Since 2009, I’ve noticed there’s still a lot of confusion about the difference between active income and passive income. Let me clear things up: earning passive income is not a walk in the park!
It took me from 1999 to 2012 to generate enough passive income to make a significant financial move. Then, it took another five years to support a family of four in pricey San Francisco with passive income alone. Despite this, in 2017, I managed to earn enough to consider not working. However, I continue to earn active income to boost my passive income further.
About 60% of the reason I keep generating active income is to keep up with inflation. Costs for housing, healthcare, and tuition are skyrocketing, and these are especially significant when you have children. The remaining 40% is a mix of habit, the drive for more, a sense of purpose, enjoyment, and the comfort of financial security.
Active income means earnings that require your constant time and energy. It’s what you get for performing services and includes your salary, bonuses, and perhaps earnings from tips or commissions. Sure, you might earn a salary while out sick or on a paid sabbatical, but long-term active income demands ongoing effort.
Now, let’s talk passive income. This is money you earn without active involvement—think dividends from stocks or rental income from real estate. However, passive income usually starts with active income because you need initial capital to invest.
Sometimes, the lines get blurry. For example, my blogging might seem passive because Financial Samurai earns whether I post or not. But in reality, I spend hours each week writing, editing, and managing content. That’s why I don’t consider it passive income.
Semi-passive income is a bit of both. It requires some effort but far less than what active income demands. Examples include earnings from rental properties if you’re not actively managing them daily.
The perfect mix of active and passive income varies per person, but a good goal is to cover all living expenses through passive income. That way, any active income is just icing on the cake, giving you freedom and reducing stress over finances.
To sum it up, understanding and managing these income types can lead to a balanced, fulfilling financial life. Make sure to differentiate them correctly and set realistic goals based on your personal and financial situation.
