Why I Decided To Go From Active To Passive Income
A few years ago the only form of income I was actively working on was active income. I had some form of passive income but didn’t truly know the power of it until several years ago. Once I started to focus more of my energy towards creating passive income things began to change for the positive.
Before I go any further, I’ll briefly outline the difference between active and passive income and let you be the judge.
Active income is income for which services have been performed including wages, tips, salaries, commissions. This is where there is a direct correlation between your time and your income – The 2 are directly connected. In other words, you’re trading your time for dollars. You work 8 hours, you get paid for 8 hours. If you don’t work, guess what…. You don’t get paid!!
While earned (active) income is the most common form of making money. The problem and huge downside with this form of income is that as soon as you stop working guess what, you stop making money. The big challenge with this is that it can be difficult to earn additional income unless you learn a new skill, become more valuable or work harder and longer hours.
The other downside of active income, and I’m sure most of us already know this when you look at your weekly/bi-weekly pay cheque is that you are taxed at a higher rate than any other form of income.
Now there are benefits to active income. On huge one is you typically do not need any start-up capital in order to make active income. The other great benefit of active income is that it’s a great way to start your investing career. While working for money, put a percentage of your income away that can be later used to start creating passive income.
Passive income is any type of income that does not require your time (or very little of it) in order to sustain it. Examples: Investments, High interest bearing accounts and real estate. In other words it is money you get from the assets you have purchased.
Let’s say that you buy a rental property and rent it out for more money that it cost you to carry it. The difference or the profits between this spread is considered your passive income. The great thing with passive income is it is generally recurring income. Once you have set it up correctly in the beginning the income will continue to come in month after month, year after year with almost little to no work.
The key is to make sure that you set it up correctly from the beginning or else it turns into active income. This is one of the main reasons people get out of Real Estate.
Passive investments can also be funded by borrowed funds or joint venture capital. By having a good business plan and a proven track record, you can help attract and raise venture capital money. Passive income also allows favourable tax treatments as well. Make sure you talk to your accountant for expert advice of course!
Looking at the two main forms of income, you can see and understand why so many people consider passive income as the key to long term wealth. Some consider it the Holy Grail!!
I remember the first home we purchased was valued at $56,000. Guess how much it’s worth today….. over $300,000. The sad truth is that leaving your money in the bank will do nothing for you. The average annual interest rate per annum is 1% and the average inflation rate in Canada over the last 90 years has been between 3-4%. As inflation continues to rise the purchasing power of your money will depreciate unless it’s invested wisely and out pacing its archenemy called inflation.
Until next time… Make the Smart Choice.