If you were a business your goal would be to generate a profit utilizing the resources you had while solving a need. As an individual, you must also take your resources to earn a profit for yourself. Of course, your lifestyle and location determine how much that would be. When respect to income, there are two main categories active and passive income. Many internet sources will site many different forms of income, but they all fall into one of these two categories.
Active Income
Active income as it sounds is any activity that you have to “actively” participate to produce income. Typical forms of this would be to be an employee, own a services business or own a retail business.
EMPLOYEE
As an Employee you trade your time for income. Short and simple. Increase your skill level, and your time is more valuable. Get a second job or third, you can capitalize on otherwise idle time. Therefore, as an employee, your main ways of increasing income from this source is become more valuable or spend more time doing it. Most people start this way and eventually work towards entrepreneurship or retirement.
ENTREPRENEUR
As an Entrepreneur you also trade your time and capital for income. By taking on more risk, you are able to produce higher returns of income. As discussed, you can have a services business, a retail business, or both. In a services business, you trade your time performing a service or teaching others how to do it for you to generate income for yourself and them. In a retail business, you offer products to sell. You set up the supply system, the inventory system, and all aspects of the retail business. If it is profitable enough, you can trade some of your profit for hiring a manager, which in turn can turn it into a passive income stream. If you invest anytime into it at all it is still more likely an active income source.
INVESTOR
Another type of Entrepreneur is an Investor. This is categorized separately to show a distinction between the different amounts of energy invested. An Entrepreneur generally invests more time then capital to produce income. An investor generally invests more capital to produce income. Though most of the activities of an investor generate passive income, someone who is an active investor, also known as a “venture capitalist” or “angel investor,” is constantly investing time and capital to generate returns.
Passive Income
This leads us into passive income sources. Passive income is income generated through a previous activity that without your continued time and energy (or with minimal oversight), generates income. Examples of this could include real estate rentals, dividends, capital gains, etc.
DIVIDEND INCOME AND CAPITAL GAINS
Dividend Income and capital gains are many ways that businesses can reward their investors. From the Investor standpoint, this is a good stream of earning money off of the money that has already been saved.
RENTAL INCOME
Another type of income from invested funds is rental income. Typically this form of income comes from the rent or lease of property, house, storage, or anything the like. By buying a property and then leasing or renting, you are able to generate annual income in addition to the possible capital gains associated.
Making the switch
Early on, most all people start off with active income of some sorts. Though you can grow your active income by becoming more skilled or by spending more time working, you are still trading hours for dollars. By saving some of that income to invest into passive income sources, you can start to add to your income and eventually replace your active with passive income. At that point, choosing to work is your choice, not someone else’s.
