income from businesses. Most employees are active income earners. Active income earners commit significant amount of time in order to get paid for their services.
Passive income on the other hand is income received on a regular basis that may not require any direct application of further efforts, after some initial input. Examples of passive income include: rental income, dividends from share ownership, royalties from book publishing, interest from banks etc.
To become financially independent, you need to learn and actively seek to convert your income source from active to passive. You should identify the appropriate investment vehicle and invest in it to generate your passive income stream. I am an engineer, I earn my active income through salary that I receive as an engineer. I am also an author, and I make passive income through royalties that I receive when anyone purchase my book.
Knowing the difference between active and passive income is very important and it could be the foundation that you need to build a sustainable financial future that will be devoid of financial worries. Passive income is essential for anyone who wants to learn how to make money work for them.
Here are some fundamental differences between active income and passive income:
Time Required:For most active work, you need at least 8 hours each day depending on the part of the world where you live, in order to contribute meaningfully at work and earn your salary. Active work also requires continuous time investment in order to stay relevant and earn more money. That means, you have to show up every day in order to earn your wages. For passive work on the other hand, the initial time you spent on developing the idea is all you required to continuously make money. It does not require constant and regular time investment. Basically, with passive income you make money round the clock even while you are sleeping.
Effort Required:To earn active income, you have to actively put in effort, knowledge and skills into the occupation or business. For passive income on the other hand, after the initial effort that is required to set up or invest, you do not have to continuously put in time to receive income from the passive source.
Income Potential:For active income source, your earning potential is based on your profession or the type of services you rendered. Passive income, on the other hand, provides a great opportunity for you to increase your earning potential, however, it takes time and focus to achieve a passive income level that can replace your active income.
Lower Tax Bracket:In the United States of America and in most countries around the world, the kind of income that is taxed at the highest level are earned income, which is basically income from your active work. Passive incomes are taxed at lower rates, which means it provides tax advantages to people that earn their incomes from dividends, or rental income.
Works when you sleep:This is the best part of earning money through passive means. You make money rain or shine and even when you are sleeping. This is the kind of income derived from investments that you have made which constantly generate returns for you from months to months, year in, year out. For active income, you need to work and put in efforts in order to make money.
Here are my top 5 Passive Income Ideas
Invest in Stocks: Stock market give you the opportunity to invest in and own a portion of great companies all over the world. Stock markets and buying shares can be very challenging and risky, you need to do a lot of research to safeguard you from the risks that come with investing in
Invest in Bond:Bond is another source of passive income. A bond is a form of debt instrument issued by companies, municipalities, state or federal government to raise funds. When you buy bonds in the market, you are lending out your money, and in turn you will get certain amount of money for a period of time. A bond provides fixed income to you, and it typically has an end date known as maturity date when your money will be paid back to you. Typically, a bond is assigned with ratings which depends on the credit worthiness of the issuer, and this helps the investor to assess how risky the investment will be. The highest rating is AAA and these typically produce lower returns when compared with low rated entities with ratings BB+ and below up to D.
Real Estate Investment:Real estate investment is very good and profitable. The important consideration here is the location of the property and the kind of tenants that you attract. It has a lot of tax incentives such as depreciation, mortgage interest deductions, cost of repairs, and maintenance write off. If you are not available to manage the properties, it is advisable to get good property managers to help you manage the tenants. As the property owner, you also have to ensure you are responsive to concerns from your tenants in order to keep them for a long time.
Affiliate Marketing:Affiliate marketing is particularly good if you have a website where you can promote other people’s products. To become an affiliate marketer, you need to reach out to companies and offer to promote their product or services, and in return they will give you commission, based on the number of clicks that convert to sales. This is good if your website has lots of daily visitors.
Peer-to-Peer Lending:Lending tree, Lending Club, Peerform, Funding Circle, and many of the peer to peer lending platforms now offer opportunities to issue out loan and make passive income in return. The great thing about this is that the companies have vetted the borrowers, and they pay higher returns to you than what you can earn from your savings account.