There are mainly two types of income – active income and passive income. Active income requires active involvement and hence is limited to time and efforts put by you. Whereas, passive income is based on the principle of leverage. Most rich people create wealth using the passive income model.
Active Income
This is the most common form of income. This is also called the earned income. Most people start with active income to build their initial wealth. This can be earned quickly & consistently. The downside is that your active income stops the moment you stop working.
Examples of active income:
1. Employees:
You work for others. You generate active income for yourself but usually generate much higher returns for your employers.
2. Self-employed
You work for yourself. Doctors, Lawyers, Consultants who operate individually fall under this category. You generate income solely for yourself.
Passive Income
Passive income takes time to build and can be risky too. Most rich people build wealth in this way by leveraging others’ time and effort. This requires very little to no active involvement to grow income.
Examples of passive income:
3. Business Owners
As a business owner, you employ people and leverage their talent, time, efforts, ideas to generate massive income.
4. Investors
You invest your money and make money work harder for you to generate returns. Stocks, mutual funds, real estate are some of the common areas that can generate higher passive income. You need to invest your earned money to generate such income.
Conclusion
Active income and passive income are both interconnected. Active income helps you build initial wealth, which is needed to generate passive income. The quicker one can build a passive income, the sooner one can reach financial independence.
“Your 9-5 job fuels your side hustle, your side hustle fuels your investment, your investment replaces your job.”
Source: www.mywisdomlane.com
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