Many articles cover different ways of saving money as well as adopting a proper attitude towards saving money and managing your personal finances, without really venturing into the realm of earning money. Today I want to go over three different types of income (active, passive, and semi-passive), how they all work, and how you can utilize each type to continually increase your net worth.
What is Active Income
Active income is the main source of income for the vast majority of people. It requires a direct exchange of time for money. The more you work, the more money you will make.
An example of active income would be the typical salaried worker. They work 40 hours a week in exchange for a given amount of money.
Pros of Active Income
- You know exactly what you will get in return for your time
- The time you spend working directly corresponds with how much you will make
- You see results immediately
Cons of Active Income
- You have less free time for yourself
- The time you spend working directly corresponds to how much you will make
In order to increase your active income you have to do one of two things.
- Work more
- Get a promotion or a raise
For the person whose goal is financial freedom, working more is not an appealing option, and most professions are limited by the market when it comes to increases in salary. This makes active income a great candidate for secure and consistent cash flow which can be supplemented with other types of income.
What is Passive Income
Many people see passive income as the Holy Grail to gaining wealth. It initially takes work to get started, but will continue making you money even when you aren't working. This is what makes it so appealing.
An example is selling stock photography or graphics online. Once you do the work to get the files posted, you can continue earning money without doing a thing.
One of the most common problems people have with this type of income is that they will only get to a certain point of earning a small amount of money, only to lose interest and pursue something else. The trick to passive income is to try a few things out and see what works, then pour your time into a select group of ideas to build them up. Long term cultivation can yield a large amount of essentially work-free money.
Pros of Passive Income
- You make money while you sleep
- It frees up your time to pursue other money making ventures
- It can provide a long lasting source of income
Cons of Passive Income
- You usually don't make a lot of money all at once
- It can sometimes take a long term commitment
- It may eventually stop earning you money
By building up multiple income streams, you can focus your efforts on improving the ones that work best, while eliminating ones with a low return. As you continue to increase your passive income, you will eventually reach the point where you can pay for all of your expenses without the need for another job. This is part of my main goal and can be attained more easily than you might think. Notice I said "attained more easily" and not just "easily attained". Passive income still takes hard work and dedication, but the long term results are superior to active income.
What is Semi-Passive Income
Semi-passive income is a combination of both active and passive income. Semi-passive income will continue to make money when you aren't working, but it does require a certain degree of maintenance or management.
Owning your own company is an example of semi-passive income. Your business will continue to earn money without your presence, but usually requires you to check in and make management decisions along the way. The more you put into it, the greater the potential for earning becomes.
Another quick example of semi-passive income would be acting as a landlord. You make money every month from the rent payments, but you still have to check in frequently to ensure everything is as it should be, as well as taking care of any potential problems with the property or tenants. It is partially a long term investment as well because you earn money monthly from it and expect it to appreciate in value over the years.
Pros of Semi-Passive Income
- If you own a business, there is large potential for growth because your employees are actively growing your company
- It frees up time for other endeavors
- You can sell a company or house at any time
Cons of Semi-Passive Income
- It requires more responsibility than standard passive income
- There is a certain degree of management and maintenance that is required
Semi-passive income is so tantalizing because it can earn you money without work, but if you spend some extra time with it, you will begin to see greater returns.
The Trick to Earning More Money
Find ways to make money using all three types of income and then continually analyze your progress and focus only on the highest performers.
Oftentimes, having an active income job and pursuing different passive income ideas is the best way to go, and is what many people strive for. Multiple sources of income protect you from the unexpected and also hold the potential to maximizing your earning ability. Once you find a way to earn enough passive income, you will have the choice of working only when and if you want to.
How To Start Earning Multiple Types Of Income
Most people already have monthly expenses and work an 8-5 job, so they feel that the only way out of that job is to get rid of everything they have. The truth is that while it is a good idea to start over from scratch if you have the means to, you don't have to eliminate your monthly expenses to get ahead.
The old adage, "Slow and steady wins the race", portrays the attitude that is required when you begin considering different income options. Find one idea and work with it. A lot of times, we think of one idea but don't see an immediate return so we move on to something else. This is the one deadly sin of passive income. You have to practice patience before you will begin to see progress.
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