Income makes the world go round, especially as the average person needs about $57,200 yearly to make a decent living. The problem is that while some people are lucky enough to have a good salary, not everyone has the same benefits. With rising inflation, medium salaries are no longer enough to cover all expenses.
This is why passive income has gained a lot of popularity nowadays. Having an extra source of money can help you fill in the blanks, adding to an even more comfortable lifestyle. In this article, we will talk about active and passive income so you can effectively balance your cash flow.
What Is Active Income?
This is the type of revenue where you must be actively involved in a job to earn cash. It is often linked to your career or job, the gains coming from your daily services. The main advantage of this kind of income is that you get predictable and controllable pay by the end of your efforts. You decide your wage and how many hours you are willing to work to get your money.
Active income also comes with a few disadvantages, the main one being that you need to work for it. You may lose your salary if a certain life event prevents you from doing your job. Most of the time, active income is also not enough, barely keeping workers from paycheck to paycheck.
What Is Passive Income?
You earn this revenue type without directly involving yourself in the process. This is often brought by investments, capital gains, royalties, interest, or renting out property. It offers you an extra source of income without requiring full involvement, bringing the potential for financial security and protecting you against inflation.
However, the disadvantage of this type of income is that you don’t have much control over your returns. It also may require a high initial investment, which is why you may not be able to gain passive income unless you have an active one to rely on.
How to Earn Active Income
Active income comes in different forms, depending on your job. Here are some common examples of it:
1. Hourly Wages
This is one of the most popular ways to earn active income. As the name suggests, you are paid by the hour and can gain even more if you clock overtime.
2. Salary
You are entitled to this fixed sum after offering your service for a specific amount of time. For instance, you may be trading 160 hours of your time (i.e., 20 working days), which can earn you a monthly salary.
3. Commissions
Depending on your job, commissions can also be a source of active income, giving you an “extra” for every service. As an example, you may be a real estate agent who just made a $1m sale. If you take a 3% commission, your profit will be about $30,000.
Top Tips for Earning Passive Income
Balancing your active income with the passive type can be beneficial regardless of your earnings. Here are a few methods to boost your revenue:
1. Invest
Investing is one of the most popular ways to earn passive income. By keeping a diversified portfolio, you can gain income from stocks and bonds without sacrificing your free hours. You just need to choose your investments right.
2. Share Your Bandwidth
Nowadays, most people have more Internet than they can use, which goes to waste at the end of every month. If this is your case, using bandwidth-sharing apps for passive income would be a good idea. These passive income ideas can help you share the excess with others, earning you a commission for it.
3. Rent Out
Do you own an extra property that you are not using? Perhaps you inherited a home from your parents or have an annex to your house that you are no longer using. Renting it out can help bring more cash from the tenants, potentially increasing your finances.
How to Balance Both Active and Passive Income?
To save money and keep yourself protected in case of layoffs, you must maintain a good balance between these two types of revenues. The higher your passive income, the better.
A good idea would be to take what excess money you have from your active revenue and use it for your investments.
Similarly, if your investments earn more money, you should invest it further if your finances can handle it. There’s no general rule as to how much passive income you should earn, but a good practice would be to have money coming from both directions.
The Bottom Line
Passive and active incomes can help you have a comfortable lifestyle. Active revenue is usually reliable and can cover living expenses, whereas passive income can bring more financial security. To make life easier, you should learn how to balance them efficiently.