Passive vs Active Income: What's the Difference?

passive vs active income different revenue streams


According to a recent global wealth report, there are 46.8 million millionaires worldwide (USD). The highest paying jobs rarely top $300,000 a year. How then do millions of people become so wealthy?

The answer lies in passive vs active income and the difference between the two. If you desire to have true financial freedom, the kind that frees up all your time to spend as you wish, you need to know the "secret" behind passive income. Read on to understand this basic wealth building principle and you will be halfway there yourself.

Passive vs Active Income

There is nothing wrong with a hard day's work for a hard day's pay unless you want more than selling your time can bring. Active income is the money you earn from traditional work contracts that requires you to actively produce the income, i.e. jobs.

You agree to sell your time, 40 hours a week - give or take, in exchange for a salary. With an active income, the limits of your time will always limit your earning potential. Jobs come with a sense of security and for many, it is a way to serve their community and earn a living for their families without the stress and uncertainty of business life.

Passive income is the golden ticket to wealth building because this income comes with little to no effort or time needed to maintain the cash flow. Passive income comes from investments in other active income efforts. Your investment buys a piece of the pie without you having to spend your time producing that income.

Common Misconception About Wealth

Being rich doesn't mean you have lots of money. The rich don't hang on to their money. They invest their money in income streams. The rich are rich because they are always increasing their incomes.

How much would you pay now for an income stream of one hundred dollars a month guaranteed for the rest of your life? Would you buy this income for $500? How about $5,000? Once you realize the real value of money is in its ability to produce future income for you, the rest is easy to understand.

A Simple Example

Passive Income comes in many forms. Generally speaking, when it comes to investments, they say the bigger the risk the bigger the reward. Not all investments are high-risk or complicated at all.

For example, putting your money in a savings account is a simple low-risk investment that will produce 100% passive income. We are not saying that saving your way to riches is the way to go, but it demonstrates the concept very well.

The money you put into your account is your investment. There is no need to put any additional effort into the investment. The bank promises you an interest rate on the balance of your savings account. These interest payments are your passive income.

The average interest rate for savings accounts in America is 0.06% APY. For the sake of example, imagine you have a million dollars and decided to invest it by depositing it in a saving account at that interest rate. Your million-dollar investment would bring you a passive income stream worth $600 a year (0.0006 x $1,000,000).

Best Passive Income Ideas

The truth is you don't need to be some kind of business genius to leverage the power of passive income. Some of the most known passive income streams are not new ideas but still boost earnings for those that take the investment risks. Here are a few passive income strategies that have stood the test of time.


  • real estate flipping and renting
  • affiliate advertising
  • MLM (multi-level-marketing)
  • stock dividends
  • information product creation
  • educational courses

Find a Winning Formula

Your business plan and passive income strategy is nothing short of finding a winning formula. The formula is the machine that generates the income stream. A well-oiled machine will keep producing passive income for years and years to come.

The first step in creating your formula is to choose a product or service to enter the market. The product or service doesn't even have to be your creation. The majority of the profits are in the "middle man" stages of business. Your machine could simply connect the seller of the product or service to the buyer or client. The middle man, you and your "machine," take a percentage as a finder's fee.

Choose a niche that interests you like health-focused passive income or any other industry that you want to invest in. Create or affiliate yourself with a product or service to offer consumers and start marketing it.

The key here is to make small investments until you find a formula that makes a consistent profit. Since passive income is produced from little to none of your own time your formula should be scaleable. Simply scale-up your formulas to increase the size of the passive income streams.

Here is an example: You decide to promote a real estate marketing course. The creators of the course offer you $15 for every course you sell. You decide to try a Google pay-per-click campaign and advertise a landing page that promotes the real estate marketing course.

You run a test for a few months buying $500 worth of traffic from Google. This strategy in itself could be a winning formula. If the Google PPC campaign generates a consistent profit than scaling up the campaign should produce the same results with higher profits.

Take Action for Change

Most people will never see the true freedom that building wealth with passive income will bring. Take the path of "most people" and you will get what most people get. A pension and Social security check when and if you make it to retirement age will be the only "passive income" you will ever enjoy.

Passive vs active income is no contest. Passive income streams are the king of the incomes now and forever. The question is are you willing to sacrifice and risk money now to build income for your future? For more personal finance tips and investing tricks read more articles on the site.