Passive Income vs Active Income
You probably hear fancy phrases like “horizontal income stream” or “passive income” being thrown around by people who seem to be gaining more money as they go, but also seem to work less. They are phrases that, to a normal person, seem unattainable -- unfathomable even.
But let’s take a look at what passive income actually is and you’ll soon be finding ways to stream some of that sweet horizontal income yourself.
Let’s say you’re a lawyer. You put in long hours and hard work for your clients so that you can pay your mortgage, take care of your family, and maintain a standard of living. Your pay is a representation of your work. Or, maybe you’re a freelance professional photographer. Your compensation is reflected in the hours, the expertise, the editing, and the photographs themselves. Both of these are considered active income.
Now let’s say you own a multi-unit rental property. Every month, the tenants pay their rent which goes towards the mortgage, the manager, maintenance and, the rest? It goes to you. Instead of getting paid for work you put in, you have an immaterial or indirect participation. This is passive income.
Some passive income streams might come from:
Interest from a bank account
Earnings from advertisements online
Rent from a property
On a smaller scale...
Renting out an empty room in your house or condo
Affiliate marketing on your own website
Build a smartphone app
Create your own online store
They can be little streams that accumulate small amounts over time or large rivers that flow millions or billions of dollars. This is not to say that zero work is involved. Nothing is 100% passive. For example, if you own that multi-unit building, you had to go out and find the right property, hire a manager, or maybe self-manage it. It’s passive income because you’re not clocking in everyday or providing a standard of work that requires a certain standard of pay. You simply own a property and manage it, the rest is topping on the cake.
“You become financially free when your passive income exceeds your expenses.”
-T. Harv Eker
The real fun begins when you compound your streams from there. With that leftover money, you can save enough to buy another property, another investment, another stream of passive income. This is building wealth. When money is to be made and wealth is to be built, there is always work: Smart, savvy, knowledge-gaining, risk taking, rewarding work.
So, before considering that part-time job and having two sources of active income. Think about working smart instead of working hard.
Paul Morris and David Osborn are the leading experts on building wealth from passive income. In their upcoming book, “Wealth Can’t Wait,” you’ll learn how they did it and how you can do it, too.
Stay tuned for more blogs on everything wealth!