What Makes Passive Income Different?
Passive
income is different because you can earn it independently of the amount of time
you spend working — it’s not contingent on the hours you devote to it.
Essentially, you take an initial action to start the income stream, and then,
without further effort on your part, what you did can continue to generate
earnings in a hands-off way.
Active
income is based on what you do on a regular basis to earn income, such as going
to your job each day. There are more limitations on active income because it’s
dependent on the amount of time you’re actively working to earn it. Aside from
it being illegal, even the most capable employee can’t work more than 24 hours
per day or seven days per week. And that’s especially true if the job is
physically taxing; people tend to become less productive the longer they work.
Likewise, the most effective entrepreneur can’t sell to more customers than
there are in the market. Income that’s based on current actions has plenty of
logistical limitations like these.
Passive
income lacks these limitations. A passive income stream generates income
constantly without wearing you out. Here’s an example. Say you have a
brick-and-mortar store where you sell home decor. You’ll likely only be able to
reach customers who can physically come into the store during the hours that
you’re open. This is active income because it requires you to be present and
working in the store to earn money.
Now,
say that you sell digital downloads online. Your website is accessible 24/7 to
shoppers from around the world, and their purchases automatically download once
your ecommerce website processes the shoppers’ payments. You don’t have to be
present to process any transactions or run a store, so this form of earning
represents passive income — there are no time or material constraints on the
amount of money you stand to earn. Active income is often limited to the number
of hours you work, but passive income can earn you as much (or as little) money
as a product or service sells.
Although
passive income may be considered less hassle than full-time employment, earning
passive income isn’t always easy — and the scenario described above isn’t the
only example of what a passive income stream might look like. Many effective
forms of earning passive income require you to have money
to invest upfront or spend years cultivating and maintaining an
online presence.
What Are the Benefits
of Passive Income?
Personal
finance experts often tout the importance of having multiple income streams to
create financial stability. That’s one advantage of creating a source of
passive income to use in addition to the active income from your job — or to
supplement multiple passive income streams you’ve developed.
For
example, if you work one job, you have one stream of income. If you’re laid off
from that job, it’s no longer a source of income, and you’ll want to find
another as you earn unemployment benefits. Even if you have two jobs that lead
to two income streams, you can still lose both if you’re involved in an
accident and are no longer able to work. Passive income is an attractive way of
earning because it doesn’t depend on your current ability to work. When you
have a consistent stream of passive income, you’re less likely to experience
financial hardship if you lose your active stream of income.
