BUILDING WEALTH WITH PASSIVE VS. ACTIVE INCOME? WHICH IS BETTER

In terms of income, it can be categorized into two categories: passive income and active income. There is a misconception that passive income is better than active income, and many people are unclear about the difference between passive income and active income, or how to earn passive income. In contrast to active income, passive income is earned from owning income-generating assets as opposed to earning income in exchange for your time. Both of these methods are good for building wealth, and many income sources which are commonly thought of as 'passive' might actually require a great deal of effort, to begin with.
Active Income
Income earned through active employment, such as a full-time job, commissions, or tips, is considered active income. Active income may also be derived from self-employment or from material participation in a business and receiving a salary. Active income is earned before passive income can be generated for most people. Real estate investors typically work full-time jobs to earn active income, then invest as much as possible to build passive income streams.
Various Types Of Active Income
Wages And Salaries
One of the most basic forms of active income is the salary or wages you earn from your job. Salaries are fixed amounts received for regular work schedules such as 9 to 5, Monday through Friday. A salary is typically earned by working for a company or someone else. Even though salaries are a consistent form of active income, they can be lost at a moment's notice as a result of layoffs or downsizing. These types of income provide the majority of people with a living.
Bonuses And Commissions
Active income also includes bonuses and commissions. There is no fixed rate of income for this type of work, and it can vary significantly depending on the type of work performed. It is not uncommon for many jobs to include a bonus or commission element in addition to the base salary, while other jobs may be entirely commission-based. Salespeople in the real estate industry, commercial real estate sales professionals, and other types of salespeople typically earn this type of income. The earnings potential of commission-based jobs is generally higher than that of salaried positions. Their profitability is, however, subject to fluctuations based on economic conditions, seasonality, and other factors.
Consulting And Freelancing
As other types of active income, freelancing and consulting fees can either supplement one's income or serve as a side hustle. People with valuable skills in high demand can often set up their own side businesses by selling their time for short-term or long-term projects. There is an increasing number of businesses that are willing to hire freelancers to support their mission, growth, and revenue. In order to be a freelancer or consultant, you should have an entrepreneurial spirit, as this type of work is unpredictable and it requires you to build a strong brand and reputation. There are several types of freelance work, including graphic design, software development, copywriting, and photography.
Equity Compensation
A form of equity compensation is awarded to senior employees or employees who are particularly valuable to a company. A variety of equity compensation options are available, including straight shares, stock options, and restricted stock units (RSUs). Most individuals' income is comprised of equity compensation. The average CEO will receive 85% of his income from stock-related compensation in 2020, for example.
Capital Gains
When certain types of assets, such as stocks or real estate, are purchased and sold, capital gains can result if the asset's sale price is greater than the asset's original purchase price. It is possible, for example, to purchase shares in a company at a low price and then sell those shares at a higher price later on after the stock has increased in value. Capital gains are defined as the difference between the purchase price and the selling price. The process of generating capital gains as a source of consistent income requires significant time, expertise, and risk-taking. It is also important to note that capital gains are subject to a variety of tax treatments depending on how and when they are generated.
Renting Out Property
An active income can be earned by listing your property on sites such as Airbnb. Despite the fact that renting out your property may not require a significant amount of time and effort upfront, it is not an income source that can be set and forgotten. Achieving active management of your listings, communicating with renters, and maintaining your property certainly requires active involvement.
Old Goods And Furniture Flipping
It is increasingly common for people on TikTok and Instagram to build side businesses by taking old or broken furniture, refurbishing it, and then selling it for a profit. The low startup costs of this venture make it a great way to make active income if you are handy and have an eye for design. You can generate even more income from your social media pages by partnering with brands and featuring their products on them after you have built up an audience. As a final point, this type of business is a wonderful way to recycle old products that would otherwise be discarded.
Active Income: Pros and Cons
Pros    Cons
⦁    Develops a specific skill or expertise over time.
⦁    May provide social interaction and camaraderie associated with a traditional work site.
    ⦁    Money is traded for time.
⦁    This interferes with other activities.
⦁    It is not possible to scale income potential beyond the constraints of time.
⦁    Taxes are applicable to income.
Passive Income
Investors who earn passive income generally do so from assets that produce income, but in which they are not actively involved. It is common for an asset to be purchased with savings derived from active income sources, such as wages or salaries. Apart from the fact that passive income is not subject to Social Security or Medicare taxes, investors can reduce their income tax liability by taking advantage of a variety of possible tax deductions.
Various Types of Passive Income
Interest And Dividends
Passive income includes interest earned on savings and dividends earned from stocks. High-yield savings accounts or CDs and bonds can be used to generate interest from your savings. Shareholders of public companies receive dividends. It is not a universal practice for companies to pay dividends, and the number of dividends paid varies greatly. Although dividends are passive income, choosing investments that generate dividends is an active and time-consuming undertaking. A dividend investor can typically expect a return of one to five percent.
Rental Income
It is possible to earn passive income from real estate by investing in rental properties, commercial properties, public real estate investment trusts, or real estate crowdfunding platforms. A landlord whose property generates income can also benefit from tax deductions by deducting expenses related to property management, insurance, and other expenses related to income-producing real estate. Real estate investing involves an active component regardless of what type of property you invest in. Managing real estate properties, dealing with tenants, managing relationships with lenders and investors, ensuring upkeep, and selecting the appropriate projects to invest in fall under this category. Many personal finance experts question the concept of passive real estate investing due to the fact that some forms of real estate investing can be so time-consuming.
Peer-To-Peer Lending
Increasingly, peer-to-peer lending is attracting investors who are seeking an alternative to low-interest savings accounts and bond yields. Through Peer To Peer lending, investors make unsecured personal loans to others and can earn high returns. Despite the rise in popularity of peer-to-peer lending, these investments are very risky. Money invested in Peer To Peer lending is often difficult to access during economic hardships because the loans are not secured against collateral or FDIC insured.
Digital Product, Online Course, Or Community Development
It is possible to earn passive income by creating digital products, courses, and online communities if you are able to package your skills and knowledge and sell them to a targeted group of customers. The costs of creating a course, digital product, or community have never been lower in today's digital age, and all that is required is a computer and some creativity. Many people earn millions from their digital products but do not forget that getting to that point likely took a considerable amount of effort. It requires time, effort, and attention to keep these types of products relevant and up to date after launch, in addition to marketing the product and continuing to engage your community. A number of platforms are available for launching a project like this, including Thinkific, Teachable, and Patreon.
YouTube/TikTok Ad Revenue
Building your channel's audience and monetizing content through ads or affiliate marketing links are the most effective ways to earn money on YouTube or Tik Tok. A video created by you has the potential to become an income-generating asset once your presence reaches critical mass. Getting rich on YouTube may seem amazing on the surface, but it takes a great deal of effort and determination to achieve this goal. To earn any income, it is often necessary to have an audience of tens of thousands or hundreds of thousands of followers. Nevertheless, if you are able to build an audience, you have the potential to earn a substantial passive income through YouTube. It is estimated that YouTubers can earn between $3 and $5 per 1,000 views of their videos, with the top YouTubers generating millions of dollars a year.
Pros & Cons Of Passive Income
Pros    Cons
⦁    Makes money while sleeping, vacationing, etc.
⦁    Provides more time for recreational activities.
⦁    Tax deductions may apply.
⦁    Enhances income potential beyond the limitations of time.
⦁    Physical presence at the work site is not required.
⦁    It is often necessary to create active income before you can begin.
⦁    Active income is usually harder to generate.
Conclusion
The possibility of earning passive income can be a great way to earn more while working a regular 9-5 job or it may replace your current source(s) of income completely. Nevertheless, when it comes to developing real wealth, the debate between active and passive income becomes more nuanced. Self-made millionaires generate income from multiple sources, according to a five-year study of 233 wealthy individuals. Approximately 65% of them had three streams of income, 45% had four streams of income, and 29% had five or more streams of income. It appears that it is not simply a matter of prioritizing passive income over active income when it comes to building wealth. The aim is to generate multiple streams of income and to scale your time. Finding the right combination of passive and active income streams is up to your creativity and aspirations. In any case, if you are seeking passive income or active income, be aware that there is no free lunch, and any source of income that ultimately becomes passive will likely have started out as an active endeavor.

By Rashmi Goel