How do you earn money? Active Income vs Passive Income

Everybody wants to make money, but a lot of people focus in trading time for me rather than making their money work them. Trading time for money is the only thing people know on how they can earn money. Did you know that the average millionaire has at around 7 streams of income? How is that possible? Do those millionaires work 24/7? They must be workaholics! Wrong… those millionaires focus on passive income streams.

Today I want to show you to the difference between active income and passive income.

What is active income?

Active income or Vertical income occurs when you trade time for money. This can be working an hourly or salary job, being a freelancer or being self-employed.

Example:

• Eric makes $50 an hour
• Megan has a yearly salary of $70,000
• Josh makes $3000 per website

With this said, you can conclude that the more time you spend on your job, the more money you make. The problem is that there are only 24 hours in a day and you can’t work all the time because you will burn out.

Time is one of the most valuable things we have because once it is spent, we can’t take it back. A second, minute, or hour minute spent its something that is gone and all we have left from it is a memory, so we have to make sure we do what we love and work in areas that brings us happiness.

I sometimes refer to ‘active income’ as ‘vertical income.’ The reason is because the job income is only one stream, and a lot of people put focus on just that one vertical. I believe that is the reason why they call it ‘climbing the corporate ladder.’ People focus on the next promotion, the next salary jump, an increase in hourly pay. Climbing the ladder is great if you love what you do, but there is another way to make money, and that is through passive income streams.

What is passive income?

Passive income or horizontal income is income that you received without doing much effort at that time. You can even refer to it as making money while you sleep. How cool is that! Note, some passive income streams do require long hours of work before you can reap the rewards. Which explains why not many people have focus on building passive streams, sometimes laziness and conformity begins to set in.

Examples of passive income are:

• Rent checks
• Royalties from music or books
• Automated business
• Interest in money you lend
• Dividends from stocks

In most cases of passive income, you are leveraging your money and making it work for you rather than you trading time for me.

Real life example: Let me introduce you to Jimmy

Jimmy is an accountant for a XYZ firm and gets paid $50 an hour. Jimmy only gets paid while he is at work doing spreadsheets, meeting with clients, taking phone calls from his past clients and meeting with his team. If he is not working, he doesn’t get paid. In other words he has to be active in his job to get paid.

Can Jimmy increase his vertical income?

Jimmy can increase his active income by becoming more valuable to the market place, as Jim Rohn would say. He will have to become more skillful at his craft. Maybe take an extra class or get another certification. He has to put in the extra effort now so that he can be rewarded later. The more skillful he is in his craft the more he can get paid.

Like Jimmy, 95% of the population in the United States gets paid by trading time for money. That is not a bad way to start, in fact we must first make money actively in order to make a living. Unless you got lucky and received an inheritance.

Here in America, before a worker sees their hard earned money in their bank account, there are a few deductions. One piece of the pie goes to taxes, another piece goes to social security, and another piece goes to your retirement account, such as 401K. The good thing about working in corporate America is that sometimes the company has a matching program for the 401K up to a certain percentage. When I was working in corporate America, I had a match up to 4% of my paycheck going to my 401K. Not bad! This is free money that your company is giving you towards your retirement!

The last 2 deductions I mentioned above (social security and 401K) are great because by the time Jimmy retires at the age of 65 he will have 2 streams of passive income. Jimmy will receive his monthly social security check and his retirement account deposit.

What Jimmy needs to do now is begin focusing in building other streams of income while he is at his job so that he is not fully dependent on Uncle Sam and the stock market when he retires.

A lot of people just focus on their active income and want to climb the ladder chasing a new position or a bigger paycheck. What I wanna ask you is, if you will get 2 passive income streams by age 65, why not start much sooner? Why not start creating passive income streams in your 20s, 30s, 40s or 50s? It’s never too late to start investing or creating another stream of income. It is time to stop trading time for money and make your money work for you!

My goal is to make you aware of different ways that you can create passive income and help you in that process. It is very rewarding when I help a friend buy a property or give them advice on their business and later see it implemented.

Later, when you get to the point where your passive income exceeds your monthly expenses you have achieved financial freedom. You can literally take a trip to a deserted island and when you come back home you will see more money in your bank account than when you left. Not bad huh?

Now, building passive income streams may not always be sexy. You won’t get rich in 6 months or 1 year but with a little bit of patience and perseverance, you will see your passive streams grow. Most of my experience in passive income streams have been through real estate investing. I bought my first house at age of 23, and that netted me about $500 a month to my pocket after expenses. My second home pays me about $150 a month. I will go into more detail later as to how I bought my properties. But what I want to say is that $150 may not be much, but when that money appears in my bank account on the first of the month, I get excited because it’s money that I didn’t have to do any work for. I actually haven’t stepped into that second home in over a year!

Hope this was helpful and if you have questions on how you can increase your active income or start building passive stream of income, please post a comment below.