I think many of us heard about income streams, active income, passive income, and portfolio income before (if not, I have brief description of each below). I’d like to share some quick observations about active versus passive income as it relates to financial independence and wealth.
The image above is a simplification that shows active income on one end, and passive/portfolio income on another. The key differentiators are how much of your time and energy is required to generate the income:
- active income generation requires a lot of your time and energy, whereas
- passive/portfolio income generation can persist for days, months, or even years with very little effort.
Below the continuum are various income streams to help make the picture whole.
In my previous post, I defined financial independence as having enough income generated from passive sources to cover my family living expenses and a few luxuries. By inference, we can say that we should proactively do the following to achieve financial independence and build wealth:
- Build the income potential of each stream, especially the passive ones
- Diversify the numbers of alternate income streams
- Shift income generation from active toward passive income streams
Regardless of success, it would be a mistake to focus on just one or two income streams, especially if they require you to trade your time for that money. Equally bad is growing too comfortable with just a few streams, such that it stops you from experimenting and diversifying. After all, something that works really well today could fail you tomorrow — e.g., losing your job, your profitable restaurant closed down due to infestation, your super stock pick went bust due to fraud, etc.
So the question is: Are you proactively building, diversifying, and shifting your income streams? If you are, or have a plan, I would love to hear about it.
- Income Types
- Active Income is “income for which services have been performed. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation.” (source: Investopedia)
- Passive Income is “earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved.” (source: Investopedia)
- Portfolio Income is “income from investments, including dividends, interest, royalties and capital gains.” (source: Investopedia)
- Income Streams
- Job – Trading time for wage, tips, salary, or commissions by working for an employer. This is currently my primary source of income, but I am working on building, diversifying, and shifting.
- Consulting – Trading services for a fee, working for multiple customers. I had a short stint doing some web site design consulting work, but it didn’t work out well with a full-time job.
- Small Business ownership – A small business that you are heavily involved with, and it couldn’t operate independently without significant involvement from you. For example, this blog is a small business that I am growing.
- Managing Businesses – Partial or full ownership of businesses that can independently operate without your daily involvement — e.g., Warren Buffett and Berkshire Hathaway.
- Real Estate Investing – This ranges from you personally managing each property (more active) to owning a lot of investment properties managed by real estate management firms (more passive) — e.g., Donald Trump and his real estate empire.
- Investments – Examples include investing in stocks, bonds, ETFs, mutual funds, REITs, as well as lending via Lending Club.
- Royalties – One of my long-term goals: write a book and make money off royalties.
- Patents – I don’t think I’ll be inventing anything soon, but this is a multi-billion dollars industry.
More about income streams and passive income:
- Alternative Income is a Virus at Lazy Man and Money
- My 2008 financial resolution at Brip Blap
- Everything You Ever Really Needed to Know About Personal Finance on the Back of Five Business Cards at The Simple Dollar
- How to Grow Your Net Worth When You Don’t Make a Lot of Money at Free Money Finance
- How Do You Plan To Get Ahead? Ways To Increase Your Income at The Digerati Life
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.