Passive income differs from active income in that there is always a direct time value behind active income. For example, you trade an hour’s work for $20. With passive income, you try to make your income independent of your time. The goal is, therefore, with a usually higher initial effort, to build up a long-term stream of income for which you no longer have to invest any working hours.
Now, active income is often demonized and passive income is put above everything else. At least that’s how it seems to me. While I am a long-run believer that it makes sense to find a way to generate a stable passive income that allows one to achieve financial freedom, active income should not be judged prematurely.
Active income is the money you earn as a direct result of the work you do. This is the most common form of income and is often earned by “trading time for money“.
In fact, for most people, active income from a job is their only income.
It’s a risky position.
Examples of active income:
No matter how you’ve structured it, whether you’re hourly or salaried, whether you’ve “produced” your service or not, you’re still trading hours for dollars. (Unless you have a team behind you delivering the work.)
Passive income is the money you make from assets you control. This can be income from rental properties, profits from your own business, or the sale of products.
Examples of passive income:
Passive income is naturally attractive because it doesn’t require your direct participation – at the time of acquisition – in order to get paid.
Of course, establishing or acquiring passive income often requires a HUGE upfront investment of time and/or dollars. That’s the opportunity cost of active income; You could have spent that time making money NOW, but instead, you spent it speculatively hoping to make more later.
There are different ways to build up a stable passive income. In most cases, however, it requires some seed capital or time. This start-up capital can usually be worked out much more quickly using classic working models (time for money). As a result, your active income enables you to develop a passive income stream in the first place.
Two classic examples of how you can generate passive income through the use of money are real estate and stocks.
Two examples of passive income without start-up capital, on the other hand, are writing books or selling information products via an online shop or blog. You can also provide the information for free and earn money through advertising or recommendations.
Once such a passive income stream has been built up, you usually only have to invest very little energy and time to ensure that the flow of money does not come to a standstill. The bottom line, however, is that you need money in both cases. Mostly earned through active work. Because either you invest your money directly in your future income generator or you put time into your product which should later bring you money. Even in the latter case, you need money from somewhere that you can live on.
I was listening to a podcast last month and the question arose about how much time you spend in “reactive mode” versus “proactive mode”.
This really hit me as I definitely struggled with it and a challenge I believe all side hustlers face.
A few years ago I was pretty much in “reactive” mode, delivering work for clients, answering emails, and fulfilling other people’s requests for my time. And that was all fine because it paid off.
But it doesn’t “scale,” or at least it doesn’t scale easily.
And I didn’t have much time to pursue “proactive” projects — like writing a new book, creating a course, or creating a new website.
Examples of “reactive” tasks:
Examples of “proactive” tasks:
Here’s a general rule: Active income activities are generally reactive, while passive income activities are generally proactive.
When you audit your time, where do your hours go? Are you working on active or passive income activities?
If you’re short on time, how should you prioritize your projects? Should you focus solely on building active income streams to ring the cash register right away?
Or should you focus entirely on building passive income investments? After all, if you work part-time, you can rely on your main job to pay the bills.
I think the answer depends on each individual’s unique situation. When you need to see money come in instantly, an active income strategy is a way to go.
In fact, for most beginners, an active-income approach is probably the quickest way to get out of debt, build a financial cushion, and improve their balance sheets.
Most active income side activities do not require large upfront investments and you can see the returns immediately.
For example, Harry Campbell stated that within a week of applying to be a driver, he earned his first rideshares.
I got an email a few weeks ago from another listener who said he made $300 his first weekend buying and selling on Craigslist.
It’s rewarding and empowering to make those first few dollars outside of your main job!
What kind of service could you offer?
The crazy thing is that active income often leads the way to passive income. Here are just a few examples.
Mechanical engineer Jon Doe was constantly tinkering with bikes in his garage—his own and those of his friends. One day, he wondered if anyone would pay for his repair service, and sure enough, his ad on Craigslist started attracting new customers.
The other clever thing Matt did was set up a camera to film himself doing the repairs, which has led to a profitable YouTube channel and even selling complete repair video files online, making a service business effective turned into a passive income business.
My friend Wes “The Sales Whisperer” Schaeffer introduced me to an interesting way to start a passive income services business.
Wes helps teams streamline their sales processes, systems, and workflows. This often involves setting up customers with new customer relationship management software, especially if their existing system is outdated (or non-existent). With years of sales experience across dozens of industries, Wes has the knowledge to recommend the best tools for any business.
Passive income comes into play because Wes maintains affiliate or reseller relationships with many of the services and software tools that he recommends. He earns his sales advisory fee upfront and then earns residual income by referring a new customer to specific software that is helpful to his business.
Over the years, this “passive” element of Wes’ business has grown into a significant source of income. And it all came from introducing customers to other people’s products and showing them how those products could bring them more sales.
It is important to understand that it is usually a smooth transition. First, you need your active income, then you can develop long-term passive sources of income and thus open up a regular stream of income. Without an active flow of money, it is hardly possible for most people to build up further sources of income. Unless you just inherited a lot or won the lottery.
Of course, there are many different ways to earn passive income, but you should be aware that this is rarely built up overnight. For example, you need a certain amount of wealth in stocks to be able to live off the dividends or the expected annual growth in stocks.
So you don’t have to rush it on the path to financial freedom or your personal passive income generator. The most important thing is to set a goal and continuously pursue it. Then you can, with the help of your active income, develop a long-term stable passive income.
The problem with a fully reactive or “active income” strategy is that the rush can never stop or income dry up. At some point you want some of your money to work for you to give yourself some breathing room.
As Warren Buffett said: “If you can’t find a way to make money while you sleep, you’ll work until you die.”
So if you’ve been a side hustle for a while or are financially strong enough, I think it makes sense to chase after passive income. Or at least build some “proactive” time into your allotted non-productive times.
Perhaps you are investing in additional sources of income or perhaps building your own assets such as a website, book or course.
Active vs. passive income is a battle between now and – maybe – getting paid later. There is definitely such a thing as spending too much time on passive income strategies because they may never succeed.
As with any “special” work where you speculate, chances are you’ll never get paid – by dropping your hourly rate to a whopping $0 on this project.
(I’ve had my share of it!)
In a way, it’s a chicken versus egg dilemma; It almost takes some level of passive income to free up your time to work on further developments. And if you don’t make time for passive income, you may never get it.
One way to get around this is to increase your rates to a level where you don’t have to constantly hunt down active income.
I think 75/25 active/passive is a good split for beginners, but over time you’ll want to shift your focus more towards passive income.
How much of your day do you spend in reactive vs. proactive mode?
How much of your side hustle do you spend chasing active income streams versus passive income sources?
Take a look at our affiliate marketing training. There we show you exactly how you can build a passive income with affiliate marketing!