Active Income & Passive Income

If you are interested in achieving financial freedom , and have read a few books regarding financial intelligence, then I am sure you are aware of these two term . For the uninitiated , the way we earn our income can be broadly be divided into two category , that is active income and passive income.

Despite the negative connotation that the term " passive " carries , I assure you , passive income is way better than active income . Active income refers to the method of earning income actively ,which means trading time or effort in exchange for money , while passive income means getting money to work hard for you , while you are not working .

In order to further explain these terms , we must look at the cash flow quadrant model proposed by Robert Kiyosaki ( of rich dad , poor dad fame ) . In this cash flow quadrant ,

As you can see , the diagram is pretty much self-explanatory , however the one thing I wanna point out is , can you figure out which segment belongs to the active income and which belongs to the passive income ? If you think that the left segments ( the Employees and Self Employees segments ) belonged to the active income side and the right segments ( Business owners and Investors ) belonged to the passive income side ,then congratulations , well done , you are absolutely correct.

You see, the main problem with a typical active income method (which means getting a JOB ) , is that when you STOP WORKING , the money STOPS TOO.

If you ever want to acquire real wealth , you're just not going to get there trading hours for money. The world's wealthiest people have known for hundreds of years that if you want financial freedom , you MUST tap into passive income , that it to become business owners or investors. But , obviously that generalization was too broad and there's much more ways to earn passive income than becoming business owners or investors .

Generally though , passive incomes can be sub-divided further into

1) Residual Income
2) Leveraged Income

Residual Income is income that keeps coming in month after month, year after year, from work you do just ONCE. It's like a royalty. An example would be writing a book or recording a song and getting paid forever on it. Wouldn't it be absolutely awesome to have that?!

Leveraged Income is is earning money through other people's efforts. There are only 24 hours in a day. Hence, there's only so much you can earn through your own efforts. This way of leveraging incomes is typically employed in multilevel marketing business , in which a percentage of your recruit's sales profits will be channeled to your income as commissions .

There are a lot of ways to earn passive incomes , ways such as letting a house , be a shareholder in companies , making investments and etc . There are other exciting ways to earn money other than an ordinarily , mundane job as well, such as participating in forex trading , buying stocks , options , futures and etc . All of these which will be discussed in the future posts . Look out for it ! :D