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In this article, I’m going to be answering the question, what is passive income and nonpassive income? For most people, nonpassive income looks very familiar. You go to work and earn a paycheck.
But for the vast majority, the end goal is passive income. It’s pretty much the holy grail when it comes to creating wealth. And I’m about to explain why.
Let’s get into it.
Table of Contents
What is Nonpassive Income
Nonpassive income or active income is best defined as income that you get when you’re paid for a job by an employer or contractor. This is more commonly thought of as exchanging time for money and active involvement to earn income.
With nonpassive income, this would be income from a job worked in the form of salary or wages. You can also earn nonpassive income from a business as well.
What is Passive Income
I say that passive income is the holy grail because it’s what most people want. Who wouldn’t want to be able to travel for a month and not have to worry about working because you still have income rolling in. Or the concept of making money while you sleep.
In a nutshell, passive income is income you earn from work that you do once, which pays you over and over again. Think of this type of work as front loaded meaning the work you put in upfront can pay you ongoing.
In the book Rich Dad Poor Dad, one of my all-time favorites and a classic, Robert Kiyosaki does an excellent job at explaining in detail what passive income is all about.
He also talks about getting out of the rat race, which basically means replacing your J.O.B. with a business that earns you passive income. Essentially what Kiyosaki talks about is with a job, you go to work and earn a paycheck. But when you stop working, income stops coming in.
With passive income, this is where you are able to leverage your efforts to earn income over and over again. This can be done by a number of ways. I’ll share 3 of my favorite vehicles with you here.
3 Passive Income Vehicles
1) Real Estate
With real estate, you can earn passive income with an investment strategy such as rental properties. This is where you have a property that cash flows month in and month out.
Cash flow refers to net income from collected rents minus expenses. For example, if you collect rents over and above your expenses for your properties, this property is cash flowing and you are earning passive income.
2) Network Marketing
The idea of earning income for the efforts of others is another form of passive income. In network marketing, when you sponsor someone you earn income from their efforts.
This is another way to create leverage for yourself and earn income passively. The only challenge with network marketing is that not all opportunities are created equal. And it is hard work and will require an advanced skillset.
When done right, network marketing or multi-level marketing can be a solid vehicle to earn passive income.
3) Affiliate Marketing
This is one of my favorite ways to earn passive income. You create content on the internet and create value for those who consume your content. And then you refer them to products or services that add more value all while earning commissions if they make a purchase.
With affiliate marketing, you create that piece of content once and earn income passively over and over again. There’s more to it than that. Like for instance you have to get traffic to your content and such.
There are also other ways to market affiliate offers such as email marketing, through blogging, and social media. But all-in-all, this is a great way to earn passive income.
Here’s an excellent video that shares 7 ways to make passive income.
Passive income when done right can be amazing. You do the work once and you get paid over and over again for your efforts. While there is nothing wrong with nonpassive income, you’re still trading time for dollars.
All three of these passive income vehicles that I share above are vehicles that I use personally. My favorite is affiliate marketing and my least favorite is real estate.
While positive cash flow can be a good thing with real estate rental property, there are other unexpected things that can happen that require immediate attention and can reduce your income (i.e. leaking roof, broken boiler). Ideally, you’ll definitely want to work to add a passive income stream if you don’t already have one.