When it comes to money-making, there are two important aspects of income, active income and passive income. People around the world have different perspectives on these. For some people, active income is a better way to live life. Whereas for most people, having passive earnings is a guarantee of financial security.
For beginners who are yet to choose one, knowing about both these income sources is vital. It is possible to work on both according to time, opportunities and financial conditions.
If you are still confused about the comparison of active and passive income, the rational comparison given below will help you to make informed decisions.
| Active income – Meaning | Passive income – Meaning |
| It is the money you get in exchange for performing a service at the current time. As long as you keep providing or performing services, you keep earning. As soon as you stop working, you stop earning. Examples of your income are: Salary from a job, Freelance project, daily wages, Commission from sales, etc. | Passive income is what you earn without any effort or with little work. Examples of passive income are: Rental property, royalty from music, dividends from stocks, affiliate marketing, selling online courses, investing in business, etc. |
Pros of active and passive income
Now you understand the meaning of both the active and passive income. Now let’s compare both based on pros they offer.
| Pros of active income | Pros of passive income |
| The first advantage of active income is that you have a regular source of earning. Because you are doing a regular job or business, you know how much amount you are going to receive every month. This helps you run your finances in a predictable way. Whether it is debt management, utility bills, savings or investment decisions, you can manage your money according to your income. Example – if you are planning to pay off pending unsecured loans a specific income amount is always there in your mind. Accordingly, you can plan for either pre-payment or part payment. The second benefit is that in active income, you get instant returns for your hard work. As soon as you work, you get money in a short time. In freelance, part-time jobs or full-time jobs, you receive money on the decided date or duration. The third benefit is easy entry. To earn from any active source, you do not have to invest funds. You can start working right away. You get paid according to your work. No need to put money before starting work. For example, when you start working somewhere, you only have to give an interview. The fourth benefit is control. You have control over your work. You can bargain on your income. If there is no financial satisfaction in your current job, you can switch jobs or clients. Also, it is possible to work on multiple income sources like full-time, part-time and freelance. | Now let’s talk about the benefits of passive income. Just like active income, passive income also has benefits. The first is time freedom. Because you can earn money even while sleeping or relaxing, it gives flexibility of time. You can spend your whole day, month or year, in a way of your choice. No need to have the compulsion to get up early in the morning, nor the fear of getting up late at night. The second is scalability. Passive income options can scale fast. There are many income sources that scale with time. For example, if you have invested in a business, as the business grows, your income will also grow. In such a case you can be completely satisfied with your future. The third benefit is financial security, an important factor which motivates people to earn income through a stable source. Even if you do not get a job in future or even if your business does not run, you will always earn money every day. The fourth benefit is the potential for early retirement. Due to this type of income, you do not remain dependent on a traditional job or active income source. In that case, you can fulfil your early retirement dream very easily. Not only this, you can also fulfil your investment and saving goals very fast. There is always job security in this income source. |
Cons of active and passive income
Every coin has two sides due. Let’s know what are the concerns or cons that come along with active and passive income.
| Cons of active income | Cons of passive income |
| The first disadvantage is you have to work continuously to earn money. Also, time management is not in your hands, you have to work according to the conditions of the clients or employer. Flexibility of work is also less. For example, you can work as a freelancer but you have to work according to your client’s terms and conditions. Active income source also has disadvantages due to being limited. You have to work many hours every day. This stops you from focussing on other concerns of life. Also, it is difficult to work on passive income alternatives. This makes life goals difficult. Due to this, the life quality compromised. The second issue is the risk. This adds a big disadvantage to this choice. You may lose your job at any time. As a freelancer, anytime your client can discontinue the work. There is no control over work and earnings. The third concern is stress and fatigue. Due to long working hours, one has to face stress. Many people go through varied health issues due to strict job routines. Getting even a sick leave is a struggle for some people working as an employee. The fourth disadvantage is the biggest. No income during downtime, i.e., when on vacation or during illness, you cannot earn. Example: Due to job loss or for any reason, unless you have a job, you do not have any income source. During this time, you are completely financially insecure. However, getting personal loans can easily fill the financial gap easily. But in the end, an income source is vital. | The first disadvantage is upfront work or investment. It can take a long time and a lot of money to create a passive income source. Only after that, do you start getting returns on it. In that situation, many factors like market conditions, and economic conditions can have an impact. The second disadvantage is delayed returns. Most of the earning sources also require a lot of hard work. In this, you get good returns only after making consistent efforts for many months and years. Therefore, delayed returns are a big disadvantage of this choice. Secondly, risk is a factor. There are many such sectors that may cause a big loss. Example – investing in stocks, real estate or investing in a business and there are options that may cause a big loss. This affects financial plans directly. Maybe you were planning to take unsecured loans to start a small business. Passive income makes repaying funds easy. But there may be a huge loss in the second that gives you passive income. All your plans fail in that case. The third issue is ongoing maintenance. For example, for some passive income sources, you have to work occasionally. In such a situation, no matter what situation you are in, your presence, time and money are vital. The fourth concern is due to the lack of knowledge while working on such an earning option. Example – Some may think that dividend stocks will help manage their lifestyle expenses at least. But for that, you need to find profitable stocks. With a lack of knowledge, you may lose money. |
Conclusion
Comparison of both the income sources shows that both have their advantages and disadvantages. Still, both are the best. You should work on active and passive income options according to your financial circumstances. If you have already earned a good amount of money, depend on any one of the income sources.
You can improve your financial life only by mixing and matching both. Everything has its own pros and cons. Active income sources are good and passive income sources are good, too. Only your individual circumstances make a difference.
