What do you think the two types of income are?
Does it really matter? Who cares? I mean, income is income. It’s all good. Are you really going to hesitate when someone hands you a check while you try to figure out what type of income you are receiving?
I do think it’s important to think about income, but for many people, they only think in terms of one kind of income. By knowing that there is more than one form of income, it can help you think differently and help you earn both types of income.
All About Active Income
The first type of income is what most people think. It’s called “active” income. This is money you get from work. You work a part-time job while you are going to school, or maybe you put in 40 or 50 hours working for a company and you get a paycheck. This is called active income, but it takes effort on your part. When the alarm goes off in the morning, you have to physically get up and go to work to earn your paycheck. And this makes it interesting. It requires your effort and your time. You have a limited amount of effort and time you can give. I mean, how many full-time jobs can you have a week? If you’re at Company A working, you can’t also be at Company B working. It’s one or the other. We all have just 187 hours in a week. Our time is limited – there is a cap on the number of hours we can work for active income. But this is how most people are familiar with income and how most people earn income. They get up, go to work, and get a paycheck. That’s active income.
Passive (or Non-Active) Income
Is there such a thing as non-active income? Yes. It’s called passive income. If you’re earning passive income and the alarm goes off in the morning, you get to hit the snooze button. Actually, if you earn passive income, you can chuck your alarm out of the window. Buh-bye, alarm clock. Why? Because passive income doesn’t require your effort or time. In fact, while your friends are stuck in traffic on the way to their jobs, you get to sleep in and still make money.
Sound too good to be true? Passive income is how many wealthy people make the majority of their income. How? The most common sources of passive income are:
People paying you rent from a house, apartment, or building you rent to them.
If you write a book or song or invent something, you can get paid a percentage of each sale.
The goal for many is to gradually increase their passive income so they are less dependent on active income. And this often requires working a traditional job and earning active income while you invest and ramp up your passive income.
Active requires your effort and time, while passive doesn’t require very much of your effort or time.
The takeaway (at this point anyway) is not so much all the different ways to earn active or passive income. The takeaway for you should be that there are actually two types of income: active requires your effort and time, while passive doesn’t require very much of your effort or time.
Time for a Pop Quiz!
If a friend said he wants you to start a business with him, is that active or passive? Active for sure. It will require a great deal of your time and effort. If the same friend said he wants to borrow money from you and pay you interest, is that active or passive? Passive. You earn the interest in your sleep and without doing anything. Of course, after your friend stiffs you, it will turn very active as you try to get your money back!
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.