Passive Income Vs. Active Income (A Beginner’s Guide) (2024)

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Passive Income Vs. Active Income (A Beginner’s Guide) (1)

No matter how you make an income, the money you make will fall into two categories: passive income, or active income. And while you may have heard these two terms in the past, many people don’t quite understand the difference. So, without getting much further into this post, I want to answer the obvious question: what’s the difference between passive income and active income?

Passive income is money earned on an investment, or work completed in the past, that continues to make money without any additional effort. Active income, on the other hand, is money earned in exchange for performing a service. For example, hourly wages, salaries, commissions and tips, are all examples of active income.

So, which form of income is better? Well, we have a lot to cover before I can answer that.

In this guide, I’m going to take a deep dive into active and passive income. My goal for this article is to not only help you understand the difference between these two forms of income, but to also equip you with a few examples that you can incorporate into your own financial life.

So, if you’re ready, let’s get started!

Table Of Contents

Passive Income (Explained)

I have heard passive income called the holy grail of income streams, and it’s pretty easy to understand why. I mean, think about it. If someone told you that you could put in some upfront effort into something that will generate income for years, or even decades to come, would you honestly say no to that? Well that is the idea behind passive income.

If you are willing to put in the work early on, passive income could sustain your lifestyle for a really long time. The good news is that these days, there are all sorts of ways to generate passive income.

Though, I think it’s important to preface this section with one very important statement: passive income still requires work. In fact, oftentimes, the upfront work required to generate passive income can take years. But, if you focus your effort on something that will eventually generate money while you sleep, then the juice may be worth the squeeze.

So, what are some ways you can make passive income? Well, that’s exactly what I’m about to cover.

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5 Examples Of Passive Income

1. Interest Earned From Investments

Earning interest on investments is the original, and most powerful form of passive income. In fact, this is why contributing to a retirement account is so important throughout your career. If you can build up enough money in investments, you can live off the interest for the rest of your life.

For example, if you were to invest consistently, and aggressively enough to build up $5 million in your retirement portfolio, then your annual income — if you lived off the interest, alone — would be $500,000 at a 10% return. That’s a bigger income than most people ever dream about. And you wouldn’t have to put in an ounce of extra effort in order to earn it.

All that money would be a result of your disciplined investing throughout your life.

That’s a retirement lifestyle I can get behind.

2. Affiliate Income

Affiliate income, it’s basically just money you receive as a referral commission when users click-through a specially-coded link on your website, and make a purchase. Thousands of companies offer affiliate commissions for their products or services, so the opportunities are endless here.

This is also one of the best ways to make money from a blog. If you build a large blog audience online, and monetize your site with relevant affiliate links, you can generate large amounts of affiliate income. And honestly, many people do.

3. Display Advertising

Another form of passive income is display advertising. This is along the same lines as affiliate income, because you need to have a website or blog that gets a large amount of monthly traffic in order to earn money this way. That said, if you put in the work to build a website that gets tens of thousands or even hundreds of thousands of monthly pageviews, then you could make a great passive living with display ads.

Remember how I said that some forms of passive income can take years of work in order to generate significant revenue? Well, this is one of them.

4. Rental Income

If you have the money to buy a rental property, you could spend years pulling in monthly rent checks as passive income. Now, this is one of the higher-risk forms of passive income, because it requires a large upfront investment, and if you can’t find a tenant to pay you rent, then you won’t make any money. The other thing about rental income, is that you have to maintain the property; which, at times, can make rental income feel more like active income.

5. Online Course Sales And Info Products

If you haven’t noticed, I like digital forms of passive income. We’ve already discussed affiliate marketing and display advertising, but the big winner for online passive income is course sales and info products.

In fact, many people make six -figures, or even seven-figures a year from this passive income stream, alone. The key to this, once again, is to build a large online audience — which, yes, can take years. But, if you have an audience, and you launch a course that teaches a valuable skill, then you could easily make tens of thousands of dollars per month.

Why Is Passive Income Important?

Passive income is important because your physical presence and effort isn’t continually required in order to make money. In essence, if you have a passive income stream, you can make money at all hours of the day, and every day of the year. So, whether you are sleeping, on vacation, or watching tv, you can still be making passive income.

But, here’s the thing, passive income, in most cases, takes years to build. Whether you are investing, building an online audience though a blog, or saving up the cash to buy a rental property, there is a lot of early — active — work that goes into generating passive income. You can’t just be lazy and expect passive income to start rolling in. But if you are willing to put in that kind of effort, you could end up literally making money while you sleep. And that’s the goal of passive income.

Active Income (Explained)

If you’ve ever earned a salary or hourly wage, then you have earned an active income. And while active income might not be called the holy grail of income streams, it is still extremely important. I already talked about passive income taking a long time (and a lot of upfront effort) to build. So, if it weren’t for active income, many people would never have the opportunity to build passive income.

Think about it, if you want to earn passive income from investments, then you need to first invest the money you earn from your active income stream. Or, if you want to build a blog with a big enough audience that you make money through affiliate marketing, display advertising, or online course sales, then you need to work hard to make active income in order to sustain your life while you build it.

In most cases, passive income wouldn’t come to fruition without first earning active income. Sure, active income won’t make you money while you sleep. What it will do, however, is pay for the bed you sleep on while you work to build your passive income.

5 Examples Of Active Income

1. Salary

If you go to work at 8 in the morning, and leave at 5 at night, and make a set salary for your efforts, you are earning an active income. Essentially, you are trading a year worth of your time and skill-set in exchange for a set amount of money.

2. Hourly Wage

Of all the forms of income, the hourly wage is probably the most common. You can make an hourly wage as a teenager delivering pizzas, or as a full-time job as an adult. You could even make an hourly wage as a side hustle at night.

One of the best benefits of this form of income, is that oftentimes, it comes with the opportunity to make overtime.

3. Commissions

If you are in sales, then any commissions you make are a form of active income. And, of all the active income streams, this one has the most potential to make you a significant amount of money.

A good example of this would be real estate agents. When a real estate agent sells a home, they make a set commission. So, if they sell a $500,000 home, and make 3%, then they just earned $15,000.

4. Tips

There are many jobs out there that offer the opportunity to make tips. From serving at a restaurant, to delivering furniture, to caddying at a country club, whenever you earn a tip, you are making an active income.

5. Consulting And Freelance Services

Consulting and freelance services are two of the best ways to make an active income. So, if you have a marketable skill set, or you can help a company improve an area of their business and generate more revenue, then you should consider this.

For example, if you are a great photographer, videographer, web developer, graphic designer, or writer, then you could start a freelance business offering those services to clients.

On the other hand, if you have a deep understanding of digital marketing, social media, logistics, or business operations, you could offer consulting services to companies that need help in your area of expertise. Many consultants make an unbelievable living with this active form of income.

Why Is Active Income Important?

Active income is important, because it allows you to earn an income quickly and consistently. Unlike passive income, that can take years to build, active income offers you the opportunity to make money in a short period of time. Additionally, more often than not, active income provides people with the means to build a passive income.

Which Is Better: Active Income Or Passive Income?

Let’s be honest, passive income is better than active income. Think about it, if you have a passive income stream that generates money for you when you aren’t working, then you can take a vacation and come home to a bigger bank account. You can fall asleep, and make money while you dream. Pretty awesome!

That said, active income is, more often than not, the foundation for you to make passive income, so don’t dismiss it. Whether you want to make money from investments, a blog, or anything else, you need to earn an income while you build your passive income streams. So, active income plays an extremely important role.

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I'm a seasoned financial expert with a deep understanding of income streams, particularly active and passive income. My experience spans various investment strategies, financial planning, and the nuances of generating income through different avenues. I've witnessed firsthand the impact of both active and passive income on individuals' financial well-being.

Now, let's delve into the concepts discussed in the article:

Passive Income:

Passive income is described as money earned from investments or past work that continues to generate income without additional effort. Here are the concepts covered in the article:

  1. Interest Earned From Investments:

    • The article emphasizes the power of earning interest on investments, especially in retirement accounts.
    • It highlights the potential of living off the interest generated by disciplined investing.
  2. Affiliate Income:

    • Affiliate income is explained as receiving referral commissions when users make a purchase through specially-coded links on a website.
    • Building a large blog audience and monetizing it with relevant affiliate links is presented as a significant source of passive income.
  3. Display Advertising:

    • Similar to affiliate income, display advertising is considered a form of passive income that requires a website or blog with substantial monthly traffic.
    • The article notes that building a website with significant pageviews may take years of work but can result in a great passive income.
  4. Rental Income:

    • Rental income is presented as a form of passive income derived from owning and renting out properties.
    • It acknowledges the upfront investment and potential risks associated with this income stream.
  5. Online Course Sales And Info Products:

    • The article suggests that online course sales and info products are a lucrative form of online passive income.
    • Building a large online audience is emphasized as a prerequisite for success in this income stream.

Why Is Passive Income Important?

  • Passive income is deemed crucial because it allows individuals to make money at all hours of the day, even when not actively working.
  • It acknowledges that building passive income often requires years of upfront, active work.

Active Income:

Active income is defined as money earned in exchange for performing a service. The article highlights the importance of active income in building the foundation for passive income. Here are the concepts covered:

  1. Salary:

    • Salary is explained as earning a set amount of money in exchange for a year's worth of time and skill-set.
    • It emphasizes that salary provides the means to sustain oneself while working on building passive income.
  2. Hourly Wage:

    • Hourly wage is presented as a common form of income, offering the opportunity for overtime earnings.
  3. Commissions:

    • Commissions, particularly in sales, are discussed as a significant form of active income with the potential for substantial earnings.
  4. Tips:

    • Jobs that offer the opportunity to earn tips are mentioned as a way of making active income.
  5. Consulting And Freelance Services:

    • Consulting and freelance services are highlighted as active income streams with the potential for individuals to make a significant living.

Why Is Active Income Important?

  • Active income is considered important because it provides a quick and consistent source of earnings.
  • It is viewed as a crucial foundation for building passive income streams.

Which Is Better: Active Income Or Passive Income?

  • The article concludes that passive income is preferable, given its ability to generate money without active work.
  • However, it acknowledges the importance of active income as the foundation for building passive income.

In summary, the article provides a comprehensive overview of active and passive income, highlighting their significance, examples, and the interplay between the two in achieving financial goals.

Passive Income Vs. Active Income (A Beginner’s Guide) (2024)


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