The first step is to understand what passive income is and
how it differs from the kind of income you earn working an hourly or salaried
job. The differences are key because they point the way to financial freedom. If
you want to be your own boss and the master of your own destiny, passive income
is the way to do it.
The Differences between Active and Passive
Income
Even if you use a different term to describe it, you already
know what active income is. Active income is the kind of income that requires
you to actively engage in work for a set period of time before you earn it. For
example, if you have a job that pays you by the hour, you receive money only for
the hours you work – right? That’s active income because your activity is
required on a consistent basis if you want to earn a living.
The same is true of a job where you earn a salary. You are
expected to do certain work in exchange for your salary. You must show up at
work on time, work a set number of hours, and complete the duties that are part
of your job description in order to earn your salary. You may even be required
to work additional hours without additional pay if you are an employee with
exempt status.
Finally, freelance work also qualifies as active income.
Freelance workers get paid only for the work they complete. If they get sick and
are unable to complete a task or job, they earn nothing.
Now let’s contrast that with passive income. Passive income
is income that may require some work to set up. However, once you have
established a passive income stream, it often requires only minimum maintenance
to keep the money flowing.
Let’s look at a simple example. If you write an eBook, you
must spend time and energy writing it. You have to hire an editor and someone to
design the book’s cover, and you’ll have to make sure that it’s in the proper
format to sell on Amazon. However, once the book is completed and it’s for sale
on Amazon’s website, you will earn money every time someone buys the book.
That’s what makes the income passive. If someone buys a copy while you’re on
vacation or asleep, you still earn money.
I hope you are beginning to see why passive income is the
answer to achieving financial freedom. Instead of adding more hours to your
workday, passive income can make it possible for you to work fewer hours and
still earn a living.
Why Passive Income Matters
Now let’s talk about why having sources of passive income is
so important. The average person is not going to earn a huge salary. True, a
select few people do earn enormous salaries as CEOs or in other top executive
positions. Others may be in-demand consultants who can charge huge hourly rates.
For the majority of us, though, our income potential is not huge. We are limited
by our education, experience, and the number of hours that we can physically
(and mentally) spare for work.
Passive income opens up possibilities that might not
otherwise exist. It allows us to earn money in ways that do not require hours of
additional effort on an ongoing basis – and that’s huge. If you find that
working long hours translates to having only a limited amount of time with your
family – or that you’re passing up opportunities to do what you love – then
passive income can make the difference.
Passive income matters because it’s the kind of income that
can easily supplement your active income – and eventually, it may even replace
your active income.
Your earnings with active income are limited based on the
number of hours you work, as well as by things like your education and work
history. There are no such limitations on passive income. You have complete
control over it, which means that nobody can cap it. The fact that you can earn
it while you are sleeping, playing with your kids, or on the golf course means
that you have the freedom to do what you please with your time.
As you can see, passive income does differ significantly from
active income. Money is money, but the money you earn from passive income
streams is the kind of money that can set you free from the daily grind and
allow you to pursue the things that are most important to you.
In the next chapter, we will talk about the benefits and
risks of passive income in greater detail so that you know what to expect as you
work toward setting up passive income streams.
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