Active Income and Passive Income

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Understanding Active Income and Passive Income

Your income can be basically classified into two categories.

Active income and passive income

Active income is earned income. Passive income is capital gains. Earned income means the money you make by working through your muscles. You go to your office every day, work 9-5 on the weekdays and get a paycheck by the end of the month. This is active income. Or, you might be earning active income even when you are self-employed. You drive Uber cars, or you do a handyman job, these are also active income sources.

Passive income means you earn without any effort or little effort. You are basically earning from something that you have done in the past. For example, if you are earning rental income, it is a passive income source because you bought that property in the past. Earning revenue from your business is also a passive income because once your business is firmly rooted, you don’t have to go to work every day, you will already have a team to look after it.

While having an active income is good for the stability of finances, building a passive income is considered even better because that’s how you build your wealth. Another reason why you need to build passive income is that you will have to pay more tax on active income compared to passive income.

Building Passive Income Through Active Income

In order to build passive income, you need two things

Money to invest in different markets, or start a business

Skills to create a passive income (creating digital products or subscription websites, for example)

What if you don’t have any of these two? Can you still build passive income?

Well, you can still build a passive income source even if you do not have money to invest or start a business or the skill to create products to generate passive income. You can use your active income to build passive income.

You can do this in two ways.

You need to start saving money. You need to save your money in high-yield saving accounts so that you will have a substantial amount of money in a few years and you can use that money to invest in the stock market or buy real estate property.

You can start saving right away. All you need to do is use a micro-investment platform. Micro investment platforms are the investing and trading platforms where you can start investing with a small amount. For example, on Acorn and Stash, you can invest with just $5. However, before micro investing do some research as some investment platforms have account maintenance charges. Choose platforms where you do not have to pay these fees.

Different Ways to Build Passive Income

Whether you want to retire early and enjoy your life, or do not want to work full time to make money, you need passive income. There are different ways to build passive income

Investing: You invest in the stock market and earn dividends. You invest in real estate properties and collect rents. You buy equity in a company and earn a return on your investment.

Business: You create a business, and your business starts generating revenue, when the business starts generating revenue, you do not have to work 12 hours to run that business. It will be completely a passive income. Just look at Jeff Bezos. He started Amazon by working in a garage, and now he can travel to space all the while Amazon makes money for him every second.

Other passive income sources: If you don’t have money to invest or start a business, or if you do not have the required skills and knowledge for starting a business, there are still other ways to build passive income.

You can start a youtube channel. In the long run, your youtube channel will be one of the best ways to build passive income.

You can start a blog and earn passive income through ads, affiliate marketing, sponsorship, etc.

You can create a membership website and earn passively.

You can sell digital products on various marketplaces and make passive income.

Reasons Why You Need Passive Income

Active income means you have to work every day (or 5 days a week) to make money, passive income means you earn money with little or no effort.

It is easier to build active income because that’s how you are brought up. Your parents tell you to do to school, study, get a degree, get a good job and start making money. This is the ideal way to build an income. There is nothing wrong with this but the main problem is it will be enough only to feed you, when it comes to living comfortably and enjoying the life you can’t. First of all, you will never have enough money to enjoy life, secondly, even when you earn enough, you will never have enough time to enjoy your life.  That’s why you need to build passive income.

Passive income methods do not require you to work full time (8 hours in a day, 5 days a week), you might be able to generate enough income just by working 3-4 hours in a day, or even less than that. Some passive income methods do not even require you to spend any time. For example, if you have real estate properties, you do not have to manage tome to manage your properties, still, you continuously collect rental income every month.

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