Depending on the source of income, experts distinguish between active and passive income. In the first case, to receive regular payments, a person must constantly work, invest effort and time. Passive income continues to flow into the account even during periods of inactivity. However, it can be difficult to distinguish active income from passive income, since there are mixed signs.
To highlight the first differences, you need to consider the essence of the terms. Passive and active income differ in the role of the recipient in earnings.
Active income implies the active participation of the recipient in the formation of capital. A person must constantly provide services for which he will be paid. When he stops working, the flow of funds will stop.
In economics, the term "passive" refers to any property that works against you. Such property can be, for example, an apartment: you pay taxes, but do not receive anything from it. Cash savings are also liabilities, as they can become cheaper due to inflation and economic fluctuations. Gold and jewelry also fall into this category: you overpay for them at the time of purchase and receive no benefit.
Passive financial receipts arise when a person turns his liabilities into assets, i.e. makes them generate profit.
For example, renting out an apartment or investing cash savings in shares. The role of the recipient himself is passive: he makes a minimum effort to ensure earnings, assets work for him.
The main disadvantage of active methods is dependence. The recipient is dependent primarily on the employer. At any moment, a person can be fired, then he will be left without a source of income. Finding a new job can be difficult, especially after 40 years. The situation is aggravated by a narrow or unclaimed specialization. Retraining may be required, which also takes time, money and effort.
The need to invest your labor is limiting. Time and effort are not endless resources. For this reason, the number of sources of active income is limited to 2-3.
If a person is too active in trying to create a financial cushion and does not use passive methods, he begins to deplete.
This can lead to emotional burnout, stress, psychological disorders. Exhausting work worsens health. Diagnostics and treatment are additional expenses that reduce income.
In the case of passive methods, the key resource is not labor investment, but capital. For this reason, the entry threshold is relatively high: you won't be able to start with such methods of earning money right away. Since you have to invest assets, there is a risk of losing them. Experts recommend investing only free finances. Most passive methods require at least basic knowledge in the relevant field, which is why a person will have to engage in self-education.
Passive income can complement active income. It is most advisable to combine methods at the early stage of asset development. In the future, this may be unprofitable, especially if the salary is too small compared to income from property and investments. In the latter case, it is better to spend free time not on work, but on self-education and market analysis in order to get more finances from invested funds.
The main difficulty in obtaining passive payments is the need to own assets. If you do not have property and savings, you will first have to accumulate capital. An alternative way to create passive income is to work on developing a channel, group or blog, etc. However, in the early stages, such methods are active and require costs, albeit relatively small.
Another problem is risks. If you do not distribute finances correctly, you risk losing them or going into the red. This disadvantage can be partially eliminated if you invest money in different projects, but you will not be able to completely avoid losses.
I would not risk giving a clear answer to the question of which income is better. Everyone needs to decide for themselves. For me, at 25, active income was better, because I did not own any assets. At 30, I began to master affiliate programs, and now I have taken up investing.
Passive income is much better than active income, but it is impossible to switch to it right away. Everyone should strive to earn money from investments. Investments not only allow you to free up time and take care of yourself, but also provide a comfortable old age.
The information in general turned out to be useful and informative. It is not surprising that many do not understand how to manage finances because they do not study such articles. Thanks to the author for the explanations in the field of finance.