Let’s talk about two different kinds of income: active and passive. These are essentially what their names make you think they are, and we’ll start with a definition and follow with some explanation of each.
Active income is any income that is earned from working for it. Salary at your job, income from any business you own, and even money you make from commissions on sales or private projects are all active income. You have to expend a lot of time and energy to earn this type of
income. Active income is the easiest type of income to control. If you don’t feel that you are earning enough, it may be possible to try for a better paying job or simply get some part-time work on the side.
Passive income is money that you aren’t necessarily doing any work for. This can include money earned from any interest being paid from a checking or savings account, income received from posting ads on your blog, or money you get every month from a rental property.
We know there is a certain amount of work that goes into renting property, but it isn’t exactly something that you need to go and physically do every day. This is why we’ll call it passive income.
This sort of income isn’t always easy to bump up in one step the way it can be done with earning more active income. However, passive income may actually be more important. For starters, it’s consistent, meaning it resists the up and down cycle that active income can have. Active income depends on things like whether or not you worked the same hours this week that you did last week, etc. On the other hand,
passive income from a rental property is unlikely to change month to month, barring some sudden event in the neighborhood. Also, there are easy ways to bump up your passive income as well, even if it isn’t a large jump at once. This can include things like switching to a bank account with higher interest. It may also include finding ways to earn a bit of money from your hobbies. Let’s say you like photography. It
may be possible to license or sell photos you take and earn a tidy income from royalties, for example.
Many people also consider money earned by investment portfolios to be passive income, but this decision is for you to talk about with your financial advisor. It is important to know the distinction, so that any tax paperwork you file on your various incomes is filed properly.
Ideally, your overall financial strategy should include both the active and passive types of income. Using both ensures that while you only have so many hours in a day to physically work, you are almost constantly earning some kind of money. This is extremely important in today’s difficult economic times, with the unstable job market and everyone’s concern about having enough money to last them through retirement. Take care of building your active income, find ways to let the passive income build itself, and you’ll be set.