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Passive Income vs. Active Income: A Beginners Guide to Understanding The Difference

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Last Updated on November 14, 2021 by Daniella

When looking for side hustle ideas, it’s important to understand the difference between passive income vs. active income.

You have heard these terms before but you might not have a crystal clear understanding of them.

If you want to explore a side hustle where you build up the income over time and it eventually pays you residually, passive or semi-passive income ideas would be a good option for you.

Or if you’re a current freelancer looking for ways to turn your active income into passive, this article could definitely help you out.

In this article you’ll learn the difference between passive income and active income.

You’ll also be reading about:

  • Examples of passive income
  • Examples of active income
  • Passive income and active income ideas
  • What’s better, passive income or active income

There’s a lot to cover. Let’s get into it!

Passive Income vs. Active Income

The main difference between passive income vs. active income is passive income is income generated by assets or systems while active income is money you get in exchange for your time or a specific action.

What is passive income?

First, what is passive income

Passive income is money you earn in your sleep. So essentially, it’s the income you’re making without actively doing anything.

To create passive income, it takes some work or money in the beginning to lay the foundation and once everything is in place, the income can be turned on like autopilot with little to no maintenance required to keep it going.

For example, if you’re a blogger, you could have written a blog post last month linking to affiliate products. Someone could click the affiliate link and buy the product today, earning you a commission.

You did some work last month to research and write that blog post. But, after you published it, no other work was done and today, you earned money through an affiliate commission!

Sometimes this could also be considered as semi-passive income if some minimal work is required to manage it like website updates, regular blog post updates, etc.

Another example is if you write an ebook and promote it on Pinterest using Pinterest pins. 

After writing the book and posting the pins on Pinterest, you do nothing else. Pinterest will circulate your pins across the platform, sharing it with more potential buyers, which can help you sell the book!

Passive income is the creme de la creme of income! It’s the money that is most highly sought after because it’s an easy way to create recurring income for yourself automatically with minimal to no maintenance.

Examples of passive income

Here are a few more examples of passive income:

  • Selling digital products like courses or ebooks
  • Display ad income
  • Social media ad income
  • Affiliate marketing commissions

All of these passive income ideas require work up front to create the passive income stream. Once you’re done with the set up, you can start earning income passively without doing anything!

7 passive income ideas

First, the only way where you can make 100% passive income without any work put in up front is investing is the stock market. We love M1 Finance for their user friendly app and easy way to research and learn about stocks while investing in ETFs.

However, for the ways to make passive income from your creative energy, check out these 7 passive income ideas and examples:

1. Sell courses on Udemy

2. Sell digital products on Etsy

3. Monetize a blog with affiliate links

4. Insert advertisements on your blog

5. Write on Medium

6. Create a sales funnel that sells on autopilot

7. Explore Pinterest affiliate marketing

Selling courses on Udemy

Udemy is an online course marketplace. It has a collection of over 100,000 video-based courses that teach students on a variety of topics from python programming, watercolor painting, stock trading, and more.

As a Udemy seller, you have an opportunity to create a video course on virtually any topic you like and sell it to Udemy’s audience.

After you build the course, there’s nothing else you need to do. 

When a customer buys your course, Udemy will handle the sale transaction, releasing the course to the student, and payment to you. You can create multiple courses based around your expertise and make money in your sleep!

Other sites you can do the same with include:

Etsy digital product selling

Etsy is a handmade marketplace where sellers create and sell their handmade creations online. Examples of products you can find on Etsy include WordPress themes, gluten-free cookies, digital art, graphic t-shirts, coffee mugs, and more.

Etsy stores feature physical and digital goods.

To earn income passively on Etsy, you’ll want to focus on the digital goods but, some physical goods can be sold for passive income, like print-on-demand products.

Examples of digital goods you can sell on Etsy include:

Print-on-demand products you can sell passively include coffee mugs, sweatshirts, t-shirts, hats, and other goods supported by POD companies like Printful.

Monetize a blog with affiliate marketing

For bloggers, there are plenty of passive income opportunities. One of which is affiliate marketing.

Affiliate marketing is about referring products to customers that can earn you a commission if your referral results in a sale.

For example, you could refer an Instacart subscription in your blog. When a viewer clicks your affiliate link and buys, you earn commission.

Here are 22 easy affiliate programs for bloggers you can check out.

Place ads on your blog

Another way to make money passively blogging is with ads. You can partner with an ad network like Google Adsense and set up ads to be placed throughout your blog. You make money when your website visitors click the ads.

They don’t have to take action like buy or sign up. You get paid on the click!

This is one of the easiest ways to make money passively as a blogger.

Examples of ad networks include:

Keep in mind, there might be requirements for joining an ad network like with Mediavine, in order to be accepted, one of the conditions is that you should have at least 50,000 sessions per month in blog traffic.

Become a writer on Medium

Medium is a publisher that features thousands of writers that create stories on their platform. It’s free to join and you can create content about your favorite topics, monetizing your work to make passive income through:

  • Affiliate marketing
  • Medium Partner Program

First, affiliate marketing with your Medium articles works the same way as blogging. You refer products in your Medium content, linking with your affiliate link and when a visitor clicks the link and buys, you earn a commission.

Next, the Medium Partner Program is an opportunity to make money on the views your articles receive. After doing the work of writing your article, all you do is meter your work through their partner program and you can earn money passively on the reads your articles get in the future.

To learn more about Medium, check out how to join.

Build a sales funnel for sales on autopilot

A sales funnel is a selling tool that can help you funnel leads through a process with the end goal of selling them a product.

You set up a sales funnel using email automation software like Converkit.

It starts by collecting the lead. You’ll attract leads online and the goal is to collect their email address. 

Once you have the email address, you can use an automation sequence to send a series of emails to the lead on autopilot, warming them up until eventually you present them an offer to buy. 

The offer can be your product like a course, ebook or digital product you have created. It can also be an affiliate offer.

Sales funnels are an excellent selling tool and a great way to make a lot of money passively.

Setup Pinterest affiliate marketing

Setting up Pinterest affiliate marketing can be a fun way to use social media to earn income passively. 

The way Pinterest works is, you create a Pinterest pin and post to Pinterest where it’ll live on the platform and circulate across the network. 

You can create a few pins per day or batch-create pins to post on one day or over a time period using a tool like Tailwind.

The pins you make can link to affiliate products. When a Pinterest user comes across your pin and buys through your affiliate link, you earn a commission.

Once you have your system down, you can potentially make a lot of money.

This affiliate marketer makes $28,000 per month with Pinterest affiliate marketing.

What is active income?

Active income is the opposite of passive income. It’s income tied to work you’re actively doing. An example would be working an hourly or salaried job. You are actively working to earn money. When you stop working, you stop earning.

Most people have to start with active income.

It’s easier and faster to make than passive income, in my opinion. 

Think about it. Get a job, work, make money. Pretty simple right?

But, with passive income, after you do your initial setup, the money doesn’t just start pouring in. It can take some time to ramp up and it’s not guaranteed the way active income can be.

And, to start building passive income streams, you’ll likely need income to invest. 

For example, to create a digital product like templates or an ebook, you might need word processing software or graphic design tools. 

To earn from ads or affiliate marketing on a blog, you’ll need to build the blog first, which takes startup costs.

That upfront investment will come from active income.

So, to build passive income, you’ll probably need to make active income first.

Examples of active income

Active income is tied to any income you have to work for which can include working a 9-to-5 job or being a business owner.

Active income usually comes before passive income but, once you have your passive income streams in play, they can grow and potentially exceed your active income one day.

Many people start building passive income streams for this reason and eventually they can leave their source of active income behind.

5 active income ideas

Here are 5 active income ideas:

1. Hourly pay

2. Freelance pay

3. Salaried pay

4. Small business income

5. Commission income

6. Tips

Hourly job

An hourly job like working for a restaurant, retail store, or auto repair shop pays you a rate per hour for every hour you work.

If you earn $15 per hour, then if you work 30 hours for the week, you’ll make $450 for the week ($15 x 30 hours). 

You only earn that money if you work the hours. This is exactly how active income works.

Freelance pay

When you work as a freelancer, you work as an independent contractor and usually work for a variety of clients rather than 1 employer. You would get paid per project or per hour, depending on how you structure the pricing for your services.

This is active income as you are getting paid for your service.

Salaried job

A salaried job pays you an annual income for working full-time. You’re trading your time for money, just like with an hourly-paying job.

Small business

A small business, whether it’s product-based or service-based earns money tied to actively working. 

While some businesses can make money passively, many companies make money only when actively working, like an independent contractor that makes base pay on the number of hours they work or the amount of product they can produce.

Commission income

Commissions are tied to sales income. In some professions you work, your entire income or part of your income are from commissions, which comes from your sales performance.

For example, a car salesperson can earn 25% commission on the profit of new car sales.

That commission is directly tied to their selling ability. If they are successful in working to sell the car, then they earn the commission.

Tips

Tips come from actively working in service-based jobs like restaurant service, delivery, bartending, etc.

Which is better, passive income vs active income?

I think most people would say passive income is better.

Many would want to earn income in their sleep. 

How amazing would it be to relax on vacation, eat a nice dinner with your partner, hike, or take a nap and make money in the background while you’re living life?

That’s what you can experience with passive income.

But, not everyone is after passive income and it’s important to keep in mind that active income is necessary for most people. It’s one of the quickest and easiest ways to earn steady pay.

You know that if you put in the time to work that you will make money, guaranteed.

That peace of mind is something that many people are happy enough with and don’t care to pursue passive income.

Final thoughts on passive income vs active income

So what wins, passive income or active income?

Both.

Active income is necessary for a lot of people. You need active income first before you can pursue passive earnings.

Why not do both?

Passive income can be a very fulfilling way to make money but it can take a lot of work and it’s not guaranteed. It can take a long time to start earning income passively which is why active income is so crucial.

What do you think? Share your comments below.

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