Active Income vs. Passive Income: Understanding the Difference

Each of us aim to achieve financial freedom. Two terms that come into play in the quest for financial freedom are active income and passive income. While active income refers to earnings you get directly by actively performing tasks, passive income is all about earnings where you do not have much involvement. Knowing the distinction between active income and passive income is quite significant if you are looking forward to building great financial strategies for your wealth.

In the article, we will understand the major differences between active income and passive income and what benefits they offer you.

What Is Active Income?

As mentioned earlier, active income is the money you get in exchange for some work you do. In other words, it refers to the earnings which you get through your work in the form of salaries and wages. Hence, it can be said that active income requires you to actively work on tasks, whether it is in the form of employment or self-employment. The more you work, the more you can generate active income.

Sources of Active Income

There are several sources of active income, however, the most common sources include:

• Salary or Wages: These are the payments you receive from your employer when you provide them with certain services. The payment could be monthly, weekly, or daily.
• Freelancing: You can also earn by leveraging your skill set and providing services to various clients on a contractual basis
• Entrepreneurship: Managing your business also provides you with direct money as you actively work on your business.

Benefits of Active Income

Active income usually offers immediate financial help and stability as you get paid for your work on a regular basis. Hence, here you can control your income by increasing your workload or seeking higher-paying opportunities. Moreover, when you are earning an active income, it provides you with a sense of achievement.

What Is Passive Income?

Now, on the other hand, you have passive income. Passive income generally refers to the money you earn without being actively involved in the task. It is the earnings you generate with minimal effort and are not involved in it full-time. Unlike active income, passive income provides you with money or generates income for you even when you are not actively working. However, passive income is not free- money as it requires an upfront investment of time, money, or resources.

Sources of Passive Income

The major and popular sources of passive income include:

• Investment Income: It refers to the money generated from investments in stocks, bonds, mutual funds, P2P investments, or real estate.
• Rental Income: The money you get from leasing or renting out your properties or assets.
• Royalties: You can also receive earnings for the use of intellectual property, such as patents, copyrights, or trademarks.
• Affiliate Marketing Income: It refers to the commission you get by promoting products or services.
• Dividend Income: The income you get paid by companies you have invested in when they register profit.

Benefits of Passive Income

Passive income offers you financial freedom and flexibility. Once you have established these passive income streams, you can generate consistent revenue without the need for constant involvement. This way you can also diversify your income sources and create multiple streams of revenue.

Also Read: Tips to Earn Passive Income Through P2P Investments

Active Income Vs. Passive Income

Now that you have understood the basics of active income and passive income, let us understand the major differences between them. The primary distinction between them lies in the level of involvement required to earn the money. While active income requires continuous effort and time commitment, passive income requires only minimal effort.