Whether you are trying to build wealth or just want to create a good income for your desired lifestyle, it is vital to understand the difference between passive and active income.

Understanding each income type can help you decide which approach is best suited for your desired level of wealth, type of work life and how this supports your desired lifestyle.

Active Income

Active income (hands on) is the process of trading a block of your time and effort for a set amount of money. Usually when you trade your time and effort for money, you are actively providing a service to a client or working as an employee for someone else.

Essentially, active income is earned through means of a typical job where you get paid for hours worked. In this scenario, your entire income is 100% reliant on you and your ability to work for set amounts of time. This means, if you don’t work, you don’t get paid.

Most often, active income is generally not scalable because it requires a 100% hands-on approach. Additionally, your hourly rate does not change with your level of effort or the level of value you add.

Generally, depending on the job, active income has zero time leverage because you are only one person who can exist in one time and space. For example, if you are a construction worker you cannot work for two different companies at two different locations at the same time. Therefore, you are limited to only one income stream at a given time.

However, it is possible to become rich through active income, but it is reliant on specific factors.

One way to become wealthy through active income, is to be highly specialized in a field of service that is high in demand and or targets a wealthy clientele. This opportunity puts you in the position to charge a high premium for your time/services.

Passive income

Passive income is income that is earned from previous work, usually in the form of creating or acquiring revenue generating assets. Passive income, once established requires little or no time or effort to maintain depending on the setup.

In general, you do all or most of the work up front. Usually there is some involvement needed to maintain or update these assets, however, depending on the income level and nature of the assets, you can hire people to perform that work, keeping you hands off.

Because passive income is mainly hands-off, this creates massive time leverage for creating more income streams and or living a desired lifestyle. The choice is entirely yours.

Some examples of passive and semi-passive income are rental properties, storage units, vending machines, laundromat, high dividend stocks, online affiliate marketing, peer-to-peer lending, royalties from books and stock photos and music, develop and licence apps or software, and online courses.

Which Type Of Income Stream Is Right For You

As you design the life you desire, evaluate the advantages and disadvantages of both passive and active income types. Consider which one will achieve your targeted wealth level and support your desired lifestyle.

Learn to balance the necessary work-to-reward ratio that resonates with you and allows you to reach your wealth and lifestyle goals within a desired timeframe.