When it comes to active vs. passive income, which is a better choice?
Certainly, we shouldn’t have to choose one over the other. But since our most precious resource, time, is limited, we may just need to pick one sometimes.
So today let’s discuss the subject of active vs. passive income particularly as it relates to the dimension of time.
Once we understand what they are, perhaps we’ll manage our time wisely as we strive to achieve financial independence.
This post may contain affiliate links, which means I may receive a commission, at no extra cost to you, if you make a purchase through a link. Please see my full disclosure for further information.
What Is Active Income and Passive Income?
An active income is one in which you earn by trading time and effort for money.
You can do this through either a 9-5 job (main source of income) or a side hustle (supplemental source of income).
Essentially, as long as you have to actively work in a job or perform a task to get paid, you would receive an active income.
Passive income, on the other hand, does not equate to money earned from a unit of work. This means that you get to receive an income passively with little to no work whatsoever.
That’s right! This happens when you invest in the stock market or rental property, and it pays you dividends or rental income in return, for example.
Your investment was the work you put forth to earn it. Then, once invested you should be able to enjoy the fruit of your labor.
Similarly, you might work extremely hard on a business venture with little to no rewards at the beginning. But over time, you business might take off to the point where you can hire out.
Once your business is in a smooth operation without the need of your effort, you can start to earn a passive income.
An Active Income Is Great For Starters
When I first started in the workforce, I was beaming with optimism.
Indeed, work is great when you get paid to learn and gain new skills.
But over time, an active income could be restraining. This is especially true once we become parents.
With a fragile baby in hand, it’s hard to imagine leaving her to go to work everyday. This could be especially true if you have a desire to breastfeed which requires time and commitment.
And so my desire to search for ways of building multiple income sources became stronger as I stepped into motherhood.
In a way, creating this blog was a way for me to gather my thoughts and explore new opportunities.
Over Time, Passive Income Is Just Better
Building a passive income is not an easy task. After all, an asset that spits out perpetual passive income is basically a profit machine!
And that’s what makes it so challenging but enticing.
Whether it’s an investment or a business, overcoming the beginning phase is tough. Sometimes an investment might lose value. Or, your business might not be as profitable as you’ve imagined.
But if you can get through the lean years, you’ll reap the fruits of your labor once your investment or business takes off.
When this happens, you’ll start receiving passive income without doing much.
But until then, don’t lose focus!
Trajectory of Active vs. Passive Income
An active income usually stays consistent over time, with a slight increase in the beginning years and then flattens out.
This is due to the fact that our income tends to grow rapidly in the beginning stage of our career and then slows down as our skill sets stay stagnant or become obsolete.
Of course this is not true for all jobs, but it’s a common trend in many 9-5 careers. Hence, our active income trajectory might look something like this:
The pitfall of an active income is that it’s not scalable. Thus one can only earn it through exchanging time for money. And since time is a finite resource, it becomes an obligation to work in order to earn.
On the other hand, a passive income has the potential of an exponential growth that requires very little or no effort. This can be associated with an investment that takes off or the performance of most successful businesses.
With passive income, you might earn little to nothing in the beginning and then it might take off in a rapid speed like this:
Since building out passive income streams could take time (lots of time), it is better to start early.
In fact, the best time to start building a passive income stream is when we have an active income source.
Imagine you have a steady pay check and you have no worry of losing money on an investment or a business. That’s an opportune time to take more risk!
Once you reached a juncture where your passive income overtakes the active one, well then, the sky is the limit!
So as you can see, when it comes active vs. passive income, you really should embrace both but stay fluid as you move through time.
Since active income is a more stable form of income, it’s a great source to start with. Once you have an active income, try to save and reinvest your earnings into something that can potentially provide multiple streams of passive income.
At the end of the day, having passive income gives us more choices and freedom, but it’s harder to earn. That’s why if you could start early and take advantage of the stability that an active income provides you, you might supercharge your passive income stream that much quicker.
PIN this post
