You might have heard that the key to building wealth is generating passive income. But what exactly counts as active or passive income, and how do you get started earning one or both?
The simplest definition is that active income comes from your job, while passive comes from investments. Earning money from a career, side gig or business might be traditional, but in today’s hustle culture, generating passive income streams is seen as equally important.
[Related:12 Ways to Build a Passive Income Stream]
“Active income includes salary and hourly wages earned by working, while passive income could be earned by investing in stocks that pay dividends, interest from fixed income investments, rental income from investment properties or other investments that generate proceeds,” says David Weinerman, managing director of the Weinerman Group at Summit Financial in Parsippany, New Jersey.
Read on to learn more about these earning strategies and which is best for you.
What Is Active Income?
According to Andrea Woroch, consumer and money saving expert, active income is easiest understood as income that you put in work to earn.
“Active income is money earned through a business or job. You have to put in a certain amount of work and/or hours to earn active income which could be paid on an hourly basis, annual salary or via business profits,” she says.
What Is Passive Income?
Passive income, on the other hand, doesn’t require the same time commitment as active income, at least after initially setting up the revenue stream.
“Passive income comes from assets that produce income which don’t require any additional time, work or effort in order to make money,” Woroch says.
What Kind of Income Should You Be Earning?
Clearly, passive income sounds like the preferred way to earn money — you do far less work for the same result. But according to experts, it’s not always that simple.
“Most people would assume passive is the better of the two but that depends on which stage of your financial journey you are in. If you are younger, active income is going to do you more good because you are still growing your assets. You need money in order to earn passive income,” says Joe Wilson, a certified financial planner with Preferred Wealth Management in Atlanta.
He adds that because passive income generally comes from investments, it also comes with more risk, while a salary is more consistent.
Still, the work-life balance you can unlock by relying on passive income to cover some of your budget makes it an attractive pursuit.
[READ: Best Jobs for Work-Life Balance.]
“If it was an option of one or the other, from a work-life balance perspective, passive income may be better since it would provide someone with more flexibility and leisure time,” Weinerman says.
“A combination would be best for one looking to maximize their income and grow wealth, then ideally having passive income to replace active income (in retirement),” he adds.
Tips for Increasing Your Passive Income
Even if it is not your main source of income, generating some degree of passive income can boost your emergency savings and other financial goals.
[READ: How Much Should You Save In an Emergency Fund?]
Even if you don’t have a significant asset — like a home — there are ways even a small investment can lead to a return.
“Opening a high-yield online savings account is a great way to make a little extra passive income fast and easy,” Woroch says. If you have cash that you don’t need for expenses or a near-term goal, consider investing in the stock market. You might need less money than you think to get started, Woroch says.
It’s also as important to address your current budget and see if you are allocating your active income in the best way to build wealth.
“The reality is, you need to have active income in order to invest to create passive income, but learning how to spend less than you earn can help you save up to create passive income,” Woroch says.
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Active vs. Passive Income originally appeared on usnews.com
Update 08/27/24: This story was previously published at an earlier date and has been updated with new information.
