The Power of Active Income v/s Passive Income

There are two primary ways to get earned income and they are active income and passive income.

Active income is any income that’s generated through the utilization of your own labor. It typically requires you to trade a particular amount of your time for money at employment.

Passive income is any income that’s generated through the utilization of systems that work for you. Even though you’ll not be doing much to take care of them at the time.

Active income is usually the first and sometimes the only way that we think of making money. It is certainly the most common way to make money and many would argue that it is also the easiest way to make money.

But which one is better?

There are certainly good points made on all sides of this debate so let’s mention them. As you can no doubt tell by the title today we are going to be going over the passive income vs active income debate. I’m about to be illustrating what both sorts of income are, discussing the pros and cons of each. Along the way, you’ll get some interesting ideas on how to make money using one or both of these methods for yourself.

Let’s face the truth, the schools aren’t going to teach it for us. The main draw to passive income is that when it’s running you’re ready to generate some kind of income monthly whether you’re showing for work or relaxing on a beach somewhere.

Advantages of Active Income

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However, despite sounding like passive income is way and far away from the superior sort of income. There are literally some genuine advantages that active income has that passive income usually doesn’t.

  •  The first advantage of active income is that it can often be generated immediately.

 

  •  Unlike passive income, which usually takes time or money or both to get the system completely set up and running properly. In order to start generating a reliable and sustainable income stream, active income can be earned pretty much right away. There are always people who are looking for help with things either because they’re busy, or they don’t like doing it, or they are a business owner trying to expand their business.

 

  •  Another advantage to active income is that it is usually larger than what your passive income would be to start with. Again, to make a reliable and sustainable passive income stream, you’re usually going to have to spend a good chunk of time creating your product or service. And also researching how to make a profit out of it as well as learning how to properly market it to the right audience.

Depending on what type of product or service you are looking to sell this could take you anywhere from a month or two to a year or more. Depending on the state of the economy, your qualifications, and the type of active income it is your pursuing you could be earning a couple of thousand dollars a month or more within a week or two.

  •  A third advantage to active income that is usually mentioned by many people is that it is easier to make than passive income. And while that may be true to a small scale, for instance, it doesn’t take too much training or education to flip burgers at a local fast food place. I would say that it is only true up to a certain point.

I would say that going for higher-end jobs, like a doctor, lawyer, accountant, or even some type of management position is actually harder to achieve than a comparable level of passive income. This is largely because of the time, educational, and testing requirements that professionals need to meet before landing the jobs that they are going for, and the experience levels that are often required for higher-end management positions.

I believe that it is actually possible, and depending on your work ethic and skill set maybe even easier, to earn a comparable amount of income passively as say, an accountant makes actively. But I’ll get into that in a minute, first let’s talk about the advantages of passive income that active income is usually doesn’t have.

Advantages of Passive income

Passive Income

  • The first advantage to passive income is that, once you properly set up your system and get it going. It often takes less working time to generate the same level of income that you could make with an active income stream. One myth that some people have when it comes to passive income is that you don’t need to work for the money.

That you can live what’s called the “laptop lifestyle,” go sit on a beach somewhere and watch the money roll in and while that dream has some truth to it, it is a bit misleading. As told earlier, in order to earn a reliable and sustainable income passively you’re going to have to do a good amount of research and work upfront to get the system going in the first place.

  • A second advantage that passive income is that it is incredibly good at helping you escape the rat race. As a matter of fact, I’d say that it is almost always mandatory. The reality is, if we live long enough, eventually we will all reach a point where earning active income just isn’t feasible anymore, but we’ll still need some money in order to survive. And if we can’t work and earn that money actively then the passive income, either through a side-hustle, business, or our investments, is likely our best solution.

 

  •  A third advantage that passive income possesses is that it, in comparison to active income, is incredibly scalable, and as a result, can help you to achieve financial independence much faster than you could with just an active income. This is the entire idea behind the book, “The Millionaire Fastlane.”

The fact of the matter is that we all only have 24 hours in a day to get anything and everything we need to get done. So, if we are getting paid by the hour, or paid a certain amount of salary each year, there’s going to be a cap on how much money we can make actively. Passive income, though, works a bit differently in this regard and the effects that these differences can have on your financial future (and present for that matter) are extraordinary.

A simple example that explains this concept very clearly.

A great example to show how this works would be starting your own YouTube channel and generating a passive income stream by letting ads run on your videos. Let’s say that ‘X’ earns $20 an hour at her job. She’s 40 years old and wants to become financially independent by the time she is 55, but she has no savings put away yet because she spent her early years paying off her student loans, mortgage, and other debts. She currently spends $40,000 a year and wants to maintain that standard of living in retirement and thus her goal for achieving financial independence is $1,000,000 following the 4% rule.

It also means that she’s currently saving $1,600 a year or about $133 a month. Let’s also say that ‘X’ been working on a YouTube channel that teaches people how to train pets and on average every new video ‘X’ uploads to her YouTube channel earns her $1 per day. She currently has 20 videos uploaded on her channel and is making $20 per day. Each new video takes her a full day of work to produce, but she hasn’t made any new videos in a while due to her workload.

‘X’ has a few routes that she could take in order to achieve financial independence. She could either pick up more hours at her day job, cut her expenses, and invest more, devote more time to her YouTube channel, or some combination of the three. If she takes the first route and picks up more hours at her job, she is certainly going to earn more money, but since there are only so many hours in the day, she is going to be limited in how much she can earn from this strategy.

She is also going to run the risk of running herself into the ground from overwork. But it’s still an option, so how could this work out for her? Let’s say that ‘X’ worked a solid 10 hours a week of overtime for the 50 weeks a year that she works, kept her spending the same, and invested that money she made from the extra hours. She would be making an extra $300 a week thanks to her working overtime which translates to $15,000 a year for her to invest in addition to the $1,600 a year she was already investing.

Assuming an 8% average rate of return over the long term, ‘X’ would hit her $1,000,000 goal in about 23 years when she is 63. That is still technically an early retirement, but it isn’t the early retirement that she was hoping for. But what if ‘X’ also cut back her spending? Say if, instead of spending $40,000 a year she only spent $30,000 a year and invested the difference in addition to working the overtime, maybe because she’s working so much more she doesn’t have the time to go out and do as much so she spends less.

Since she wants to maintain the $40,000 a year standard of living when she does retire, her financial independence goal remains $1,000,000, but instead of spending 23 years investing $16,600 a year in order to get there she now achieves it in 18 years at the age of 58, by investing $26,600 a year. That’s better, but it is still not quite as good as we are wanting. What if, instead of working overtime or cutting the spending, ‘X’ decided to devote more time to her YouTube channel?

As I said, she hasn’t uploaded in a while due to her workload, so she would likely have to cut her hours down a bit in order to produce videos. Say if she went down to working 4 days a week so that she would have enough time in her schedule to produce 1 video each week.

Passive Income

This would mean that she’s now only making $33,280 a year from her job and needs her YouTube channel to produce $6,720 a year, or about $18.41 a day to cover her expenses. But one new video each week, earning an average of $1 per day, is an additional $52 per day in income over the course of a year. $52 per day, 365 days a year, is nearly $19,000 a year in additional income. ‘X’ was already making $20 per day from her older videos, so after one year’s worth of uploads, ‘X’ would be pulling in $72 per day or $26,280 a year from her side hustle.

After two years she’d be making $124 per day or $45,260 a year, which is actually more than she’s making working 40 hours a week at her day job and it’s also enough for her to fully cover her expenses. So if this YouTube thing holds up and she could maintain her $40,000 a year lifestyle, she’d actually be financially independent right then and there, but she doesn’t want to retire and leave her financial fate up to just her YouTube channel so she’ll keep investing until she hits that $1,000,000 net worth goal.

Assuming ‘X’ kept uploading videos every week and invested all of the money she earned from YouTube after covering expenses. ‘X’ would be financially independent in less than 10 years at the age of 50! That’s the power of passive income and scalability.

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