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Two kinds of Income

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Sunday, 30 November 2014 - Last Updated on December 2, 2014
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twoWe spend so much time in generating income because we need money to sustain our daily lives and to fund our future need such as the coming retirement, kids’ education and many others.  Unknown to many, there are many ways to generate income. Majority only knows one way, to work hard for it. That is the only way employees know and that way will guarantee that they do not become rich. The rich knows another way of making money and they do it the smart way. The way they do will make the rich richer. How our wealth grows depends on how we earn it and how we make it work.

As can be concluded from the above, we can say there are two kinds of income, active income (income generated by employees and workers) and passive income (income generated by the rich). Let us see how these two differs.

Active income

Active income is defined as income generated by working for it. Your salary made id dependent on the time spent working for somebody else whether employed on hourly basis or working as a contractor. Active income may also include the self-employed people because their income is proportional to the effort they exert and the time they invest. Without these two components, they will not receive any income. In short, people who have active income trade their time and effort for money.

Some activities that generate earned income include:

  • Having a job
  • Having a small business that owns you
  • Consulting job
  • Gambling
  • Any other activity that earns based on time/effort spent

While active income is the most common method for making money, it is obviously the least stable for the simple reason that once you stop working, you stop making money. And because the amount of income made is directly proportional to the time and effort spent, it’s very difficult for someone to make more income without working longer hours. At the same time, it is also hard to invest more time learning a new skill as time constraint is his main challenge. People under this category do not have the power to leverage and create more time because they are alone. Nobody, as employees, can work for more than 24 hours. And no employee can have 25 hours a day. Worse, active income is taxed at a higher rate than any other type of income.

The only advantage of having an active income is that you generally don’t need to shell out a big startup capital. Time is the only capital you have. That explains why most people rely on active income at the start of their career.  However, active income is a sure-fire way to start your investing career, as it will allow you to save up cash that will help you generate the other type of income, assuming you have the discipline to save up.

Passive income

Passive income is the income generated from leveraging on the time and effort of others. This is the most stable form of income as the person does not need time and effort to earn. His presence is not required in making money. In fact, he can wield control even from afar. This type of income is available to businessmen (who have a business system), network marketers, and investors. Under this type, these people earn from the efforts and time of others. Businessmen can have more than 24 hours a day. As an example, if he has 30 employees working under him, literally he has 240 working hours per day and he can accomplish more tasks than by doing all the tasks by himself. Passive income can also come from investments in assets that will generate more money for him. By having passive income, a person can trade his money to buy him more time to think of ways to increase his passive income.

Some activities that generate passive income include:

  • Rental Income from Real Estate, vehicles, books etc.
  • Business Income from a business with a system like that of McDonalds, Jollibee, etc.
  • Creating and Selling Intellectual Property — Books, Patents, Internet Content, etc.
  • Legitimate Multi-Level Marketing where one earns over ride from the effort of people under the system

There are some major benefits in having a passive income as enumerated below;

  • Passive income is generally a recurring income; once a good investment is made, the income will continue to come in regularly even for a lifetime with little additional work from This means that you can essentially “retire” and still continue to grow your net worth. A perfect example is Henry Sy of the SM conglomerate.
  • Investments that generate passive income often allow the owners active control over their investment instrument. For example, if you are an owner of apartments for rent, or even a corporation, you have the full authority in the day-to-day operations that would positively affect the success of your investment
  • Passive income investments often allow for the most advantageous tax treatment because investments are taxed the least. Corporations can use profits to invest in other investment instruments like real estate, or other businesses, and can use these for tax deduction Another thing is that real estate can be flipped for larger real estate property, where taxes can be deferred indefinitely
  • Since it is generally possible to accurately project the return with the lowest risk, these investments can often be funded by leveraging on good debt. As an example, a good business plan can attract angel funding or venture capital money from different interested investors. Real estate on the other hand, can often be acquired with a small down payment of 20% or less in some cases, with the majority from borrowed

If you do not have the expertise to do the above, you may still create passive income by investing your hard-earned money in paper assets. This kind of income is another passive income but more of what we call the portfolio income. This is also an income where you just leverage on other people’s expertise to make your money grow as you continue doing your routine activity. Whatever type of income you are in right now, just focus on ways to create passive income via investment and definitely wealth will just be around the corner.

 

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Photo by Pixabay. Public Domain.

 

Edmund Lao (43 Posts)


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