What’s the Difference?
We’ve all heard of the terms passive and active income before. Although the names of the two can be self-explanatory, the difference between them can still be a gray area to some. I hope this blog can help break down the main points regarding these two different types of income for you. Read on!
What Is Active Income?
When you work a full-time or a part-time job, and your employer pays you a fixed amount for the service you rendered, the compensation you receive is called active income. Simply put, you earn active income in exchange for your services! Commissions and tips are also considered as active income—if you are a freelancer, the money your clients pay you is also considered as such. For most Filipinos, active income serves as the primary fuel for their daily expenses.
Here are the basic things to remember about active income!
This is the compensation you receive after rendering time, effort, and services.
You will not earn money if you do not work. Active incomes may end or get disrupted when you die or get sick.
There is a fixed time or period for you to render your services.
Active income poses a low risk, which means that it is a stable source of income. However, the money you receive is often fixed and set by your employer and is unlikely to increase.
If you are an employee of a company, an organization, or another individual, you are most likely earning active income!
What is Passive Income?
On the other hand, passive income is the money you earn from your income-producing assets such as stock investments, businesses and house rentals. You do not need to render your services to earn money. However, passive income is not free money! You need to do lots of research to be able to plan your investments accordingly.
To eliminate further confusion, here are some quick facts you need to know about passive income!
In earning passive income, your money or investments will do the work for you.
You can earn money even if you do not execute actual work.
There is no fixed time or period for you to render your services.
Passive income poses a high risk, which means that the amount of money you earn heavily depends on the market. However, if all goes according to your plan, this venture can also grant you high rewards.
If you invest in stocks or rent out properties, you are earning passive income!
One may still receive passive income even after death.
I hope the earlier explanation has helped you see the differences between these two types of income! At the end of the day, these two are not necessarily mutually exclusive. People often start by saving from their active incomes so they can build a business or start investments that will later on provide passive incomes.
In these challenging times, it will help to ensure our financial security—and this may mean exploring other income sources other than your day job.
What are your active and passive income sources? Do you have both?