Active Income vs Passive Income

Passive Income has been a widely debated topic over the internet. Some believe that Passive Income means not having to work ever again, some people do not believe that Income can be truly Passive. My personal opinion is that no income is 100% Passive.  So how does Active Income differ from Passive Income then?

The difference is that Passive Income is generated when we put in the leg work up front and then leverage on time, money, people and system to receive income over and over again with minimal input. Active Income however, refers to working in a career, trading time and effort for money. Most of us start working for a living after school, joining companies which give us monthly paychecks in return for our time. This Active Income is very important in the beginning, paying for our housing, food, family and other needs. Most importantly, Active Income is one of the primary way to build up Capital which is required to invest in Passive Income.

So why do we need to build up our Passive Income? I am sure there are many professionals and businessmen who have Active Incomes far surpassing their Living Costs. The problem is that Active Income requires trading Time for Money and Time happens to be a non renewable, ever declining resource. Normally, the harder and longer we work, the larger the paycheck. As we get more responsibilities in life, Living Costs go up and inflation causes to costs to rise even faster. Do we then trade more time and health for money? Eventually, there comes a time when we have to stop working due to maybe retirement, poor health or worse still an accident.  Since most people focus on only one career, they only have one Active Income stream. This single Income stream is also very vulnerable to layoffs and salary reductions during downturns. Once the Active Income stream is lost, we will surely end up in Negative Cash Flow territory. Negative Cash Flow is not only taxing on the mental and physical health, but also reduces the cash balance continuously.

Fortunately, there are plenty of resources available and many people have made successfully built their Passive Income. An example of Passive Income is Rental Income, we do the legwork up front by researching and hunting for the right investment property. After which, minimum administrative efforts and tenant management skills are required to collect rental income if we setup the system correctly of course. Another example is Dividend Income, again we have to do our research and buy stocks which are of good value. After which, minimal efforts are required to track the stocks and ensure they are not going off course to reap the Dividends year after year.

The trick to Passive Income is thus to do majority of the work upfront to minimize the effort required later to collect the Passive Income.