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Active and Passive Income: What’s the Difference?

Does your job not pay enough? Are you drowning in heaping pile of student loans? Does your husband want a new car?

I feel ya. We all need some extra cash!

When beginning your search on how to make more money, you need to first consider how important that money is to you right now. Do you need a spare $1000 to go on a vacation or are you looking to save for your dream home.

Both active and passive income are great ways to accumulate money, but they are earned in different ways.

In short, the difference between active and passive income is how you earn it. Active income is earned by doing a job or task and getting paid for only what you accomplished. Passive income is getting paid over and over again after you have done a job.

Ready to dive into this topic? No matter your experience or background, by the end of this post you will better understand the different types of income and what is best for you!

Once you’re ready to learn more, scroll back up to this list and find another article to discover!:

• 8 Proven Passive Income Ideas for Women
• 3 FREE Apps Every New Investor Needs
• The Single Best Way to Earn Extra Passive Income 

What is Active Income?

If you have a W2 or 1099 job then you have active income.

Having this type of income literally is as simple as its own description! Think of it this way: you are actively doing something to put money in your bank rather than getting a check in the mail for something you did awhile ago.

We were all taught as young adults to get through school, go get a degree, and make money with a stereotypical job. School = degree = job = money.

Through this process we are actively working toward an end goal: work hard, get paid.

With active income you must work for your money.

Unfortunately, the majority of us aren’t making the big bucks with our jobs. In fact, considering you’re reading this tells me your financial situation isn’t perfect.

I, like you, am merely a woman who was taught that I should go to work every day to pay my bills.

Whether you make minimum wage or are earning six-figures to maintain your lifestyle, you are still under the category of receiving active income.

Of course, once you begin to budget, pay off your debt, and begin saving for retirement, working becomes less stressful for us not earning a nice income.

But doesn’t it sound nice to be able to learn to take a month-long vacation to Hawaii because you didn’t have to work anymore?

Or, to be able to afford sending your kids to college without taking a second job? Finally have an excellent credit score? Be able to enjoy life without financial stress?

That sounds nice to me.

With having a job to fully rely on living comes having the stress of potential lay-offs, bonus freezes, and creepy bosses (admit it, we’ve all experienced one).

With active income comes many other barriers:

• The more money one makes, the more he/she is inclined to spend
• Without proper budgeting, a family can either live paycheck to paycheck or outspend their means
• People work harder to get promotions and pay raises (they work for their money = active income), instead of learning how to make their money work for them (passive income)

RELATED ARTICLES: Net vs Gross Income

What is Passive Income?

If you live in America, you probably did not have a great financial education in public school. Sure, there were some accounting classes and some personal finance classes, but your teachers never taught you about this thing called passive income.

This form of money earning is something that schools don’t seem to teach. We are taught to be employees, not employers.

Work=money=survival. Right?

That’s only partially true. Passive income literally means to have your money work for you.

There are plenty of ways to earn income without putting much effort in aside initial work.

Some ways we can earn passive income include: 

• Real Estate
• YouTube
• Stocks
• Books
• Rent out a room in your house (Go Google “house hacking”!)

Now, I understand the above examples cannot replace your current source of income quickly. However, it’s important to get a solid understanding that passive income gives you money after you’ve created it initially, rather than needing to work every day to make money.

Passive income is a stream of money that only requires minimal management on a day-to-day basis.

Essentially, if you can go home and not think about your form of passive income and look at your bank account months later and it be a higher number (disregarding your active income), then you are making passive income. 

Semi-Passive Income

I do want you to keep in mind that there are plenty of ways that many people disguise passive income as active income. If you are putting in effort and time regularly, then it is not a true form of passive income. You are still working. For example, writing a book is active until it is published.

Then, it is purely passive income, since you no longer have to put effort into creating the product.

A blog or YouTube channel is semi-passive. You can go to bed and still receive monetization (the passive part), but still have to regularly make content and spend time to keep earning.

Another disguised form of passive income is the vast world of real estate investing. Real estate isn’t exactly passive, as many say it is.

An incredible amount of learning and time is put into understanding the real estate market and investing methods, searching for homes/apartments/buildings, running analyses on properties, purchasing, fixing, and successfully renting.

However, once everything is squared away, then it can become passive.

The “Pinnacle Point”

In Dave Ramsey’s Complete Guide to Money, he describes the “Pinnacle Point” as the point for financial freedom. He defines this as the point in your earnings when your savings and investments make more money in a year than you actively make at your job.

But, keep in mind that everyone has a different definition for financial freedom.

To some, financial freedom is having a portfolio with passive income (stocks, bonds, mutual funds, real estate, etc.) that can pay for all your expenses. As in, you could quit your job today and be able to pay your bills without worry.

If you are new to money management, it may be best to first learn your net worth and begin understanding your unique financial situation!

Some people also consider financial freedom a total myth. Sure, everyone has financial limits, and some people can get greedy. Smart investors still continue working to find the next way to earn money. But, they have financial freedom. They don’t have to work if they don’t want to.

Once the Pinnacle Point is reached, it is not a green light to quit your job and vacation for the rest of your life.

Surprisingly, most people actually enjoy serving others or feeling purpose in our world through their work.

In fact, I want you to be this way. I want you to be able to work a job you love, or do a hobby full-time, BECAUSE YOU CAN.

Imagine being able to go to work without the stress of knowing you must go for the paycheck. Imagine being able to do what you actually enjoy, without needing to work overtime to make ends meet.

What’s also great about reaching financial freedom quickly, is you’ll be able to use the money from your active income to put towards more passive income. You’ll also have less stress putting together your child’s college fund or saving money for the honeymoon you never took.

Financial freedom is defined however YOU want it to be defined.

If you determine that you family needs $6000/month to never have to rely on actively working again, than that is your number for financial freedom.

If you wish to live lavishly, or if currently have unstable spending habits, you’ll obviously need more.

However, if you are one of those people, I highly recommend you check out our other posts to get started on budgeting and money management!

Everyone has different monetary goals, and I never condone ladies who want to own nice things, but you MUST have a good foundation of money management to maintain financial stability over the long haul!

Now, some people may be tempted to spend more once they have more. They may start to want more, buy more, and save less. All the great investments, income generators, and tools they worked so hard for could have less meaning and value.

No worries, you won’t be one of those. We’re here to keep you in check.

The women who are getting themselves into financial freedom are just like you. They are driven individuals who want to make a difference for themselves and their family.

It is unlikely that the women who work hard overtime to get themselves out of debt, make investments, build portfolios, and obtain financial freedom would turn their back on all of their principles to live outside of their means.

Keep Inflation in Mind!

One important point to remember when exploring the confusing finance world is the sneaky factor of inflation.

The amount of money you determined above, to consider yourself financially free, will be different in a matter of a decade. Yikes! But what does this mean?

Through all the books, courses, and podcasts I’ve explored, I’ve discovered that long-term successful individuals never stop working!

Therefore, there are a few points I’d like you to brainstorm:

• What would my life look like once I’ve reached financial freedom?
• If I had all the time in the world, is there a passion that I’d want to pursue?

So, how do you beat inflation?

The answer is NOT to keep your money sitting in a checking account or under your bed.

Proper investing will keep your money protected against inflation.

Good, passive income choices can provide you opportunities to invest in these means.

Okay, Let’s Summarize!

• If you’re putting in effort or time to make money, you will earn active income.
• If you put effort in at the beginning (think: publishing a book) and receive money after you’ve created this, then it is passive income.
• A goal for your family should be to understand what your Pinnacle Point will be: how much money per month will it take for you to not work actively to pay your bills and live your current life?
• Keeping your money in your local bank that has minimal interest, or keeping it all in cash under your bed, will NOT protect you from inflation. Keep learning to discover the best way for you to invest so you can avoid your dollars losing value.

Thanks for reading! Understanding active and passive income is a foundational concept and a building block to further learning!