Passive vs Active Income: Are You Working For the Wrong Income?

construction-workerAs children, we are often taught by our parents to do well in school, go to college and get a good job to succeed financially in life? We have all heard that being active and hard work will make us healthy and wealthy. But being an active participant isn’t always good for your financial health.

Think about it – Do you want to work 40+ hours a week for the rest of your working life? Chances are you have spent most of your working life working for the wrong kind of income. I’m talking about Passive vs. Active income, and which is right for you.

Active Income

This is the kind of income most people are working for, unless they were born into wealth or won the lottery. This is the income you derive as tips and wages from your job. It may be in the form of product sales on eBay or providing a service as a dog walker or being employed in a more traditional vocation. It’s likely your salary or your hourly wage in the form of a paycheck. If you have any doubts as to whether a given income is active, just ask yourself: If I don’t do the work, will I get paid? If the answer is no, it’s active income.

Passive Income

Passive income is derived from a source that requires no work to generate the payment. This kind of income has historically come from investments in dividend paying stocks, interest in savings accounts or bonds, or renting real estate. The key is that it takes no work to generate the income – once income is being generated. It still takes a lot of effort to start the ball rolling.

Which is the right kind of income?

Both types of income require hard work, and both types are essential for most of us. The difference is that once the work is done for the passive income, one need not do the work again to receive the income. That’s why attaining a passive income should be a goal, and your active income should be the means by which you attain that goal. Think of it as the fuel to power your trip to a passive lifestyle.

Anyone can attain a passive income, the question is how soon do you want it?

Typically the big payoffs come from the hardest work and the biggest risk of failure. Think of the starving artist or musician before he hits it big. He sacrifices much early on, but can often retire early.

If you don’t want to, or can’t, accept the risk then you can take the tried and true retirement nest-egg path. Retirement account like 401(k)’s and IRA’s are all about building an investment portfolio that will one day provide enough passive income to replace your paycheck completely. That’s retirement, and it takes a lifetime of active income to achieve it.

The sooner you can cultivate a successful passive income stream, the better off you will be. To this end, you should be using as much of your active income as you can to create these passive income streams. If you’re in debt or want to accelerate your path toward passive income, consider taking a second job and using that income to pay down your debt, or build up your income streams quicker.

The Possibilities

The information age has opened up other avenues to the ordinary person that were previously available to only a select few. Royalties are a good example of this. Before the Internet, you had to work extremely hard on a book or record or some similar product, then you had to be lucky enough to find a publisher or distributor. Then you had to wait for marketing to do its thing and hope it was successful enough to generate significant income for you after paying all the middle men.

The Internet has opened up the royalties piece of the passive income pie like never before. Ebooks only require personal publishing software, a computer and a blog. Throw in some gorilla marketing or affiliate programs and you can generate some sizable income. Speaking of blogs, if you’re successful in generating a lot of traffic to your blog, then Google adsense can help turn your blog into a passive income source.

Investing is another good example. There is a mountain of free information on the Internet about investing, and discount brokers make it possible for the average person to build a portfolio of dividend paying stocks and bonds without ever leaving their home.

If you’re a technophile who’s got some programming skill and an idea for a killer app, then software can easily become a passive income stream. Once you’ve got the product, it costs close to nothing to set up a paypal system and a download link.

Passive income doesn’t have to be from the stodgy old school of investments, or the up and coming new technology. Some sources of passive income are strikingly bland and unexciting. ATM’s and vending machines can fit this category. While they do require some upkeep, it’s not as much effort for the income as your standard 40 hour job.

In the end, you’re looking at two basic methods to passive income: An entrepreneurial approach, or an investment approach. Which one is right for you depends on your interest, desire and inclination. The important thing is to start thinking about being more passive in your income, and more active in your life.

Image courtesy of jef safi (dis-territorialized)

This entry was posted in Investing, Making Money, Personal Finance, Retirement, Work and tagged , , , , , . Bookmark the permalink.

8 Responses to Passive vs Active Income: Are You Working For the Wrong Income?

  1. A Marino says:

    Another advantage of having passive income is that you don’t pay Social Security taxes and Medicare taxes on it. You want to pay the least taxes that you can.

    Although real estate is considered passive income, I wouldn’t say that it is free of work. Being a landlord isn’t an easy job. It requires you to make sure rent is collected. You may also be woken up in the middle of the night for an emergency. When you are on vacation, you have to leave an emergency number for the tenants. Then, you also may have to go through the trouble of evicting tenants for non payment.

  2. Scanner says:

    “Another advantage of having passive income is that you don

  3. Pingback: Roundup and Link Love - Labor Day 2008 Edition | The Wisdom Journal

  4. xinecho says:

    Oh, I wonder when can I attain a passive income. I am looking forward to it.

  5. A Marino says:

    Scanner: When you have net income from rental property, you pay withholding not social security or medicare. You pay social sec and medicare when you are actively running the property as your main job. My accountant might disagree with you about that.

    You don’t pay social security on interest on your CD’s, savings, etc.

  6. Alan says:

    Another means is through residual income, where your income either remains the same or increases when you stop working (active income) and retire (start withrdrawing income). This is something I am working on now and helping others.

  7. DivineMercy says:

    Another eye opener for securing the future! Working 40+ hrs a week doesn’t really guarantee a good retirement. Good article.

Leave a Reply

Your email address will not be published. Required fields are marked *