According to Investopedia, passive income is earnings derived from a rental property, limited partnership, or other enterprises in which a person is not actively involved. This is the term used by financial institutions such as your national tax department.
But this term has a layman meaning as well. It is the money earned routinely with little to no hassle on your part. And this can range from businesses and stocks to cryptocurrency, affiliate marketing and blogging. The definition of passive income has evolved with the global market. Simply put, the goal of earning passive income is to make money while you sleep.
But many new and aspiring earners come with the misconceived idea that you don’t have to put in work to earn passive income. And that is a complete lie. Yeah, there may be some passive income methods that don’t require much time being invested. But almost all passive income ideas require resources, whether that be your time or money.
This is not a get-rich-quick scheme.
But hopefully with these passive income ideas, after investing the time and the money, we can just kick back and let them run by themselves (with routine maintenance now and again).
Read More: Ultimate Guide to Passive Income
Passive Income vs. Active Income -What’s The Difference?
Now that we have looked at what does passive income means, it’s now time to look at its counterpart, active income. Obviously, by its name, it is the complete opposite of passive income which means you will have to devote time and the effort to earn an income.
But to achieve financial freedom, passive income has always reigned supreme. To reap the benefits of active income, you have to keep spending time and effort on your job. Here, time equals money. On the other hand, for passive income, you don’t have to continue investing your time to gain earnings.
To paint this a little clearer, here is a graph crafted called the LEAP Graph by Master Your Own Money Now.
They explained the different aspects of the LEAP Grap which includes:
L = Logarithmic refers to a logarithmic scale which if drawn on a graph increases quickly and then flattens out over the long term.
E = Exponential refers to an exponential scale which if drawn on a graph stays flat at the start but then turns upwards and increases almost vertically over the long term.
A = Refers to Active Income and it is linked to the logarithmic scale.
P = Refers to Passive Income and is linked to the exponential scale. Passive income is income generated “while you are asleep” where you spend little to no work to generate.
Here is the link for you to read more about THE LEAP GRAPH – THE KEY TO BOOSTING YOUR INCOME by Master Your Own Money Now
Now the question is which is the better option for you? Passive income vs earned income?
Well, the answer is simple. It depends on your situation.
At times, active income can be:
- easier to get,
- “more secure”, or
- just a part of your goals like becoming a doctor.
While passive income:
- can be more difficult to start and earn a reliable income
- the potential earnings are much higher
- the goal of financial freedom is more attainable
Your path is simply up to you.
Passive Income Vs. Portfolio Income
Portfolio income is defined as the income we earn from dividends, stocks and other forms of investments. According to Investopedia, you have earned income, passive income and portfolio income. However, we laymen consider portfolio income as a part of passive income since it also requires little to no effort to gain.
Can Passive Income Make You Rich?
Passive income means earning an income without much effort. And if you can earn $150 each day from your passive income streams, that’s $4500USD a month, in your pockets. Now, if you have three additional income streams that also generate $4500 a month, that’s $13500 a month in total. The great thing about passive income is that it can increase exponentially if you increase the number of income streams or the returns on each investment.
After which, to ensure that you are generating wealth with passive income, you will have to reinvest your earnings to increase your returns for the next period. That means not falling into the trap of spending your earnings but rather using it to generate more income, hence making you rich.
Another trap that you should also watch out for is retiring too early. Now, I know that I am a strong advocate of retiring at an early age. But, I never advise retiring too early. This is shown when you retire after the passive income you have generated is only enough to cover your expenses. We recommend that before retiring your income streams should be enough to cover four things:
- Your daily expenses
- Your taxes
- Your savings or emergency funds
- Your future investments for generating more wealth
If that is covered, then you should be able to retire without having any worries while creating additional wealth.
