Passive Income vs. Active Income » (An Easy Guide)
Every single penny you earn in your life falls into two main categories; active income & passive income. You might have heard both terms in your professional career, but do you really know the difference between both types of income streams?
What is the difference between Passive Income and Active Income?
Passive income is the money you generate with autopilot mode; it is more like earning with minimal effort. At the same time, active income requires you to actively spend a significant amount of time and effort to earn it.
The former source of income does not necessitate physical or active participation to earn cash, but the latter requires material participation.
The money you earn from interest and dividends on investments, limited partnerships, and rental property all come under passive sources of income.
On the other hand, salary, hourly earnings, commissions, and tips are all examples of active revenue streams because you put in an active effort to earn it.
Therefore, if you want to experience financial freedom and live a preferred lifestyle, you can have one or both of these income sources. Passive income is better than active earning when it comes to the practicality of earning. However, you still need a consistent source of income to sustain your stream of passive income.
There’s a stark difference between the two sources of income, i.e., active and passive, and here I will give you an easy guide on both of them to help you get started.
I will also cover some of the ways to earn both incomes to choose for yourself. Once you have read the article, you will be able to make a better choice to see which method works the best for you.
What Is Active Income?
Active income is the money you earn through active participation. You have to work on daily wages, or monthly salaries to make money. Active income also includes running a business, selling products or services. It is an exchange of money for goods, services, and the time you spend doing something.
Usually, people want to earn an active income until they have energy and are up for doing something for long hours in exchange for physical labor. Other times, they prefer setting up means of passive income to spend their retirement years in peace.
6 Active Income Ideas (Explained)
- A regular 9-5 job.
- A small business venture
- Earning money from tips
- Commission Income
#1 A Regular 9-5 Job
I believe everyone is pretty aware of a 9-5 job. But, for those of you who don’t know, well, here’s what it is. A salaried job is one where you are hired for your services, time, and effort on a fixed, monthly salary. It is mostly office-based, where you have to work 8-9 hours a day, five days a week, to get that salary deposited in your bank account every month.
It is similar to a daily or hourly wage job, but you don’t get paid for the number of hours here. The amount here is fixed, unlike hourly wages, where you get paid for working extra hours.
In freelancing work, you operate as an independent contractor (as in you don’t work for a monthly salary under a contract, where you have to provide your services at a specific time). You can work for several clients rather than for a single employer. It depends on organizing your service pricing; you get paid per job or hour.
Some popular freelancing platforms for getting started are UpWork, Fiverr, Freelancer.com, Peopleperhour, etc.
It comes under active income because you are earning active revenue out of the active services that you provide to the clients. For example, some of the highest-paid freelancing services to learn in this day and age are content writing, copywriting, graphic designing, digital marketing, social media marketing, etc.
#3 A Small Business Venture
A small business venture gets you money after you actively work for it look after it thoroughly. Whether it is a product-based or service-based enterprise that you own, you have to work round the clock to get things done immediately. There’s no earn-while-you-sleep thing going on here.
Whereas some businesses generate money without anyone having to work for it actively, most businesses demand looking after. In small businesses, owners make money on the number of hours they spend working or the number of products or services they sell each day.
If you’re an expert at something, you could make good money out of it by selling your consulting services. You could sell them to newbies or those interested in learning the trade that you’re good at.
Suppose you have extensive knowledge of digital marketing, social media, logistics, content writing, photography, blogging, or business operations. In that case, you may provide consulting services to businesses that require assistance in your field. You could make a fortune out of your consulting services. But, again, this is an active source of income because you have to work for money.
#5 Earning Money From Tips
The last one on the list is the tips industry, where you make money from tips. People usually give tips based on merit, which means that if you work hard enough, you might earn extra money.
Many jobs offer money from tips. They originate from working in service-related industries such as restaurant service, delivery, bartending, and caddying.
#6 Commission Income
Commissions are calculated based on sales revenue. Therefore, your entire income or a portion of it may come from commissions earned from your sales performance in some professions.
A vehicle salesperson, for example, can receive a 10% commission on new car sales profits.
That commission is exactly proportional to a professional’s capacity to sell. If they successfully sell the car, they will be paid a commission. Similarly, many BPO sectors also work on commissions. An employee’s salary depends on the number of leads they can turn into customers.
Now that we know much about active income, let’s move on to learning passive income!
What is Passive Income?
Well, since we’re comparing the two, it is obvious that the two streams of income are completely different from each other. An individual makes passive money from an income-producing asset that does not need much effort on the part of that individual.
It also eliminates the need for the person to be physically there to continue earning money. So, you see what I meant by auto-pilot mode. However, you need to make money to actively set up a passive income stream. Once you’ve established a passive source of income, it continues to pay off even after the investment or work is completed.
Passive income is more like earning while you sleep.
6 Passive Income Ideas (Explained)
- Real estate investments or rental income
- Affiliate Marketing
- Writing an E-book
- Display Advertising
- Peer-to-peer Lending
- Sell A Course On Udemy
#1 Real Estate Investments Or Rental Income
You know how you can make good money out of a property that you have rented away without having to put in much effort to earn it. Even then, you need to have enough money to buy a good property to put it on rent. It reemphasizes that you need to have a consistent active cash flow to set up a passive revenue system.
However, this is a risky source of passive income because it involves a substantial upfront investment, and you won’t receive any money if you can’t find a tenant to pay your rent. Another aspect of rental income is that you must maintain the property, making it feel more like active income at times.
Moreover, a bad tenant can also be a pain. But, you must not lose hope and give it a shot if you feel fit for it.
#2 Affiliate Marketing
Affiliate marketing is one of the simplest ways of making passive money. Here you earn a referral commission when visitors on your website click on a specially-coded affiliate link and make a purchase.
Basically, in affiliate marketing, you promote someone else’s products, and each time a customer makes a purchase through your affiliate link, you make a commission. Thousands of businesses pay affiliate commissions for their goods and services, so the possibilities are unlimited. ClickBank and Amazon are the most famous of them.
Affiliate Marketing is also one of the most effective ways to monetize a blog. You can earn a lot of money as an affiliate if you create a huge blog following online and monetize your site with appropriate affiliate links. And, to be honest, a lot of people earn through affiliate marketing.
#3 Writing an E-book
If you’ve dreamt of fulfilling your dreams of traveling the world or opening a roadside, vintage cafe, then having a passive stream can help you get started. Writing an e-book is one of the ways of getting the cash flowing without you having to work for it.
You can write an e-book on any topic that you have expertise in, but you need to dedicate at least 30 days of your life to writing a well-thought and meaningful e-book.
To help you get started, here are some of the ideas you can pick on to draft that amazing e-book of yours:
- A step-by-step guide to anything you’re an expert at.
Once you’ve done that, pick up an eye-catching title, then outline how you want your book to look. After that, streamline your work and start writing. You can even look at some of the sample books to get inspiration. Later, pick a good cover – this is extremely important. Last but not least, wisely choose a platform to sell your book at. It will decide how many sales you make.
#4 Display Advertising
You can make passive money if you own a blog or a content creation website. But, here’s a thing, you need to have large traffic on your website or blog to make money out of display advertising. If you have one, you can put up display ads on your blog, and the ad service provider will pay you a commission on the number of clicks and purchases.
However, this option takes time and effort. You need to invest in your blog for months or years to get steady traffic and many monthly visitors.
#5 Peer-to-peer Lending
In peer-to-peer Lending (P2P), individuals can acquire loans directly from other individuals, bypassing the financial institution as a middleman. P2P Lending has gotten popular due to websites that make it easier for people to conduct it.
Borrowers and investors are connected directly on P2P lending websites. The fees and terms are set by each website, which also facilitates the transaction. Most websites offer a wide range of interest rates based on the applicant’s creditworthiness. An investor first creates an account on the site and deposits funds as loans.
Next, the loan applicant submits a financial profile to which a risk category is assigned, determining the interest rate the applicant will pay. Then, the loan applicant can look over the offers and choose one. (Some users even split up their requests and accept various offers to make more money).
Here’s how you can make money through P2P Lending:
You make money via P2P Lending by giving out a loan and then earning an interest out of that loan. So, for example, if someone on a P2P lending website is asking for $5,000, then as a lender, you do not need to invest the whole amount, but a tiny portion of it.
There will be many lenders on the website, helping the borrower reach the total. So, once the borrower starts paying back, you get a portion of that interest from that individual’s money. See, you don’t have to work for it actively. Therefore, this option comes under a passive stream of income.
#6 Sell A Course On Udemy
One of the smartest passive income ideas for 2021 is selling online courses.
That’s because course creators are still witnessing enormous sales growth. Customers would want to discover your insider tips and methods whether you sell a course on your own website or on a platform like Udemy.
Once you’ve put up your course on the abovementioned platforms, you will make money every time a person purchases it. So that’s definitely a good one-time investment.
To learn more, read the list of 10 best passive income books
If you make people vote for the two sources of income, most of them would want to vote for passive income because you get to earn money without even working for it. I mean, who wouldn’t want a life like that. By having a passive source of income, you can do anything that you like, follow your dreams, sleep your life away, travel the world, and whatnot.
But is that even a life worth living? Many people would like to say yes, but in my opinion, you need to have a purpose in life. Our jobs, businesses, and workplaces keep us going on in life for many of us.
Moreover, you need to have an active source of income to generate a passive one. You cannot have free lunch in life.
On the contrary, to live a fulfilling life, you need a passive income source, too. So, if I need to pick on between the two, I don’t think I can do that because one sustains the other. So, if I had to pick one of the two, I’d pick both, because the more the better.