I’ve been discussing the creation of passive income since 2009, yet there remains a lot of confusion about how it differs from active income. It’s time to clear up this misunderstanding because earning passive income is definitely not a walk in the park.
For me, it was a journey from 1999 to 2012 to generate enough passive income to leave my job in investment banking. Then, it took an additional five years to support my family in San Francisco solely on passive income. Despite achieving this in 2017, I continue to earn active income to further increase my passive income streams.
The main reason for this is to keep pace with inflation, especially as costs like housing, healthcare, and education rise. About 60% of my motivation to earn active income stems from this necessity. The remaining 40% comes from a mix of habit, the desire for more, purpose, enjoyment, and the comfort of financial security.
What is Active Income?
Active income is any income that requires ongoing effort and energy. This includes salaries, bonuses, stock options, consulting fees, tips, and commissions. Even activities like gambling fall into this category, although it’s not a reliable long-term income source. Active income demands your time and energy consistently.
Misconceptions About Active Income
A common misunderstanding is about blog income. Many think it’s passive, but it’s not. Writing, editing, and promoting posts on Financial Samurai, for instance, require substantial time and effort. Maintaining a blog involves updating old posts, responding to emails, and occasionally reaching out for business development.
What is Passive Income?
Passive income is earned without the need for ongoing effort. It includes stock dividends, bond coupon payments, earnings from CDs, real estate investments, and royalties from creative works like books or music. Passive income requires an initial investment but doesn’t demand continuous involvement.
Common Confusion in Passive Income
A grey area arises with ventures like ebook sales. My ebook ‘How To Engineer Your Layoff’ is a good example. I consider its sales passive income, even though I update it biennially. It causes me no stress and even brings a bit of joy with each sale notification.
Defining Semi-Passive Income
Semi-passive (or semi-active) income is income that requires some effort, but significantly less than what active income demands. It should take no more than 10% of the time required for a similar amount of active income. This could include rental income, certain types of online courses, or older content that still generates revenue.
The Blend of Active and Passive Income
The ideal income structure isn’t 100% passive. Total reliance on passive income can lead to a sense of aimlessness. Active income provides a sense of achievement and recognition. For instance, I continued with Financial Samurai after achieving financial independence because it gave me purpose, especially after my son was born.
Finding the Right Mix
The best mix of active and passive income varies per individual. However, a good baseline is having your passive income cover 100% of your living expenses. From there, you can figure out a comfortable ratio, like 51% passive and 49% active, or even a 60-80% passive and 20-40% active split.
Starting Point for Passive Income
You begin to feel the positive impact when passive income forms about 20% of your total income. This stage brings a sense of possibility and progress towards financial freedom.
The Journey from Active to Passive Income
The goal is to build sufficient passive income to cover basic needs, allowing you to pursue active income only in areas you’re passionate about. This approach leads to a sense of continual success. My journey involved years of hard work in traditional employment and on Financial Samurai before transitioning to a focus on passive income.
Understanding the distinction between active and passive income is crucial. Be wary of misleading marketing that blurs these lines. Aim for a balance where passive income provides financial freedom, and active income offers fulfillment and purpose.
