Principle 5: Passive Income vs Active Income
Note: This article is a part of series called “Six Principles to Achieve Financial Freedom”. I’d strongly suggest starting from Principal 1 it to understand it better. Ignore if not applicable.
The difference between the rich and the poor is growing at a much faster pace today than at any other time in history. With the invention of the Internet, we can virtually become millionaires from anywhere in the world, even from the comfort of our home. However, the only people who are able to maintain the real wealth over the period of time are the ones who understand the Principle of Passive Income vs Active Income.
Most of us are given the same chances in today’s world, but the majority of us see no opportunities, while at the same time the rich people (or someone who is going to become rich) see multiple. Hence, in order to work towards a better living, we must first understand this principle better of passive income vs active income.
Active income is created by utilizing your prime time – 9 am to 5 pm – full time or part time. You trade 8 to 12 hours of your time to get the salary which is called the active income. It’s called active income because you have to be active and show your face to your boss every day to get it. Active income stops the moment you stop putting your time and efforts into your full time job.
In simple terms- Active income is selling your time. Think all the salaried job employees, labors, doctors, lawyers, engineers or even businessmen who work full day in their business.
Passive income simply means earning money with little or no active involvement in the process. Even if you’re sick, retired or not working, you still get the money without being forced to sell your time. It happens when you create or buy an asset that offers value to the people and can put money in your pocket even when you’re not present.
In simple terms, buying an asset such as a property that pays rent every month and the actual value of property also increases. Or by creating an asset such as designing a new product, patenting it, creating a new software or an App, writing a book or by building an “online real estate property” by attracting visitors to your online property (which many nowadays do through Youtube, Insta, TikTok).
This property can then earn ‘advertisement’ income (like rent). The best part of passive income is that it has no limit. Passive income can be created using your spare time and it can even beat your active income. Unlike Active income where you can only give 9 hours a day, or even if you do over time, you cannot go beyond 24 hours in a day.
Alternatively, if you’ve saved money then you can invest it in Mutual Funds or good companies that you trust and that money is going to make money for you. You can enjoy the power of compounding when you invest your money and it can make more money with little or no involvement.
THE REAL DIFFERENCE AND WHY IT MATTERS
If you’re doing a job (selling your time) and you truly love that job then there’s no need to worry. Because you’re spending whole day at work doing something you love and enjoy and you’re getting paid for it. Nothing can be better than this.
However, if you’re working just because you want money then you need to think and ask yourself a question. Is there a better way of making money? The answer is “Yes”. The answer will always be Yes. It’s because you can always gain more knowledge, expertise on any given subject. I learnt building web site for free from the internet and now I’m following my passion for sharing the knowledge here.
Most people only know about the first type of income. They work hard for money, instead of having their money work for them; they trade their time for money. The more they work for active income, the more they are taxed and then they spend that money immediately before the next salary day. Their expenses tend to increase in proportion to their salaries.
THE RAT RACE
They are in (what the rich dad calls them) “Rat Race”. The day they stop working, is the day they will fail to make an income or a living. Unless they rely on their son, relative or pension, which is a foolish, sheep-thing to do.
“If you don’t find a way to make money while you sleep, you will work until you die.”Warren Buffet
That is why the rich work hard for active income only at first and then invest that money into portfolio and passive income. If someone don’t do this, they’re not rich. You can read hundreds of stories of people becoming overnight crorepati’s and millionaire and losing all of it in few years.
A quote from Rich Dad, Poor Dad I believe to be in order:
“The key to becoming wealthy is the ability to convert ordinary income into passive income or portfolio income as quickly as possible.“Robert Kiyosaki
Many people think of working hard throughout their lives and then plan to enjoy after their retirement at the age of 65. However, let’s read some powerful words by Seneca – one of the greatest scholars of all time, who lived 2000 years ago:-
“You will hear many people saying: ‘When I am fifty I shall retire into leisure; when I am sixty I shall give up public duties.’ And what guarantee do you have of a longer life? Who will allow your course to proceed as you arrange it? Aren’t you ashamed to keep for yourself just the remnants of your life, and to devote to wisdom only that time which cannot be spent on any business? How late it is to begin really to live just when life must end! How stupid to forget our mortality, and put off sensible plans to our fiftieth and sixtieth years, aiming to begin life from a point at which few have arrived!”
Now that we understand the difference between a Passive Income vs Active Income. We know the only key to become financially free and wealthy is by creating passive income source. It is definitely not going to be an easy task. If it was easy, anyone would do it. Hence if you want to achieve something you never had, you’ll have to do something you never did.
All the riches reach to the top by thinking and working hard towards that idea. Hence if you want to be one of them, you must have at least more than 1 source of income. An average millionaire have 7 sources of income. In the last and final principal, I’m going to talk about what a true asset is and how to acquire it for financial freedom.