In the past few decades (or even centuries), when we talk about how to earn money, offering our time and effort to some individuals or corporations. In other words, we are being employed by other people to trade our time and effort (talent and services) with money. This way of earning is called active income because we are actively involved in the system in order to earn money.
But, did you know that there is a better way of earning money? This one is not being taught in schools (how I wish I learned this during my childhood) but this is a much better way to achieve time and financial freedom. It’s called passive income.
On this article, I will discuss to you the difference between these two types of income and why passive income is a better way to go. Read along and please share the value to others as well.
What is Active Income?
By definition, active income is an income earned as a direct result of a specific effort. Examples of active income are salary, hourly wages, fees, and commissions. Other term for active income is linear income which means that the amount of money you earn is directly proportional to the amount of effort and time you offer.
This means that active income is a no-work-no-pay scheme. And what I realize about active income is since we are earning money in exchange of our time and effort, and our time and effort has absolute limit – we only have 24 hours each day and effort can be limited by our energy which also declines as we age – therefore the amount of money we earn also is, guess what, limited!
According to Robert Kiyosaki’s revolutionary book Rich Dad Poor Dad, on his ESBI (Employee – Self-employed – Business – Investment) Cash Flow Quadrant, 95% of the world’s population is earning under active income. And only 5% of the world’s wealth is circulating on this side of the quadrant.
What is Passive Income?
Passive income, on the other hand, is an income derived from activities which does not require your active or direct involvement. These may be from investments or work that you have done before that continues to pay dividends up until present and will continue in the future. This supports the idea of “making money work for you” or “making money while you sleep”.
Please do not misinterpret that passive income does not require hard work at all. In fact, generating passive income requires more work than a regular day job. But, the big difference is that the amount of money you can earn in passive income is unlimited in contrary to active income which is, as mentioned above, limited!
Some ways to earn passive income are buying and selling real estates, investing in “ownership” of public companies in stock market, investing in government bonds, and other types of paper assets. Passive income may also include royalties from a book you wrote or song/music you composed, or online course you create and many more.
Additionally, only 5% of the world’s population is holding 95% of world’s total wealth! Wow! That must be one great reason for us to be part of the right side of the quadrant.
Let's Compare.
In summary, you can see the difference between active income and passive income in the table below. Please take note that this may not of course apply 100% to all types of active income. These are just pertaining, but not limited or focused, generally to blue and white collar jobs.
Active Income.
- Income has its limits.
- You don’t have time freedom.
- You work for your boss.
- Company uses your knowledge for its own benefits.
- No work, no pay.
- Low probability to achieve one’s dreams.
Passive Income.
- Income has no limit – YOU are the limit.
- You’ll have time flexibility.
- You are your own boss.
- Company teaches you everything you need for your own benefit.
- No work, YES pay!
- High probability to achieve one’s dreams.
How Can I Start Making Passive Income?
What’s good about having a passive income is that it can initially be done part time. So if you are an employee right now, you still have the chance to start to build your passive income regardless of your current status.
You are probably asking now, “what if I don’t have money to invest in the first place?”. Well, you probably heard about the thing called direct selling, or network marketing, or multi-level marketing (MLM). This is a great opportunity to build passive income because it does not require
large amount of investment in terms of money.In fact, you can start with whatever you can afford to invest. Some are even able to start their MLM business for free and yet doing the business great. And if you really do your research about the industry, it is currently the highest income generating industry as of the moment with about $183 billion combined annual sales! Next largest industry is the video gaming industry (during pandemic) which is about $91 billion – less than half of the direct selling industry. Please see table below taken from What Is Network Marketing by
Also, unlike in employment in which you income is often directly proportional to your degree of education and level of experience, network marketing companies does not require any! Why? Because they are very much willing to teach you practically everything you need to know about the business and it’s for free!
All you need to have is the willingness to learn and be willing to become a better you, and create your new identity. And that’s what I love about network marketing – becoming a better person in all aspects of life.
Start with Why.
We all have our own reasons of earning money. From paying your bills, to sending your children to school, to buying the clothes or budgets that you want, or having your own house or car, or travelling around the world, or probably offering charitable help to people who needs any kind of help in our community.
Many people fail in making money because they don’t even know WHY the want to earn money in the first place! starting with your WHY would be a great way to create your new identity. Going back to the golden circle principle, your WHY doesn’t just mean to earn a lot of money. Earning money is just the result. Your WHY means your purpose, your reason for getting up everyday, your belief and values. And if your WHY is clear, it will be a lot easier to accomplish your WHAT – earning money. So what is your WHY?
Road to Financial Freedom
According to Robert Kiyosaki, you will know that you are financially free if your expenses for your current lifestyle can be covered 100% by your money earned from passive income. Going back to the ESBI quadrant above, this statement actually makes sense because according to Robert Kiyosaki, the left side of the quadrant is the poor side and the right side is the rich side. We surely want to be on the right side of the quadrant, aren’t we?
As Warren Buffet once said, “If you don’t find a way to make money while you sleep, you will work until you die!”
And the only way to do that is to generate passive income as early as NOW! If they can do it, we also can do it! The only thing that is limiting us is ourselves! It’s just a matter of decision, commitment, and taking action. It also pays to find a great support group that will help you and teach you the proper way of doing things. More importantly, this group of like-minded people will share to you the right mindset and attitude during the process.
And lastly, be willing to change. Because if you will not change, nothing will change. Success will not be reaped by the present YOU. Success will be reaped by the NEW YOU! It’s a life long process. The key is to enjoy and trust that process. It will not be easy, but it will all be worth it!
- https://www.metrobank.com.ph/articles/learn/active-vs-passive-income-basics
- https://corporatefinanceinstitute.com/resources/uncategorized/passive-income/
- https://en.wikipedia.org/wiki/Passive_income
- https://www.richdad.com/the-cashflow-quadrant
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