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|Active Income Vs Passive Income by kingfad007(m): 1:38pm On Jul 31, 2012|
Active Income VS Passive Income
The most basic of money management principles is to make sure that you have more money coming in than you have going out. This is vital if you want to find financial success. Of course, this means that you need to have some sort of income. Understanding where your money comes from is important, and you should know the difference between active income and passive income
The clear understanding of these terms (active and passive income) can turn your life around both financially materially..
These two types of incomes influence your life, and the decisions you make every day. An individual whose only source of income is active income may wok all his life and end up being financially secured and not financially free active income and passive income. I dare to say that learning this information can really change the way you spend your time in conducting your business or living your life.
Most people who are employees of business organizations and the people that have small businesses of their own, all earn a particular type of income known as Active Income. While the chairman, directors and shareholders of such businesses and organization earn what is called Passive Income.
Before I explain the difference between Active Income VS Passive Income, I’ll quickly tell you a story.
The Story of Aderele and Adewale
Once upon a time, there were two men named Aderele and Adewale who lived in a village at the bottom of a mountain. The village had a problem, the only way they could have water was from a river at the top of the mountain.
Adewale thought of a business idea. Every morning, he would walk up the mountain, fill buckets with water, carry them all the way down to the village where he would sell the buckets of water to the villagers and he would make lots of money from this idea.
Aderele had a different idea, he thought of building a pipeline that would connect the water at the top of the mountain to the village at the bottom. He would make money by earning a percentage of profits from the pipeline. However this would take time.
Adewale laughed at Aderele’s idea and continued to make lots of money carrying buckets of water. Aderele went away and started his idea.
2 years later, Aderele finished his project and finally built the pipeline. The pipeline was a huge success because it delivered fresh water faster, it was cleaner and it was cheaper than Adewale’s efforts.
However, Adewale’s effort was slacking. Due to constant walking up and down the mountain, the quality of the water became poorer for it was sometime covered in dirt making the water unclean. Adewale’s strategy for beating Aderele was to work harder; he would carry more buckets of water up and down the mountain.
Adewale did this for many years and became weak until he could no longer carry buckets of water up and down the mountain. He could no longer earn any more money. However, Aderele was sitting on a beach while earning money from the pipeline he created many years ago. He never worked again.
Adewale focused on Active Income while Aderele’s focus was on Passive Income.
The moral of the story is, you cannot work 40 hours per week for the rest of your life, there will be a time when you will need to retire or be unable to work due to unexpected circumstances such as health related issues, or being fired from your job .
When we talk about Active Income, we are talking about the type of income we are normally working for.
Here are 2 examples of ways you earn money Actively:
• Your Job i.e salary.
• Your Business i.e profit.
Active Income is the income that accrues to you from any work that you need to be actively involved in order to earn money. It could be graphic design, web design, writing website copy, working as a receptionist, working as a stock trader, working as a lawyer etc.
Whatever you’re doing, you’re actively working for money.
The main reason active income is called “active” is due to the fact that you have to do something. Often, that something’ requires a significant expenditure of time or effort. Even if you make money by sitting in an office all day, you may find that you are still engaged in active income, since you have to go through the process of getting to work, and then you have duties to perform. Even if it isn’t physically strenuous, it might be mentally challenging. Even a tedious job that is not challenging in any way can actually be considered “active”, since it is quite draining to go through the day in such a setting.
The advantage of active income is that it gives you money fast. You work for a week at a job and you get paid for it. It pays your bills which also come in regularly.
Passive Income is all about earning money without you working for it.
Passive income is earned when you put your money to work for you. Many also consider passive income to be income from activities that you do for a short time (the set up) but that require very little else to maintain the income flow. It requires some up front time and effort, but after a while there is no need for you to put in a great deal of time. The money flows in with very little continued effort and oversight on your part.
There are only 5 different ways in which you can earn passive income, they are:
1. Real Estate
2. Paper Investment – Stocks, Fixed Deposit, Treasury Bills
3. Automated Business
4. Intellectual Property – Music, Movies, Book
5. Network Marketing
Active Income Vs Passive Income Conclusion
What I’ve learnt from my previous experience of earning passive income is that it requires upfront work, usually without pay but once you’ve setup your passive income stream, you can leave it forever and get paid forever.
A good idea is that ,while you’re building your passive income structure is to work on your active income but work on your passive income structure part time. That way your part time passive income project will snowball into a big income stream and that is the day when you’re financially free.
Transitioning into a position where passive income provides more of your earnings is a worthy goal; since it will leave you time to do the things that you want to do. Track your income, as you track your spending, and learn what you can do to improve your cash flow.
99.9% of the world’s population starts their income with active income. They then move from active income to passive income. Active income is the income received or earned through active rendering of benefits and meeting of needs in the form of goods and services. Active income stops the day you stop rendering goods and services. Passive income starts flowing for you at that moment. It would not flow if you have not done the necessary things you need to do. Passive income is the income earned when money is the one working for you.
There are three classes of people in this world. They are grouped as regards their potential as follows;
Money Making Potential Managing Money Potential Multiplying Money Potential
• Short term investors 60% 50% 25%
• Self Employed 75% 50% 20%
• Business Owners
• Long term Investors 90% 95% 98%
Where do you fall?
A larger percentage of the populace falls into class 1. If you want to move from active income to passive income, you need to walk your way from class 1 to class 3.
The numbers of years it will take you to class 3 depends on your talent, learning/aptitude, desire and hardwork. I don’t have anything against active income. It is just wrong for anyone to start and end his life on active income. It is also wrong for anyone to depend wholly on active income. It is good to work for the money you earn. It is better to earn from the money that works for you. It is very possible.
What to do
You need to get to work now. If you do this, it is to your own benefit. What you need to do is this
Get a sheet of paper and write out the following headings;
• This is how much income I make now.
• This is how much I save now.
• This is how much I invest now.
After you do this, find the percentage of each from your total earnings. Then write the following heading also;
• This is how much income I want to make in the next 6 – 18 months.
• This is how much I save in the next 6 – 18 months.
• This is how much I invest in the next 6 – 18 months.
The answer you give to the above headings should reflect that you want to move into class 3.
You should now get to work in order to make your dreams a reality. To help you achieve this, I recommend a book titled “Multiple Streams of Income: How to Generate a Lifetime of Unlimited Wealth!” and a business called “Avenues to Wealth”. I have the book and I read it often. I am also part and parcel of the business.
Watch out for Part 2.
For more information on moving from Active income to Passive income, do not hesitate to contact me.
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