Active Income Vs Passive Income: The Difference

What are The Types of Income?

Everyone in the world needs an income source to survive. There are many ways of earning money in order to fulfill one’s needs.

Let it be a government job, corporate job, or any kind of business, people need multiple sources of income to keep up with the pace of the growing world.

The income earned from any source is generally classified into subtypes.

These sub-types are as follows:

  1. Active income
  2. Passive income
  3. Portfolio income

Active Income

Active income is a form of compensation an individual makes in the form of salary, wages, tips, or commissions. In general, a person trades his time for money. People working in any company or a government job earn money based on the amount of time they worked for their respective organization i.e. monthly in most cases.

Basically, to create something big, you need a good financial status. That is because if you did not achieve the desired target, you will have something to support your back. Similarly, to establish a big business, you need to earn active income to be stable in the early phase of your life. 

Passive Income

Passive income is the earnings derived from various other sources like a rental property, limited partnership, or another enterprise in which a person is not continuously involved. Similar to active income, passive income is also taxable.

It is considered that having a passive source of income is the way to financial independence which is proven right by many people across the globe.

People having active income as well as the passive income are more likely to become financially independent sooner than those who depend on only active income or only passive income. Therefore, it is very important to maintain the balance to earn more profit.

 Difference Between Active income and passive income

There is a lot of difference between active income and passive income.

  • According to their respective definitions, you earn active income by working for a company or any corporation investing your time in it, and in return, you get paid in terms of salary or wages.
  • Whereas passive income is something that keeps flowing in irrespective of the amount of work you do. Definitely one has to work very hard in the early phase to establish a good passive income source.
  • Active income can be termed as a direct result of our efforts. This is when one works for one hour and gets paid with a certain amount of money for that hour of work. This can be seen in wages, salaries, and self-employed service providers like corporate employees or doctors.
  • With passive, or sometimes called residual income, once anyone invested their time and efforts and found ways to create passive income, their job is done. When the source of passive income is online, the income generated by this automated system that they have set up will produce a consistent and continuous passive income for you without any real-time presence.
  • With the active income, you have complete control over your income flow. If you do work well, you will have a great opportunity to get promoted and earn a good income.
  • When it comes to passive income, you have very little control. since you are not doing anything, you completely rely on changes in the market, technology, and the mood of your customers.
  • Another difference is that since active income demands work, it creates a barrier to competition. Whereas in passive income, since there is no very little work required, there are low barriers to competitors coming in and snatching your market share.
  • The final difference that should be pointed out is with active income there is no opportunity to diversify your income. If you are working at a job, it is very difficult to diversify and get a hold of other jobs to diversify your income. Each time you try to bifurcate your focus, you pay a price for the time you take away from your other jobs.
  • Whereas, passive income has a specific opportunity cost to diversification. Since it does not require any effort, you can split your time among many different things.

Conclusion

Both types of income have the capability to ensure that your life goes well. But it is very necessary to balance out both, active income and passive income in order to earn profit as quickly as possible.

Both types of income sources come with their own perks and benefits, but the person needs to understand the complexity to handle both.

It is not easy to handle two work at a time, but if you are determined to become financially independent, you need to show courage and work hard so that you don’t work for money, but instead money works for you.

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