Passive Income vs Active Income: What’s the Difference?
As we got serious about paying off our debt and budgeting, we also decided it was time to look into passive income vs active income. There’s always overtime at work or picking up side gigs, but as the kids (and I) get older, the less I want to work 60+ hours a week.
Call me nuts, right?
I was all about picking up as much work as possible in my youth and rarely ever said no to freelance work. However, looking back, I couldn’t necessarily tell you where that money or time went.
Passive activity ideas are all around us – and we’d be nuts not to pursue them for the sake of our relationships, our sanity, and our financial freedom. It’s a pivotal piece to personal finance and creating financial stability.
So what exactly is passive income? And why do you need it? Here’s the rundown on how passive income ideas can change the way you live – and work:
What Is Active Income?
There are a couple of types of income that you can earn. Active income is any service you provide that makes up your gross income, including wages, tips, or commissions. It’s your 9-5 job or any job where you work hours and receive a paycheck. You actively work for your salary, making it an actively earned income. Easy peasy.
What is Considered Passive Income?
Many people aren’t quite sure of the meaning of passive income vs active income. Passive income is income where you do the work upfront and then reap the benefits of earnings afterward – hopefully for years to come. All the investment is on the front end so that you passively reap the rewards later.
Think of teaching your kids how to do laundry. Sure, it might be a pain, and you might end up with pink socks or bleach splatters at the start, but eventually, they’ll get the hang of it, and you, my friend, will be laundry-free with any luck.
Can you picture it? Never doing laundry again…sounds fantastic, right?
(Ok, sure, that’s an extreme example. I’m 100% sure kids doing all the laundry without your nagging will never happen, but I can dream.):
There are many ways to make passive income, but you’ll need to put something in to get it started no matter what you pick. You’ll need to invest either:
Suppose you have the money to invest, great! You can use it to make more money. Passive income examples that need money to get started are real estate investing (like a quadplex), investment income, purchasing, or starting a business that you hire someone else to run.
Passive income examples that need your time are creating a business that you run yourself, such as a blog or becoming a landlord. While these aren’t 100% hands-free income ideas, you will hopefully still work much less than you would with active income.
Why Do I Need Passive Income?
Creating multiple streams of income is always a great idea. We’ve been in the position of both my husband and I losing our jobs (at different times, thankfully!). Without a passive income stream, it’s a quick way to get sucked into the cycle of living off of credit cards and stacking up debt while you need it least.
Luckily, we were able to make ends meet. But what if you are single? Or one of you is a stay-at-home spouse? Or chronically ill, and all the earnings for the family fall to the other?
Diversifying your income so that it comes from different pools only makes sense. If you’re not able to actively earn, having passive earning can help keep your boat afloat if anything were to happen.
Not to mention, who doesn’t dream of quitting their 9-5 job and traveling the world? Surely it can’t just be me, right?
Passive income sources can help you achieve working fewer hours while still bringing money in. Maybe partial retirement or part-time work is in your plans for the future. If so, this can be the best way to achieve that goal as well.
Tax Benefits of Passive Income
Another reason to build passive income is that you can reinvest the income. In some cases, depending upon the gig, this will give you a tax cut on the income.
Why should you care?
As discussed in Rich Dad, Poor Dad, the more money you can make and reinvest pre-tax, the better. It means you pay less in taxes in the long run.
An example is buying real estate investments. If you purchase a structure for $100,000 and sell it for $150,000, you can then roll those earnings into your next real estate purchase. In doing so, you defer the taxes on those earnings.
You can learn more about how to use your earnings wisely and minimize your taxes with other, better examples in Rich Dad, Poor Dad by Robert T. Kiyosaki.
Passive income vs. active income tax is handled differently. For more specific information about how each can benefit your situation, which types are taxable income, and tax rates, talk to your accountant to find out what makes the most sense for your situation.
Note: Unless you’re one of those folks that like extra paperwork from the Internal Revenue Service, always consult a CPA or lawyer with any questions. This includes questions about complex tax situations like limited partnership, material participation, a real estate investment trust, tax brackets, etc.
Passive Income vs Residual Income
You may have heard the term residual income kicked around and wonder how it’s different. Passive income is income earned after you’ve done the work – like rental income. Residual income is the income that’s left over after you pay your financial obligations, like the mortgage and insurance on your rental properties.
How can I make $1000 a month passive income?
The passive activities you’ll use if you have money will differ much from the ones you’ll use if you don’t. These methods will involve a lot less time to set up and include some business aspects. Make sure that you thoroughly research any of the following methods before you dive in:
Creating an investment portfolio is obvious but an easy way to make passive income. Reinvest your portfolio income back into the stock market, and it will compound and grow exponentially. There is some risk with investing, so make sure you understand how it works and what to invest in.
If you’re interested in learning more about investing, I suggest using a robo investor such as Vanguard or Betterment. If you sign up for Betterment through this link, you can get three months free.
Is rental income passive income? Owning rental real estate is one of the most popular ways to create passive income vs active income. Real estate investing in rental property, office buildings, or even flip houses can earn you big cash when you do your research. If you choose to flip houses, find trustworthy folks to do the work while you front the money.
Purchasing real estate does involve research in finding suitable buildings at the right price. You’ll need to research the area and the market to make sure it’s a solid initial investment. Becoming a real estate investor is one of the passive income streams that does involve more knowledge and research time upfront, but the earnings can also be greater if you know what you’re doing.
As with any passive income vs active income suggestions, don’t forget to talk to your financial advisor about things like capital gains when you decide to sell. It can be a significant factor in how long you choose to keep a real estate investment.
Buy or Invest in a Business
If you have the money, buying a business can be an excellent way to create passive income. Many business owners tend to own multiple companies and hire others to run them.
In this case, you’re the investor and owner, but you have someone else doing the day-to-day tasks. Some examples of businesses you can start or purchase include:
- Vending Machine Business
- Private / passive investors in someone else’s startup
- Laundry Mat
- Game Machines
- Coffee Services
My parents have owned a vending machine business and rentals. Both are very time-consuming, but hiring a manager to run either of them can turn them into passive business opportunities.
Peer lending is an alternative to investing. You can choose what notes to invest in and earn a return as they’re paid back. Peer lending provides both borrowers and active investors the opportunity to bypass banks and big companies for consumer credit. Again, there’s a risk as with any investment, but it can be lucrative to create passive income.
How to Create Passive Income with No Money
Assuming you’re like most of us (me included), you’ll want to know how to create passive income with no money to put down upfront. That means we have to put in the time to create something that will bring earnings.
Without further ado, here are the best passive income examples for those of us without money to invest:
Rent your extra space.
Use your extra bedroom, attic space, garage, or unpaved lot to earn easy passive income. With Neighbor storage, you can easily rent your extra space with vetted renters and little effort! Learn more about how Neighbor storage works here.
Write a book.
Thanks to self-publishing, you can create an ebook and sell it on your website or Amazon. Pick something you’re an expert in, or use those creative writing skills to whip up the next Harry Potter series.
Sell stock photos.
Love to take photos? Sell your stock photos to stock photography websites and earn extra income. Stock photography sites handle all the sales for you; you provide beautiful images. Check out fotolia.com or Adobe Stock photos for more information on getting started.
Sell feet pictures.
Believe it or not, there’s a hot market for feet photos. The best part is that you’re creating a digital product once and can sell it multiple times. You can earn anywhere from $5 – $100+ depending upon the buyer, the platform you’re selling on, and if it’s a custom request. Learn more about selling feet pictures online here.
Airbnb your house or rent a room.
If you have a spare room or are out of town a lot, consider signing up for Airbnb or renting out your extra space. It’s a great way to earn income by using something you already own.
Rent out your possessions.
Any equipment that you own that is expensive and in-demand can be rented out. Think cameras, power tools, and specialty items. Ensure the proper legal and insurance coverage is set up so that the renter will cover any damages.
Wrap your car in advertising.
Similar to wraps seen on local transit, you can get paid for wrapping your car in advertising. Assuming you’re not shy and are ok with putting a wrap on your vehicle, you can check out your options at Carvertise.com.
Think of all the small businesses you frequent every year. From your accountant to your lawn service, you can ask if they’ll give you a discount or money for referring them. You can also get referrals for websites and apps that you use, such as Ibotta, Ebates, or even Paypal. (Learn more by reading my Ibotta review here.)
Don’t forget your work. Talk to HR and see if you can receive a referral fee for finding new talent or clients. Most large companies have guidelines in place, but if you work someplace smaller, don’t be shy about asking for a referral bonus.
Earning Passive Income Online
Thanks to the internet, we have a whole new way to earn passive income. Any skills that you use at work or hobbies can be used to create passive income online. Here are a few ways to get your feet wet:
Start a blog.
Blogs earn income in multiple ways, including ads, affiliate sales, sponsored posts, and products that you create and sell, to name a few. The beauty of a blog is that you get to choose what methods you want to pursue to earn income. Plus, there’s nothing like making money while you sleep and waking up to new sales in the morning!
If you’re interested in learning more, check out my blogger resources page to see what courses, products, and groups I recommend to get started.
Buy a website.
If you don’t want to start a blog or website from scratch, you can use Flippa.com to buy one. It’s an easy way to bypass all of the upfront work that goes into creating a site, and you know that the site is already successful. Flippa.com provides the earning and traffic details of the website, so you know it’s already successful.
Design and sell t-shirts, mugs, and signs.
We all love those super cute t-shirts, mugs, and signs that say things like, “Laundry today, or naked tomorrow.” You can create the designs on sites like CafePress.com or Zazzle.com for free. When someone orders one, they print and ship the shirt, and you get paid.
It sounds like a no-brainer, right? These sites remove the work of creating the product yourself, making it even easier to make passive income. All you have to supply are the witty phrases and designs!
Using Adobe Photoshop, Canva, or PicMonkey, you can create printables that you can sell on sites like Etsy in a PDF format. No worries about figuring out where to get your designs printed or where to keep them until you sell them.
There are a ton of great printable ideas – everything from calendars to checklists to everything in between. Just think about what types of documents you tend to use daily. Some printable ideas are:
- Grocery lists
- Travel checklists
- Weekly cleaning checklists
- Schedules for the school week
- In case of emergency paperwork
- Monthly Budget
- Spring cleaning checklist
- Holiday shopping lists
- Birthday party planning
- And tons more!
Dropship on Amazon.
Dropshipping is a great way to run a shop without stocking products. Just open a Shopify site or an Amazon seller account, and when someone orders from you, the supplier fills the order and ships it to the buyer. There is no stock to worry about, no storage, and no figuring out how to get rid of excess products.
Create a course.
Use your skills from work or favorite hobby to create an online course. Courses can be PDF documents, videos, or a mix. There are many great teaching platforms, including Teachable, Skillshare, and Click4Course.com, to name a few.
By recording your content, it’s evergreen, and you only have to present it once. Then, you can sell it over and over, making it a great passive income idea!
Affiliate marketing is a great way to sell products without having to create them. If your favorite blogger makes a printable that you love, you can market it for a percentage of the sale.
You don’t have to have a website to participate in affiliate marketing. You can use an email list, Pinterest, or other social media to promote the products you want to sell. I love it because I can make sales without creating a product myself since I don’t have the time.
If you’re interested in learning more about affiliate marketing, check out Michelle’s course, Making Sense of Affiliate Marketing. She pulls in over $100,000 a month and has created a fantastic step-by-step guide on the ins and outs of affiliate marketing.
Create a youtube channel and earn ad money.
We all have a zillion videos on our phones of our kids, spouses, or friends doing funny or crazy things. Or, do a video of a skill you use for work or on a hobby you’d be doing anyway. Then, turn that video into money by uploading them to YouTube.
Once you hit enough subscribers and views, you can start to run ads on the videos. You get paid for views of the ads as well as clicks.
Don’t let the idea of passive income intimidate you. It doesn’t all have to be technical and scary money-savvy methods, like investing or purchasing real estate. Be creative and use your skillset to create passive income options with stuff you already know.
Other Passive & Active Income Ideas
Interested in other ways to make money, both active and passive?
- How to Make Money with a Pallet Flipping Business
- 27 Jobs Where You Can Work Alone
- The Ultimate List of Legit Side Hustles
- 50+ Brilliant Ways to Make Money Online
- The Best Passive Income Ideas to Boost Your Income
- How to Make Money on eBay: The Ultimate Guide
- Shortcuts to Finding the Perfect Side Hustle Fast
- The Ultimate List of Best Side Hustles that Aren’t MLMs
- How to Make $1000 a Month Quickly
- Best Paid Focus Groups
- Is Apex Focus Group Legit?
- Legit Online Jobs: 50+ Brilliant Ways to Make Money Now
- 100+ Woodworking Projects to Sell to Earn Extra Money
- Is UpVoice Legit? Earn $175 from this Browser Extension
Have you started working on a passive income idea to build up your savings account? If so, is it one of these or something else? Let me know in the comments below!
A forty-ish web designer/developer by day, a budget & financial fanatic by night. I’m a mom, wife, avid reader, and DIY enthusiast who’s tracking our journey to debt freedom. Read More