Secrets of the Rich: Active Income vs. Passive Income

I’ve been spending my time lately really educating myself on financial literacy. I admit my job has been so boring and not challenging so instead of killing myself to boredom, I’ve been using my additional time efficiently and effectively by adding additional knowledge on my financial education.

In addition to my article, “what’s makes rich gets richer?” I’ve recently watched a video of Robert G. Allen, the author of the best selling books Nothing Down and Creating Wealth as he discussed the difference between linear income vs. residual income.

I came to these two terms before when I first knew about Cashflow Quadrant of Robert Kiyosaki. To him, there are two main divisions of the cash flow. One is Active Income where you work for money and one is Passive Income where money works for you. In Robert Allen’s video, Active Income is also called Linear Income and Passive Income is also called Residual Income.

Now, how do you distinguish between the two? Ask yourself the following questions:

How many times do you get paid for every hour you work? If your answer is only once, then it’s active income! In active income, one hour of effort equals one unit of money one time. However, in passive income, you will get paid many times for every hour of effort. A doctor can only see one patient at a time so he gets paid for every patient that he has.

Do you have to be present to earn income? If your answer is yes, then that’s active income. If your answer is no, then that’s passive income. A lawyer earns active income by presently attending to his clients.

Did you get the picture? Passive income is a stream of income that you can own. It can be a “hands-off” income. It’s an automatic pilot. The secret of the rich is to increase their streams of income. This is done not by increasing their active income by taking a second or even a third job but by increasing their passive income. Now, where can we get this passive income?

Here are some of the sources:

Interest Income. Yes, we can earn passive income from the interests of our savings deposits. We can also earn passive income through the interests of our bonds.

Dividends. We can also earn passive income through our stock investments. Companies share their income to their stockholders by either giving them cash or stock dividends for every share they own. Alternatively, we can also earn it through the dividends of our mutual funds or uitfs. Or probably from insurance policies which also gives dividends.

Real Estate. Real estate investments can also earn us passive income. My ideal real estate is a self-liquidating asset. That is you buy a property, pay the down payment only not the whole contract price, and rent it out to tenants. The monthly rental income from the tenant itself will be the one paying for the monthly amortization of the mortgage to the bank. The rental income will be our passive income in this case.

Royalties. Ever wonder why even though Elvis Presley was now dead, he still earns income? Yes, that’s the power of passive income! His albums that he did before when he was still living continuously earn royalty income for him. For every album sold, he gets a royalty fee that’s why even he’s dead, he is still earning.

The same goes for the author of books. Just imagine how rich J.K. Rowling, the author of Harry Potter, has become. She might be getting pennies for every sold copy of her book but it gets multiplied a million times as her Harry Potter is a best seller book with millions of copies sold. Not only that, she also gets royalty fees from the film Harry Potter series itself.

Another source of royalty income is thru franchise fees. The original owner of the business gets a royalty income for every franchisee that he has. Just imagine how rich are the original owners of McDonalds now that it has thousands of franchisees worldwide.

Websites. With the coming of industrial age, successful internet entrepreneurs have also built passive income thru their blogs or websites. I have seen a few of them and one perfect example might be one of the largest adsense earners. His website, one of the largest dating websites called Plenty Of Fish, attracts millions of visitors per month enabling him to earn an easy US$1 Million per year.

Networking. This is also called MLM of Multi Level Marketing System. This is another form of passive income yet a lot disagrees to its pyramiding concept. It’s like building a team of sales people who will provide you with huge passive income as your group and sales increase.

So there you are the sources of passive income. The secrets of the rich is to increase the streams of income more on the passive income rather than on the active income so that if one stream of income dries up, there will be other streams to support them. This what makes rich gets richer.

Someday, if God permits, I would like to be an author of a book. I would personally want to have passive income from its royalty fees. Or possibly buy a real estate where I can have passive income through rental income of tenants. As of now, I rely on my active income from my paychecks with just a very little passive income from interests on savings and dividends from stocks.

Do you still have other sources of passive income in mind?

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Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

11 responses on “Secrets of the Rich: Active Income vs. Passive Income

  1. Passive income is great! Even during the current downturn, the rents keep on hitting the bank account each month.

    However, I can confirm through practical experience that “passive” income is not always that passive. Rental properties require at least some work – attending to maintenance, doing the tax returns, dealing with tenants etc. Writing a book is also not passive – it takes a lot of effort to write a book (as my sporadic efforts to complete my novel can testify to). I tend to view “active” and “passive” income as relative terms rather than absolutes.

    • I highly doubt you are a millionaire, seeing as how you cannot even spell the word. You are an internet warrior, living your dream persona on the internet. I bet you live in your mom’s basement and that you are broke. haha.

  2. I agree with you traineeinvestor. I think that to be able to get passive income, one must undergo active income first. And even though you already achieve passive income, you should also “actively” maintain it in order to preserve it. However, being active in this time mean less hours and less effort of work compared to the usual source of an active income which is a job.

  3. I totally agree with you. We need passive income rather than active income so that we have more time for our family. 🙂 Right now my passive incomes are rental of rooms, email cashpro, my website, ecosway biz etc.

  4. The movement from active to passive income requires discipline and patience. I have acquintance with some Pinoys here in Dubai that even they have access to such passive income, they settle for luxury and easy life.

    Discipline. If a person cannot see tha value of money and let time/interest do its magic, money will not growth naturally. Remember rule of 72.

    Patience. If a person looks for high return but has no patience to wait for such return. That’s why some Pinoys because victim of rich-quick a.k.a money scams.

    • I totally agree with you. I’m a Filipino and i’m really greatful i dont think like most of them. if we want to earn passively and move out of the rat race, then we must always remember that being rich does require time and patience.

      I pity those who would want to earn a lot but does not take action nor risks. I pity those who says life is hard or terrible, but does not plan an action to eradicate poverty. I wish Filipinos invest on their financial intelligence and not only rely on active income.

  5. I just tested the beauty of earning passive income and i can tell you, only losers can argue the facts sorrounding it.i now often invest at 10/100 interest rate monthly.just this month, i discover that i am earning 76680 active income but because i invested my ”pay your self first” savings, i earned 59000 as passive income for the past three months and this month of April i have earn 133000 almost doubled by active income.thank GOD it is my birthday this 11 april in which i am gaining this amount.

  6. How about retirement pay? Can it be considered passive income? One gets paid for life once a person completes his service.

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