When we think of various streams of income, they generally fall into two main categories: Active income and Passive income.
Whilst most people have heard these terms before, many aren’t aware of the differences between the two. Therefore, we’ll explore the differences between both, and the different active and passive income business ideas you can capitalise on to increase your personal wealth.
What is Active Income?
According to Investopedia, active income is referred to as income received from performing a service, and includes income from businesses in which there is material participation. Essentially, it means you are doing something in order to receive that income. Some kind of work or effort has to be exerted.
If you’ve ever earned an hourly wage or a salary, then you’ve earned an active income. It is the most important source of finance for most people and it is also the foundation from which passive income is usually built.
5 Active Income Business Ideas
1. Salary
If you are working a 9 to 5 job making a set salary annually, you are earning an active income. You are essentially trading your skill-set and a year worth of your time in exchange for a set amount of money.
2. Hourly Wage
This form of income is the most common. You can make an hourly wage as a teenager or an adult, whether you’re delivering pizzas part-time or working a full-time office job.
3. Flipping Houses
This idea requires having capital saved up already. It involves buying a house that needs some work done, fixing it up and then selling the house for a profit. Of course, the projected profit gained from selling the house must exceed the costs of doing the improvements for it to be a feasible income stream.
However, this method does pose risks. As shown in the housing bubble crash between 2007 and 2009, you could potentially lose a lot of money if the value of the house depreciates whilst in your possession.
4. Tips
There are countless jobs out there that offer the opportunity to make tips, usually in the service industry. From serving in a restaurant, to delivering furniture, to being a caddy at a golf club, anytime you earn a tip, you are earning an active income.
5. Consulting and Freelance Services
If you have a desired skill-set or expertise in a field that can help companies generate more revenue, you should consider this as an option.
For example, if you are a great videographer, web developer or graphic designer, you could start a freelance business where you offer your services to clients in need of your specific skill-set.
On the same note, if you have a deep understanding and expertise of a field such as digital marketing, business operations or logistics, you can offer consulting services to companies that need help in your area of expertise.
The good thing with this method is that you can set your own hourly wage rates. Many freelancers and consultants make an unbelievable living from this form of active income.
What is Passive Income?
Passive income is money earned on an investment or work completed in the past, that you do not have to put any additional effort into, hence passive. For most people, this is the most ideal money-making scenario.
Especially in times like now with COVID-19, there have been a lot of redundancies in the job market. Good sources of passive income would make being laid off much more manageable.
That is not to say that passive income is easy. Investing in passive income, and setting up an income stream that will generate revenue for years or decades down the line, often requires a huge amount of work in the beginning. But if you are willing to put in the effort upfront, sometimes years of work, then this investment for passive income can pay off in the long run.
So, what are some passive income business ideas? That’s exactly what we’ll be discussing next.
Passive Income Business Ideas
1. Interest and Dividends Earned on Investments
Passive income from investments is the most common and classic method. If you are smart enough to build up a good investment portfolio, you can effectively live off the interest for the rest of your life.
Let’s say you’ve invested $1 million into your retirement portfolio; you could earn $100,000 every year if you had a 10% interest return. That would be an income greater than what 90% of all Americans make. And you wouldn’t have to put in any extra effort into earning it.
With this method, you need capital to invest in the first place, and this is why active income is also important.
2. Rental Income
If you have the money to buy a property or real estate, you can potentially secure years and even decades of passive income in the form of rental payments every month. However, this method is quite risky since it requires a large up-front investment and if you are unable to find a tenant, you will not be receiving any income. Also, the costs and time to maintain a property can, at times, be a lot of work and can feel more like active income.
3. Online Course Sales and Information Products
We’ve discussed why you should start an online business and how to grow it. But when it comes to the best online passive income business ideas, this method is king. Course sales and information products can make you six-figures, even seven-figures a year. In fact, many people do make that much off this passive income stream alone. The key is to have a large online following or audience. This can take years to build of course, but if you have it, you can make tens of thousands of dollars per month.
Websites like Skillshare, Pluralsight and Udemy allow you to create a course that teaches a valuable skill. Users pay to learn this skill and the more users you and your skill can attract, the more money you will make.
4. Affiliate Commissions
Affiliate income is money that you receive as a referral commission when users click through a link on your website to make a purchase. There are thousands of companies that offer affiliate commissions, so the possibilities are endless, but the most known is Amazon with their Amazon Affiliate Program.
You must first sign up for the affiliate program and then share the affiliate link, usually to your website. People visiting your website who click on the link will be taken to the affiliate company’s website, and if they buy something, you will earn a commission.
As with online course sales, this method requires a large online audience, and the first step is to build a good website that generates traffic. The greater the number of people that go to your website, the greater the number of people that will click the link. And the more people that buy something using your link, the more money you will make.
5. Peer-to-Peer Lending
It’s defined as the act of directly lending money to a person or a business entity, where lenders and borrowers are connected through online platforms such as Prosper and Lending Club. The returns generally range from 7% to 12% and there’s not much the investor has to do after initially providing the loan.
Although the peer-to-peer (P2P) lending industry is only a little more than a decade old, it is growing by leaps and bounds every year and these P2P programs have fewer barriers to entry compared to traditional types of investments. For example, investors can fund loans with investments as low as $25. This makes it one of the easiest and most accessible passive income business ideas.
Is Passive Income Better Than Active Income?
In short, yes. By investing in passive income, you are investing in your future. Having an income stream that generates money for you even when you aren’t working is the ideal scenario.
You can fall sleep and be making money whilst you dream, or go on vacation and come back richer. The business ideas mentioned above are some of the best passive income investments you can make and will allow you to free up a lot of time once they are set up.
However, that doesn’t mean active income should be dismissed. Active income is often the foundation from which passive income can be built and will also allow you to earn an income whilst you build those passive income streams. Therefore, it’s still incredibly important.
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