Passive Income vs. Active Income: What's the Difference?
Updated: Sep 27
There are two categories of income: active and passive. Active income is when you work for it and regularly put in time and effort. This could be a job you go to every day or something you do on the side in your spare time.
Passive income, on the other hand, is generated without much effort. It comes from assets that appreciate grow in value and you can make money while you sleep!
Some people believe that passive income is the way to go because it doesn't require much work, and you can earn money even while you're not actively working. Others believe active income is better because it's more reliable and predictable. There are pros and cons to both, and it depends on your preferences.
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What Is Active Income?
When discussing different income types, people usually think about earned income from performing a service and getting paid for it. Some common examples of active income sources include the regular 9 to 5, part-time jobs, freelancing, and even having your own business if you’re actively involved in its day-to-day operations.
Most of the active income streams are easy to build as they include textbook examples of making money — getting an education, landing job interviews, and getting hired! Of course, hourly wages vary across different positions and industries, but it's relatively easy to predict how much money you can make.
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Advantages of Active Income
Some pros of active income are its reliability and predictability compared to passive income streams. Additionally, it can be generated relatively quickly as compared to passive income. You can get paid daily, weekly, or monthly and receive immediate disposable income compared to the lengthy building process of passive income streams.
Also, there’s a possibility to have several streams of earned income (e.g., salary from a job, freelance work). Keep in mind that each day has only 24 hours and we’re usually constrained in our schedules, so you'll be able to have just a handful of active income sources at a time.
Disadvantages of Active Income
On the other hand, there are a few cons of active income. It requires more effort than passive income — it can be time-consuming and demanding as you usually receive an hourly wage based on your contract.
Also, it may not be as flexible as passive income. For example, you may have to stick with a traditional job to earn a steady paycheck with an unfavorable schedule or long commute times. Nevertheless, making money in an old-fashioned way suits many people despite the cons!
What Is Passive Income?
If you're the type who likes earning money without having to work for it, then passive income is a good fit for you. In most cases, passive income consists of cash earned through prior investments that don't require further effort.
Of course, there might be some regular maintenance in your investing preferences, risks, and expected payout, but it doesn't take more than a few hours every couple of months.
If you have real estate that you turned into a rental property, it might require a new lightbulb or some paint on the walls. However, the payout is definitely worth your while!
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Some common passive income sources include rental income, interest income, dividends, etc. Earning passive income depends on your investment portfolio. Whether you prefer owning rental property, investing in the stock market, or something else, your income stream will differ from other people with a passive income stream (aka the payout isn't universal!).
These are just a few examples of passive income. However, there is a large variety when we consider earning money passively — dropshipping, drop servicing, affiliate marketing, etc. You can even earn passive income from unlikely sources, so do your research beforehand and build a personalized investment portfolio income!
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Advantages of Passive Income
Some of the advantages of passive income include the ability to generate income without actively working. Also, it requires significantly less effort than active income as the initial set-up process and regular upkeep takes less energy and resources than working a regular full-time job. Furthermore, you can have several passive income streams simultaneously with minimal effort.
Let's say you have a rental property, regularly receive dividends from stocks, and you want to open a savings account to get paid from the interest on it. You can do this easily as you have much time to research and choose the best option because your other passive income sources generate enough money to cover your expenses!
Disadvantages of Passive Income
There are several cons when we talk about passive income. It might be less reliable and predictable than a fixed salary from a full-time job. Additionally, it may require significant upfront investments, especially when purchasing a rental property, investing in stocks and bonds, etc.
Also, generating income from a passive income stream can take longer. For example, it might take years for an investment property to appreciate in value. Notably, national social security measures vary across countries so make sure to find out what social guarantees your country offers to not miss out on paid sick leave or time off!
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Passive Income vs. Active Income — Which is Better?
There are pros and cons when considering "passive income vs. active income." It's essential to do some research and explore your options before making a decision. There's no right or wrong answer regarding earning income - it's all about what works best for you!
However, if you prefer the stability and predictability of an active income, then you might want to stick with a traditional job. Ultimately, it's up to you!
What's important is finding a way to earn income that makes you happy and suits your lifestyle. Whichever route you choose, make sure it's something you're passionate about. Otherwise, you'll quickly get burned out and won't be able to stick with it in the long run.
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