Active Income vs. Passive Income

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The most basic of money management principles is to make sure that you have more money coming in than you have going out. This is vital if you want to find financial success. Of course, this means that you need to have some sort of income. Understanding where your money comes from is important, and you should know the difference between active income and passive income.

Active Income

Most of us are familiar with active income. This is income that comes from our active efforts to earn money. For many of us, this includes working at some sort of a traditional job. Active income can also come from the efforts you put forth to make money with a side business, or by doing odd jobs.

The main reason active income is called “active” is due to the fact that you have to do something. Often, that something requires a significant expenditure of time or effort. Even if you make money by sitting in an office all day, you may find that you are still engaged in active income, since you have to go through the process of getting to work, and then you have duties to perform. Even if it isn’t physically strenuous, it might be mentally challenging. Even a tedious job that is not challenging in any way can actually be considered “active”, since it is quite draining to go through the day in such a setting.

Passive Income

On the other hand, passive income is earned when you put your money to work for you. Many also consider passive income to be income from activities that you do for a short time (the set up) but that require very little else to maintain the income flow. For example, you might spend some time putting together a web site with affiliate advertising. It requires some up front time and effort, but after a while there is no need for you to put in a great deal of time. The money flows in with very little continued effort and oversight on your part.

Passive income can also come from investments. Dividend stocks and bonds are popular income investments. You put your money in (or set up an automatic withdrawal), and you earn money from dividends or from interest. There isn’t a whole lot you have to do beyond checking every so often to determine whether your income investments are performing as you like. The money comes in, but you aren’t doing much.

Transitioning into a position where passive income provides more of your earnings is a worthy goal, since it will leave you time to do the things that you want to do. Track your income, as you track your spending, and learn what you can do to improve your cash flow.

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