Active and passive income (What is) – Investors Planet
The trend towards capital formation through investment is increasingly gaining popularity. With a steady income, there is an opportunity for adequate cost planning. However, you can go into accumulation if you have not only active, but also passive income. Knowing the specifics of these concepts, it is easier to form capital.
The concept of active and passive income
Before proceeding to understanding how to take advantage of both options for increasing capital, it is worth separately understanding what active and passive income are.
Active is a type of income in which the owner of the capital acts as a permanent participant in transactions. He must constantly perform work, deliver goods or provide services. From the moment of termination of this function, the receipt of earnings stops.
Passive income differs from sources of funds. The owner of the capital does not directly participate in his earnings.
Here it is worth explaining separately that property, labor resources are an asset from the point of view of the economy. At the same time, real estate can also act as a liability (when a citizen does not use an apartment, but at the same time pays utility bills and taxes on it). Monetary funds are mainly regarded by the economy as a liability, as they tend to lose value against the background of inflation and other economic fluctuations.
Advantages of active and passive income
The main advantages of active earnings include:
- Active earnings are noticeably easier than passive. It is most common among society. It can include non-specialized work, performing simple tasks on the Internet, selling likes, comments. However, a sufficient number of additional skills are required for the correct application of passive income.
- No initial investment is required to start active earnings. You can just get a job and start earning. The exception is the option in which a new business is opened. It is possible to purchase equipment or take advanced training courses.
- At the initial stages of work, active earnings have a much higher indicator of benefits for a person than with the passive option.
The main disadvantage of active methods is called dependence on someone else’s capital and the depletion of their own forces. So, if a person is fired from their main job, the income will stop. At the same time, it is not always possible to find a new job quickly. In addition, it takes time to adapt to a new team, work tasks. Only after three or four months, the financial issue will stabilize.
If a person works two or three jobs at the same time, emotional burnout and physical exhaustion occur. Such a workaholic will not be able to maintain an optimal level of efficiency for a long time, which will eventually lead to a decrease in activity.
The advantages of passive income include:
- Minimum labor costs, time. You can spend your free time on yourself or on increasing your final capital. It is enough to create a project and skim the cream off it. In the case of production, there is a need to automate this process.
- The number of sources of passive income is not limited, as in the case of active. You can immediately work in a large number of spheres and industries.
In cases with investments, no special control over the processes is required.
- They continue to work for the investor even at the moment of complete lack of attention to them.
The main disadvantage is the high input threshold. Since it is necessary to invest existing capital in order to increase capital, therefore, you still need to earn money for this input. After the formation of primary capital, there is a risk of loss, which is also considered a big disadvantage. A person invests assets, which is the main risk criterion. They can burn out. For peace of mind, experts recommend using only available funds for passive income. Otherwise, their loss will be too painful.
Specialists in passive income are mostly self-taught. Investments in self-education have not been canceled either.
Differences between active and passive income
There are five main differences between active and passive income:
- Invested efforts
It is labor that determines the level of active income. The main criterion of passive income is the size of the invested capital and the duration of the turnover of the latter. Even if the main job is relatively easy for a particular citizen, it takes a lot of time, which leads to the limitation of this resource. Passive income does not require such time and labor costs.
- Amount of capital
As mentioned earlier, passive income is based on the capital level. To obtain passive income, a sufficiently large amount of initial capital is required. It is better for beginners to first devote time to active income with a likely reorganization in the future into passive sources. So, even if we take the simplest option of a liability – a bank deposit, the more invested in it, the larger the amount of funds will be received at the end of the financial period.
Or in another way – expansion. This term refers to the breadth of the likely number of sources of income. If in the active version we are talking about one or three sources, then in the passive version it can be five or ten. It all depends on the possibilities of capital girth.
- Possible risks
The main risk is the loss of income and the value of investments. In this matter, active risk is considered the most reliable.
- Financial condition
Even if a person’s salary has a sufficiently high level, he retains the possibility of losing it. With the passive option, there is a risk of losing with inflation. Therefore, it is worth supplementing active income with passive income. It is in combination that they will give the greatest financial stability to the owner of the capital. This state is achieved through the correct formation of financial development strategies and planning.
Published: 6 October, 2021