What Is Passive Income?
Passive income can be referred to as income that is earned with minimum labour and without active participation. It can be termed as an income that is generated through another source apart from your employer. Passive income meaning can be encapsulated in a nutshell as an income that flows in at regular intervals without the incurrence of considerable work.
Example Of Passive Income
We have put together a few examples of passive income for you:
- Rental income
If a person owns some land and he gives it out in rent to an individual or enterprise, he/she can earn rental income out of it. This is a perfect example of passive income as it doesn’t entail any work from the landowner.
- Limited partnership
A person might be a partner in a business firm but he/she might not take an active part in the operations of the business apart from investment. This will also warrant passive income for such a partner.
- Royalties
A person or a firm might earn royalties from the licensee instead of the utilisation of their intellectual property such as books, music, technology, etc.
Pros of Passive Income
The following benefits can be attributed to passive income :
- Augmented cash flow
Passive income allows a person to earn additional cash flow in addition to what he/she is currently earning. This can bode well for the overall financial comfort of a person.
- It allows a person to have more financial freedom
Passive income allows a person to fulfil their monetary dreams and desires with the help of additional disposable income.
- It helps you enhance your savings
A person can use his active income to pay down his debts, pay the bills and incur other necessary expenditures. Passive income can be used in its entirety or partially to build up one’s savings.
Cons of Passive Income
The following disadvantages can be associated with passive income :
- Less control over one’s earnings
Passive income is quite flexible as it doesn’t entail the active involvement of the person. This is a negative characteristic as well because one cannot rely on the stability of passive income.
- Lack of benefits
When a person earns passive income, he/she has to look for a good insurance and retirement plan on their own which is not the case with active income as the employer usually takes care of all this.
- It restricts your interaction with people
Since a person is not required to work consistently to earn passive income, he/she is not required to interact with employers or colleagues. This can make a person’s work life lonely.
What Is Active Income?
Active income can be termed as an income that takes up your time and efforts instead of getting paid. Active income meaning can be touted as a person’s main source of income that requires you to dissipate active duties and responsibilities as per your job description or the nature of your business.
Example Of Active Income
We have put together a list of a few examples of active income :
- Salaries
The salary or wages earned by an employee for their services to an organisation are an example of active income. This will require a person to dedicate a stipulated time each day to their work.
- Net income from business
The net profit earned by a business owner for running his organisation/company will also account for the active income of the business owner.
- Commissions and bonuses
The commissions and bonuses that are earned by a person for his services are also a part of a person’s active income.
Pros of Active Income
The following pros can be attributed to active income :
- It brings stability to earnings
Since active income involves getting paid for putting in work for stipulated periods, it ensures the stability of income for as long as a person is working.
- It provides a person with the resources to earn passive income
Active income is one of the major sources of amassment of funds that a person will require if they wish to deploy that money judiciously for earning passive income.
Cons of Active Income
The following cons can be attributed to active income.
- It takes up a significant chunk of your time and energy
People usually spend a lot of time and energy earning active income and therefore they are not left with many working hours to look for or plan passive sources of income.
- The earning threshold is restricted
Since active income is usually directly proportional to the amount of work you put in, the flexibility required for exponential earning is limited.
Difference Between Active And Passive Income
The difference between active and passive income can be understood through the following points :
- Active income requires consistent participation of a person for earning whereas passive income doesn’t require active participation.
- Active income allows you to collect resources for passive income whereas passive income acts as a supplement to a person’s regular income.
- The time taken for earning active income might not allow a person to pursue other hobbies but passive income will afford the free time to a person to indulge in what they like beyond the ambit of their work.
- Active income is total taxable income whereas passive income is subject to tax deductions.
Passive Income or Active Income – Which is better?
In a quest to find a clear winner in Passive Income Vs Active Income, one can successfully infer that a balance of both income streams can make your life financially blissful and sorted. Active income will provide a purpose to your daily routine and allow you to deploy your skill and knowledge effectively. Passive income, on the other hand, will empower you to attain a financial cushion that will afford you the time and luxury to pursue other interests. It will also allow you to enhance your earnings while you are travelling or even sleeping!
A thoughtful and judicious blend of passive and active income is highly coveted and ideal for leading a comfortable life.
Conclusion
One cannot discount the importance of a consistent income stream to sustain a comfortable life for yourself and your family. The concept of making and preserving money requires you to pay intricate attention to your income sources and to deploy a portion of your earnings judiciously so that you can knit a wealth cushion for yourself for rainy days or as a means for augmenting your living standards. By learning in depth about active and passive income, you can manage your money more appropriately.
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