Wealth Management

What’s better for YOU, an Active or Passive Income?

Growing up in a household that had been funded on nothing but active incomes, I was made to believe that working long laboring hours was the only way to make good money and support a family.  It wasn’t until a handful of years ago did I realize the number of opportunities that were actually there in front of me.  Like me, many people are not taught about passive income.  They are taught to go to school, get a job, and save their money.  Though this may be the SAFE way to bring money into your bank account, is it really the best way? 

To start out, I’d like to address how both active and passive incomes are defined (according to Investopedia.com). 

“Active income refers to income received from performing a service. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation. For example, an accountant who works for a monthly paycheck receives active income…”

“Passive income is earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved… Passive income has been a relatively loosely used term in recent years. Colloquially, it’s been used to define money being earned regularly with little or no effort on the part of the person receiving it…”

  • Active income is almost always a guaranteed way to see cash in your wallet. 

For those of us living pay check to pay check, the idea of investing your money (and in some cases your time) into passive income simply isn’t an option.   With mobile apps today that offer free stock trading for example, the idea of investing has become more accessible to people starting out, yet still remains hard for them to find the time or money to attempt.    Yes the service is free… but the shares are NOT.  I also highly recommend you to do some research before trying to stock trade.  Entering into a market that you know nothing about will, in many situations, lose you money.  Other forms seen today to be passive income are ecommerce and affiliate programs.  In other articles that I’ve written, I touched more on exactly what they are, but for a brief explanation for that sake of this article, they are simply ways to make money from selling goods or marketing goods on the internet for a profit.  The problem with this is the risk involved when it comes to anticipating your income.  You are never guaranteed a pay check like you are when you have employment through someone else, resulting in many people putting their efforts into a promised payday rather than a possible one.

  • Passive income can be beneficial for years to come.

Though the general definition of passive income has been stretched over the years, many see passive income as something that can pay you now and in the future.   Yes, affiliate marketing and ecommerce both involve some effort to build, but the difference is that you can get paid more than once for the same amount of effort.  Take a YouTube channel for example:  if you were to make a video reviewing a product, it is true that it would involve you to put in time to not only create the video, but (if you really want the traffic) market that video as well.  The reason it becomes a passive income is the fact that as long as YouTube doesn’t take that video down, you have the ability to continue making money from both ad revenue and any sales connected to your affiliate link within that video.  Another example of the long term opportunities passive income provides goes back to the stock market.  Even though at the end of the day we never TRULY know which way a stock can go, with research and knowledge about what you are investing into, you have the opportunity to ride on another company’s success without ever having to put any effort into it other than investing your money.  The same goes for real estate.  Whether it be your land value increasing or a steady income coming from rental properties, the idea of real estate investing is one that people see as putting in minimal effort for a long term financial gain.  With that said, an active income will typically only pay you a one-time compensation for your weekly or biweekly effort, whereas passive income could pay you more over time than an active income ever could.

  • Active income eliminates the risk of losing money.

Another peace of mind active income provides is knowing that at the end of your work day, you didn’t LOSE any money.  Despite the fact that the risk of making bad tips, commissions, or even becoming unemployed will always play a factor; at the end of the work day you didn’t lose that money, you merely missed out on the opportunity to make more of it.  Companies that run a respectable business will pay you the wage or commission that you both agreed upon, as long as you kept to your end of the agreement and provided them with your service and efforts.   Passive income, on the other hand, involves a lot more risk.  With real estate, stocks, and other passive opportunities; you are always running the risk of wasting time and losing money.  Although many will accept the risks in hopes of the potential rewards they can obtain, its essentially up to you to decide if your time and money is worth those risks.

  • Passive income gives you the opportunity to do more with your time.

The biggest benefit to passive income is the ability to make money while saving time.  One of the most common things you’ll hear from a person with a passive income is that they are able to make money while they are sleeping or while they are on vacation.  The biggest drawback to an active income is that you only make money when you are at work and punched in to the clock.  This is where passive income can really spread its wings and fly.  With that extra time passive income grants you, you have the ability to not only take a moment to sit back and relax, but you also have the time to pursue even more forms of income.   Any financially stable person will tell you that one form of income is never enough to discover true financial freedom.  This is where passive income becomes your key to that freedom.  Everyone is given 24 hours in a day; it’s how you spend it that will decide how fortunate you will become.  With an active income, the most “jobs” people can tend to have is two or three.  These jobs take up most of their day and barely give them time to enjoy life.  I have a HUGE respect to those who work that hard to provide for themselves and their families, but I personally couldn’t do it.  Luckily for me, that’s where passive income answers the call.  Although I do have a full time job, the passive income I am continuously building will make it so I potentially don’t have to rely on that one income to make me money.   Whether I want to keep my active income down the road or take more time to spend with my wife, I have the choice in what I want to do because I am still making money even when I’m off the clock.  That is the beauty that IS passive income… If executed correctly, you could be seeing money come in for the rest of your life.

I hope this article has shed some light on the pros and cons of both active and passive income.  Even though it may be self-evident that I tend to lean towards one method rather than the other, I wanted to keep it as unbiased as possible so that you could find what you felt was the right method of income for YOUR life. 

As always, if this article taught you something valuable or inspired you, make sure to bookmark my site and find me on social media through the links below to keep up with all of the upcoming articles I have planned for the future.  Also, feel free to join my new social club on Facebook if you would like to connect with others who are also looking to better their financial situations. Thank you for your support, and I’ll see you next time!