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Passive Income vs Active income; what are the Differences

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When humans hear income, we see dollar signs. We definitely hear of passive and active income. If some of us are put to task to explain the differences between passive income vs active income, we may fail. We may have an idea in our minds but we cannot point out the true differences. Well, worry no more. We are here to make sense of all the messy information that may be tangled in your head. We shall explore both the concepts and point out what makes them unique. It might be time for you to take out a pen and paper, we will make this brief and enjoyable. 

Passive income

The textbook characterization of passive income can be put as ‘net rental income and income from a business in which the taxpayer does not materially participate’. To most people, this terminology may prove challenging to digest. Most people especially get lost by the term ’material participation’. Material participation as it suggests points out hours/ time vested in the enterprise.

This material participation determines whether the income received from a venture can be categorized as passive or active. Once income is vetted and it passes the material participation test, then it can be summed as passive income.

For the millennials, passive income is basically income made with little or no effort. The internet has revolutionized passive income. It has introduced new methods for people all over the world to make money. Be it in the form of videos or text, passive income trends keep coming up. We have many taking up roles of affiliate marketers, YouTube gurus, eBook writers among other things. these are all legitimate ways of making passive income in the 21st century.

To understand why passive income is growing and trending. We have to understand the benefits. The benefits are what draw these people to the world of passive income.

Advantages of passive income

  • Offers people more freedom. This freedom can be expressed in time and financial options. If one is smart enough to set up the right passive income streams. They can automate systems that allow them to have money trickling in into their accounts.They can run their businesses from whichever location in the world without being physically present. More time is opened up for other ventures.
  • Tax breaks/deductions. Depending on different stipulations from your tax collector, passive income earners receive some tax breaks. For those who own rental, all the repairs, maintenance and management costs are to deduct from your rental income.Remember that these tax breaks operate under different tax considerations.
  • New possibilities. With passive income new trends spring up every day. You will have the ability to understand and learn new ways of doing things. you van enrich your surroundings. Look at how many YouTube millionaires we have.

Active income

Active income can be best defined as revenue for services rendered. You are paid for an activity that you have materially participated in. Wages, commissions, salaries and tips are all under the active income umbrella. With this form of income, effort and hours have to be considered. The time you spend at your regular job is billed.

Active income is still one of the most relied upon ways of making money. It is your average 8am-5pm job that brings home a steady paycheck. This method of making income is not very popular with the millennials. The millennials who want more balance between work and life, are moving away from active income. Reason? Because active income takes up all your time, Nowadays all people do is work leaving no time for family and health. It is highly unlikely to that passive income creates financial freedom. But let us look at some of the reasons why active income is still going strong.

  • It’s the system of the world. We found people trading their time and effort for money and we continue to follow the system
  • It’s fast and Compared to passive income that may come in trickles Active income delivers a paycheck monthly so that people pay their bills.

The main differences between passive income and active income

 

 

  1. Active income is acquired through the compensation of actual effort for money. There has to be material participation involved. As for passive income ‘little or no effort’ is required. That is the most notable difference.
  2. Active income is stable but it does not entirely open people up to financial freedom. Active income is produced to cater to the immediate needs of the population. Passive income allows people to formulate ideas and make financially dependent systems. That is why we have so many people getting rich at young ages.
  3. Passive income incurs considerably fewer taxes than active income. Depending on the passive income stream you select, you might find yourself tax-free. Since different tax laws govern each sector, you can compare and contrast which is better for you.

Many of us don’t get to choose which income is better; passive income vs active income. The truth is, we need all the income we can get. The world as it evolves becomes busier and people need more things. So what do we do? Well, we work and hope for financial freedom.

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