You know that income is a necessity in today’s world. We need some amount of money if we expect to have our needs met. When most of us think about income, though, we think about active ways to make money. However, there are those who want to transition from earning their income to just letting it come at them. Passive income is the goal for many. Here is a look at some of the differences between earned income and passive income:

Earned Income

Most of us are depressingly familiar with earned income. You have to be active in order to make money in this way. You earn your income by working at a job, by being self-employed, or by engaging in side hustles. Any time you have to work for your money, it is earned income. This is by for the most common type of income for many of us.

Passive Income

On the other hand, passive income is money that just sort of comes to you. You don’t have to do a lot for it; you just see an income stream. For the most part, passive income includes such items as dividend income, interest income, rental income, and income from monetizing your web site. Even royalties are often considered passive income.

It is worth noting, though, that some insist that there is no such thing as truly passive income. After all, if you expect to make money from dividend stocks, you have to go through the mental work involved in research and the actual act of choosing and buying stocks. Royalties come after you have completed a creative labor. Rental income may come regularly, but you will have occasional duties to attend to, and some work is involved. Building up a web site so that it provides you with an alternative income stream requires time, effort and patience.

However, the main characteristic of passive income is that it’s different from your job, and that it requires less active work. Instead, the point is to cultivate a situation in which you begin receiving income from a specific source without having to do a great deal of work to maintain it. Once the initial setup is complete, staying on track only requires a small amount of effort.

Portfolio Income

Even though portfolio income often falls in the category of passive income in most minds, it is important to recognize that you will need to break out this type of income for tax purposes. Investment income, and interest income, are considered portfolio income, and not specifically listed as passive income when it comes to taxes. However, you can, in your personal budget, continues to treat portfolio income as a passive income stream. Just make sure you understand the reporting rules associated with it come tax time.

Bottom Line

If you want to shore up your finances, you can do so by cultivating some passive income sources. While it might take some time and planning to build up these sources of income, it can be worth it. If you plan it right, eventually your passive income can exceed your active income.



Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.