Hidden Cost of Active Income And Why You Need Steady Passive Income?
Active income has been the dominant and the most common way of earning money in our economy. But it has its own limitations and when it comes to becoming financially free, active income is nowhere close to helping you fulfill your desire anytime soon. Your time is limited and you are trading your time to earn this active income. Imagine if you had to take control of your time, would you be able to do it smoothly today at this very moment?
No! I can`t control my time with an active income. Is this what your mind telling you?
The way you earn needs a makeover. The active income has a limited earning potential. You lack flexibility and control. Building passive income is what you need. Further, this technological era will majorly be governed by artificial intelligence and your active job will become less and less significant in the near future. You seriously should consider building a steady stream of passive income and not relying solely on active income.
What is the Difference Between Active Income and Passive Income?
It is imperative to understand the fundamental difference between the two types of income. Most people confuse themselves with earning passive income when they are actually working actively. A small grocery shop owner is earning an active income when he is running and managing the store actively by himself. Contrary to a business person who has a self-service grocery store, he is earning a passive income.
What is Active Income?
Active income is the income earned when you exchange your effort and time by actively engaging in the job or that work. Typical active income examples can include a salary from a job, commissions from sales, and residual income from self-employment.
What is Passive Income?
Passive Income is the money earned from the business or investments without the need for your active involvement. Generating passive income does require an upfront effort and investment of your time and money. Passive Income examples can include dividends earned from the stock market and mutual funds, the rental yield from rental properties, remuneration from business investments, and royalties from patents or books.
At a Glance: Active Income Vs Passive Income
- Active Income is a reliable source of income but has limited income potential.
- Passive Income can lack consistent cash flow but has a higher income potential
- Active income is often linked to working long hours and in a high-stress environment.
- Passive Income offers flexibility but requires a high upfront effort and investment.
Ready to Create Your Passive Income? But Is It Truly Passive?
Passive Income isn`t real and not truly passive if you are wondering about making money without action or standing still. Passive income allows you to make money while you have control over your time. But don`t consider passive income a way of making money without doing anything for it. It requires either your effort, money or both to earn the passive income.
The ability to control your time and be your own boss comes at a cost; nothing is free. A passive income from anything may require less effort than an active income after the initial years. But the work and money you need to put up initially are way too much compared to earning an active income.
Do you still feel determined to build a steady stream of passive income for yourself? Keep reading as we have an opportunity for you to build a passive income with no initial funds at the end of the article.
Unlock Your Financial Potential With These Passive Income Strategies
With the right strategies, it becomes easy to build passive income even while you are working full-time. The below strategies will help you build a steady stream of passive income with little effort to support your goal and ultimately achieve financial independence over time.
1. A Small-Scale Side Business
The key to achieving financial independence is having multiple streams of income. Starting a side business is one perfect opportunity to supplement and increase your residual income.
Evaluate the problems in society and your area of interest. If you can solve the problem and can reap the monetary rewards from it, it can make a great business.
Coin laundry business for that matter is one such business, I evaluated recently, to be a great fit for the market, in which I`m operating my rental business. With low capital, my little involvement, hiring some staff, and the use of technology mostly, it can be a great profitable passive business.
I have seen people earning a decent passive income even by simply setting up coin vending machines in high-footfall locations. Evaluate some kind of small-scale side business that can work and you make some handsome passive income out of it. Feel free to share your business ideas in the comments box down below the article for the community to help with their input as well.
2. Side-Gig To Support Your Active Income
A side gig is a good way to build a passive income. Selling on Shopify, dropshipping items, selling courses, earning affiliate income through a website or a blog, and starting a Youtube channel are some great examples of a side gig.
How about a 4-hour work week for your side gig?
A 4-hour work week is an immensely efficient way of maximizing your time and earnings while you are working full-time. Find the right gig, stay organized, outsource the big tasks, and automate that passive income stream for yourself. This way you can keep on adding multiple streams pouring extra income every month into your pocket. Gradually, your passive income streams can let you replace your active job.
Wish To Learn More About Setting up a 4-Hour Work Week?
3. Investing in REITs
Real Estate Investment Trusts commonly known as ‘REITs’ are trusts that own and operate cash-flowing real estate. In broad terms, REITs are alike mutual funds where you receive dividends on your investment with a real estate holding trust.
REITs are a truly passive way of earning income and you can start as low as $1000 with a REIT investment. VGSLX, a REIT index has churned about 10.37% annual return and 2%-3% dividend yield on average for its investors in the last 10 years.
4. Invest in Dividend-Yielding Stocks
Like REITs, you can also invest in dividend-yielding stocks for passive income. Generally, stock companies pay out dividends on a quarterly basis. You can also choose to reinvest your dividends to get compounding benefits and earn passive income that increases over time. The only thing with stocks is you invest with caution and always keep an eye on the financial health of the company and its performance.
5. Buy Cash-Flowing Real Estate Properties
Real estate is the perfect way of creating passive income for yourself. Buying rental properties that provide cash flow every month after paying all the business expenses is the perfect recipe for passive income generation. Buy rental properties, have positive cash flow, and repeat; slowly you can build a portfolio and even retire financially with a passive income stream for a lifetime.
Read: Dividend Paying Stocks Vs Rental Properties-What Should Be Your Pick?
Why Real Estate is the Most Powerful Strategy For Passive Income?
Compared to other passive investment strategies, real estate is the most powerful strategy to generate passive income. In particular, it is the rental properties that have the best potential for passive income investment.
I mean, there is no other asset class that offers the tremendous benefits that the rental property business has to offer to its investors. And the passive returns from rental property investment are far better compared to returns from any other asset class.
There are various ways, beginners can make money from real estate. But when it comes to investing for passive income, buying rental properties is safe and the best bet.
1. Generate Passive Income With No Initial Funds With Rental Properties
You can generate passive income from a rental property even if you don`t have initial funds to start with, by the means of leveraging. Leveraging, in its basic sense, allows you to fund your real estate purchase even when you don`t have enough initial funds. The only thing is you know how to identify the right property and rest you can leverage the purchase to build a passive income for yourself.
Also Read: How To Buy A Rental Property with No Money Down?
How To Buy Your First Investment Property To Generate Passive Income?
2. The Ability To Scale Your Income From Passive Investments
There is nothing better than passive investment than rental real estate to scale your passive income. By starting with just one rental property, you can build a big portfolio of investment properties pouring cash every month into your pocket. The kind of scale you can reach with rental properties by starting small is unlike any other asset class, be it stocks or anything else.
Read: How Rachel is Earning a Passive income of $3500/month by starting with one rental property?
Imagine achieving this kind of passive income scale with stock investing. If you are to earn big passive income from the stock market, you need to put in big money. If I ask, what do you think, how much money do you need to put up in stocks to earn $3500 in dividends every month?
Why Passive Income and Not Active Income is the Key To Financial Stability and Independence?
Now that you know the passive income strategies, it’s time you know why it is the passive income and not the active income that can help you achieve the goal of financial independence. And why you must focus on generating passive income and not relying solely on your active income.
1. Tax on Passive Income Vs Active Income
It’s not how much you earn but how much you can keep with yourself every month. Do you know how much big of a portion of your active income is eaten away by taxes? But when you earn passive income, you can have a lot of tax breaks. Your effective residual income would be more after paying taxes.
In general, you pay lesser taxes on passive income versus active income if you have done your tax planning well.
More importantly, you can also set off active income from your passive income losses. And, passive losses are not bad necessarily, but rather beneficial for a business. Depreciation is one such aspect of passive income loss in the rental property business which benefits the property owners.
Read: How Passive Income From Rental Real Estate Allows Various Tax Breaks To Its Investors?
2. Retirement Income Planning is More Significant With Passive Income Vs Active Income
It is only at the full age of retirement that you are eligible for social security. That is at around the age of 65, you will start to receive social security. So with an active income solely, it is only after the age of 65, you can plan to retire. But how about having multiple streams of passive income, can you afford to retire early? Yes, it is certainly possible with passive income.
Further, if I may ask, what do you think will the corpus be needed on retirement to maintain your current lifestyle after adjusting to inflation? Are you investing enough today?
According to a ‘How America Saves 2022’ report prepared by Vanguard, in which about 1400 participants took part. The average balance was only $141,542 saved up for their retirement. [1][2]
You need about 85% of your current date earnings when you retire to maintain your current lifestyle. Think of a way to build this much corpus with an active income, or else be ready to downsize. You need to actively contribute about 15% of your income to your retirement corpus. Only then you will reach close to the 80% mark that too with the social security benefits you get from the government.
With multiple passive income streams, it’s easier to retire way before your retirement age if you plan well. Also, the passive investments you do can give you a cash flow for the rest of your lifetime and you need to worry about inflation as well. Passive Investments in general have a nature of adjusting the returns according to inflation.
3. More Active Income- More Work But Rewards Less
Active Income requires more work. You need more active income, simply work more. There is no substitute for working when it comes to active income. But things aren`t the same with passive income. Passive income does require a lot of upfront effort but it certainly rewards.
Take for example. An average American who is working full-time earns about $70,000 gross income annually[3]. The takeaway income will be around $59,000 after paying $11,000 in taxes.
Imagine you labor very hard, put in extra hours, and be able to increase your active income to $90,000 annually. Do you how much your takeaway income would be now? About $75,000 after paying $15,000 in taxes.
Consider that a full-time employee on average works for 1800 hours annually. That is you are getting paid $32.77 every hour for your work when you are earning $59,000 annually. Imagine for increasing your active income, you put in 1 extra hour every day or simply 300 hours annually. Then, your active income per hour comes out to be $33.33. Your active income increases by just 56 cents per hour for this added 1 hour of effort and labor every day.
What if you have put in these extra hours to build a passive income stream? Dedicate a 4-hour work week to build a passive income and see the results yourself.
Wrapping Up
The aim of writing this article is not primarily active income vs passive income. But rather, to have a mix of both active and passive income. Your goal should be to make multiple streams of passive income while working a busy job. We are stressing passive income generation so you can control your time and become financially free one day.
Like the article? Have you learned something new? Feel free to share your valuable comments down below. And if you have been able to successfully create a passive income while working actively, your struggles and stories can inspire our community. You can also join our private community on Facebook as well.