Passive vs. Active Income – Addressing the Myths

Written by: Anna Niemira

Late in the evening, while comfortably nestled in my armchair, I flip through TV channels.  Hundreds of programs, movies, and shows – some of which I’ve already seen, some I don’t want to waste my time on. Benjamin Franklin’s famous words, “time is money”, ring in my head.  One click on my remote control and the TV is off.  Silence. Instead of passively spending my leisure time, I decide to actively invest this time to focus on my studies and ideas, to build and grow my income.

What is income?

There are detailed definitions of income, typically for us to understand the concept for tax purposes.  More simply, we can define income as what we earn; the money that we, as individuals, receive in exchange for our work. We have disposable income, the money left in our pockets after paying our taxes, spending it on our basic necessities such as food, rent or mortgage payments, utilities, car payments, and other transportation.  If we earn enough to have a surplus, after paying all of our bills, we end up with our discretionary income that we can save or spend on what our heart desires – restaurants, beauty salons, vacations, club memberships, shopping, and many other activities or products we may be interested in. 

With few exceptions, we all want to have as high an income as possible to guarantee ourselves as comfortable and as pleasurable a life as we can imagine. Who doesn’t dream of a nicer place to live, a more comfortable car to drive, or an exotic spot for our next vacation?

Some of us focus only on active income, some on passive income, and yet, some successfully mix both sources of income together.

What is active income?

It might be our proverbial 9-to-5 job, producing and selling some goods, or providing services that we earn our income through with salary or wages. When we receive a paycheck from our employer for work we have done, whether we are engaged on a permanent, contract, or hourly terms, we receive active income. When we work based on our performance, with our remuneration being a commission, we receive active income.  The same pertains to tips we receive from clients if we are employed in the service sector. 

Often, we are so focused on increasing our active income, working over-time, or having two jobs that in the end, we have no time for people and things we love and are passionate about. This is when we start to question our actively earned income and start thinking of other possibilities, reviewing the options for passive cash flow.

What is passive income?

Here, the more unknown and the mysterious begins.  When we think of passive income, we imagine people having a lot of leisure time on their hands, spending their time on yachts, beautiful beaches in jet-set destinations having chilled piña coladas served to them on a silver platter, often pointing out how lucky they are.  Unless one is born with a silver spoon in their mouth or has the right stars shining from above to win the lottery, with no exception, one has to earn a living.

Passive income might be the money we receive from dividends from our investment, rental property, or from work we have done and completed in the past, which keeps giving without our constant and continuous involvement. This means that in order to be a recipient of passive income, we have given an upfront investment of our time, money, and creativity to reap the fruits of our initial labor or capital down the road.

We might have saved as much as possible on our discretionary income and instead of spending money on our daily pleasures, we kept investing in the stock market or a real estate portfolio, building it gradually while investing our spare time in learning about the industries, economic cycles, market performance, and product evaluation. Much like Warren Buffett and other great investors in the past, we turned our savings and our time on research to find a profitable investment and used our knowledge about the market and economy to establish a sizable investment.

There is also the option of monetizing our hobbies, talents, and passions.  No wonder social media and e-commerce platforms have seen exponential growth and interest in recent years. There has been an explosion of YouTube videos, self-published books, and the selling of creative digital ideas, which can generate a passive income with every click.  Yet, it is usually not enough to create content and then expect a miraculous turnaround.  It is about investing time in researching economic conditions, consumers’ needs, as well as wants and desires so as to fit into a certain niche industry, and learning about traditional and modern marketing tools to introduce creative products, maintain public interest, and eventually generate revenue.  It is about delivering timeless content to users, readers, and viewers to enjoy and keep buying our products for us to receive a passive income.

Back to basics

It is not easy to define creative products, which might not always stand the test of time depending on the era, as well as current trends and fashions.  However, by going back to the basics and giving some historical perspective, we can analyze what current generations are still interested in despite the passage of time.  Beautiful photos, prints, and engaging stories about human nature, life, and love, are just a few examples of which the majority of us are very interested in no matter our age or generation.  We still choose for our children the classic stories of Hans Christian Andersen, The Tale of Peter Rabbit by Beatrix Potter, the Brothers Grimm fairy tales, or books by Dr. Seuss and, of course, J.K. Rowling’s Harry Potter.  We return to the great reads of Jane Austen, Agatha Christie, Sir Arthur Conan Doyle, or Ian Fleming’s James Bond adventures, just to name a few. These are still as popular in print as in movie productions, for which the authors’ trusts, cast and crew generate a sizeable passive income with each of our views.

YouTube represents a challenge to create something of lasting value.  Many videos fit into the “here and now” model.  Despite a sudden spike of views providing temporary advertising income for one or two downloads, there has been a struggle to create continuous returns, unless there are “how-to” or general topics and subjects which viewers can keep watching years from now. There are many historical and geographical publications which garner a lot of attention, with millions of views from both a returning and new audience, giving the creators, subject matter experts, and other involved parties a repeating passive income for years to come.

“Some people want it to happen. Some wish it to happen. Others make it happen.” – Michael Jordan

No more wishful thinking

We need to start creating instead of remaining in a wishful state of wanting things to happen.  Passive income comes as a by-product of our active involvement when we invest our time, our creativity, our research and our resources into projects with income-earning potential. It is about starting from understanding yourself and your passions, and then cultivating your hobbies, while actively learning the nuts and bolts of presentation and marketing created products. 

It is about turning off your TV and starting to actively invest in your passively spent time. It is never too late. As an ancient Chinese proverb tells us: “ The best time to plant a tree was 20 years ago.  The second best time is today”. Invest in your talents and your skills. Have the courage to create. Allow yourself to build your passive income and give yourself a chance for that piña colada served to you on a silver platter.

“Success is dependent on effort.” – Sophocles