Passive income is money you make without having to do any more work to make money or very little work. Once you buy or make the passive income stream, it keeps paying you money without any more work from you. Examples of passive income include stock dividends, interest, ownership of a business you do not work at, rental income, bonds, CD’s, etc.
Active income involves you performing a service continually to make money. When you went to work today, your job will add what you earned to your paycheck. If you quit work tomorrow, you will not be paid tomorrow. Examples of active income include salary, tips, commissions, running a business, etc.
Which is better?
Passive income is better. Imagine having $5,000,000 in an S&P ETF such as the SPDR S&P 500 ETF (SPY). As of today, it is yielding about 2%. This translates into earning $100,000 a year in passive income. You do not have to go to work to keep making it. It does not matter if you go to work, go to the beach, sleep in, or read a good book.
Active income requires that you keep working. If you quit working, you will lose your income. Whether you keep working or not, passive income will keep paying you money.
How to Get Passive Income
There is 2 ways to get passive income. One is building something once that keeps paying you. The other is buying something that continues to pay you money.
One way to earn passive income is to write a book. You write your 50,000 word fantasy novel about spaceships and dragons. That took a lot of work to do. You decide publish it on Amazon as an option. As people buy your book, Amazon will give you a percentage of the revenues. You do not have to keep rewriting that same book over and over again. You wrote it once and you keep earning money over time. As long as people keep buying your book, you will keep on making money.
You could also invest money to earn money. You know a local business person that wants to open a restaurant. You invest money in the restaurant and buy 20% of it. By being a part owner, as the restaurant makes money, you make money. You do not even work at the restaurant. You do not have to cook, clean, or run the business.
Risk of Income
There is risk in ever thing we do. With active income, the plant you work at could decide to shut down. If that happens, you will lose your active income. With passive income, you might not make any money. The restaurant did not work out and they never make a profit, which means you never get paid any money. Or that book you wrote only sells a few copies, so your months of work never really paid off. But if that book or restaurant does pay off, you can keep on earning money continuously without working.
However, as you collect passive income streams that are working, you will keep on earning money through time. Active income requires continuous work as long as you want to be paid.
Disclosures: I do not currently own the SPDR S&P 500 ETF (SPY). It was used as an example. We are not making any recommendations on investments, just providing examples.