Think about it - Do you want to work 40+ hours a week for the rest of your working life? Chances are you have spent most of your working life working for the wrong kind of income. I’m talking about Passive vs. Active income, and which is right for you.

Active Income

This is the kind of income most people are working for, unless they were born into wealth or won the lottery. This is the income you derive as tips and wages from your job. It may be in the form of product sales on eBay or providing a service as a dog walker or being employed in a more traditional vocation. It’s likely your salary or your hourly wage in the form of a paycheck. If you have any doubts as to whether a given income is active, just ask yourself: If I don’t do the work, will I get paid? If the answer is no, it’s active income.

Passive Income

Passive income is derived from a source that requires no work to generate the payment. This kind of income has historically come from investments in dividend paying stocks, interest in savings accounts or bonds, or renting real estate. The key is that it takes no work to generate the income - once income is being generated. It still takes a lot of effort to start the ball rolling.

Which is the right kind of income?

Both types of income require hard work, and both types are essential for most of us. The difference is that once the work is done for the passive income, one need not do the work again to receive the income. That’s why attaining a passive income should be a goal, and your active income should be the means by which you attain that goal. Think of it as the fuel to power your trip to a passive lifestyle.

Anyone can attain a passive income, the question is how soon do you want it?

Typically the big payoffs come from the hardest work and the biggest risk of failure. Think of the starving artist or musician before he hits it big. He sacrifices much early on, but can often retire early.

If you don’t want to, or can’t, accept the risk then you can take the tried and true retirement nest-egg path. Retirement account like 401(k)’s and IRA’s are all about building an investment portfolio that will one day provide enough passive income to replace your paycheck completely. That’s retirement, and it takes a lifetime of active income to achieve it.

The sooner you can cultivate a successful passive income stream, the better off you will be. To this end, you should be using as much of your active income as you can to create these passive income streams. If you’re in debt or want to accelerate your path toward passive income, consider taking a second job and using that income to pay down your debt, or build up your income streams quicker.

Now, how do you distinguish between the two? Ask yourself the following questions:

How many times do you get paid for every hour you work? If your answer is only once, then it’s active income! In active income, one hour of effort equals one unit of money one time. However, in passive income, you will get paid many times for every hour of effort. A doctor can only see one patient at a time so he gets paid for every patient that he has.

Do you have to be present to earn income? If your answer is yes, then that’s active income. If your answer is no, then that’s passive income. A lawyer earns active income by presently attending to his clients.

Did you get the picture? Passive income is a stream of income that you can own. It can be a “hands-off” income. It’s an automatic pilot. The secret of the rich is to increase their streams of income. This is done not by increasing their active income by taking a second or even a third job but by increasing their passive income. Now, where can we get this passive income?

Here are some of the sources for Passive Income:

Interest Income. Yes, we can earn passive income from the interests of our savings deposits. We can also earn passive income through the interests of our bonds.

Dividends. We can also earn passive income through our stock investments. Companies share their income to their stockholders by either giving them cash or stock dividends for every share they own. Alternatively, we can also earn it through the dividends of our mutual funds or uitfs. Or probably from insurance policies which also gives dividends.

Real Estate. Real estate investments can also earn us passive income. My ideal real estate is a self-liquidating asset. That is you buy a property, pay the down payment only not the whole contract price, and rent it out to tenants. The monthly rental income from the tenant itself will be the one paying for the monthly amortization of the mortgage to the bank. The rental income will be our passive income in this case.

Royalties. Ever wonder why even though Elvis Presley was now dead, he still earns income? Yes, that’s the power of passive income! His albums that he did before when he was still living continuously earn royalty income for him. For every album sold, he gets a royalty fee that’s why even he’s dead, he is still earning.

The same goes for the author of books. Just imagine how rich J.K. Rowling, the author of Harry Potter, has become. She might be getting pennies for every sold copy of her book but it gets multiplied a million times as her Harry Potter is a best seller book with millions of copies sold. Not only that, she also gets royalty fees from the film Harry Potter series itself.

Another source of royalty income is thru franchise fees. The original owner of the business gets a royalty income for every franchisee that he has. Just imagine how rich are the original owners of McDonalds now that it has thousands of franchisees worldwide.

Websites. With the coming of industrial age, successful internet entrepreneurs have also built passive income thru their blogs or websites. I have seen a few of them and one perfect example might be one of the largest adsense earners. His website, one of the largest dating websitescalled Plenty Of Fish, attracts millions of visitors per month enabling him to earn an easy Million per year.

Networking. This is also called MLM of Multi Level Marketing System. This is another form of passive income yet a lot disagrees to its pyramiding concept. It’s like building a team of sales people who will provide you with huge passive income as your group and sales increase.

So there you are the sources of passive income. The secrets of the rich is to increase the streams of income more on the passive income rather than on the active income so that if one stream of income dries up, there will be other streams to support them. This what makes rich gets richer.

Someday, if God permits, I would like to be an author of a book. I would personally want to have passive income from its royalty fees. Or possibly buy a real estate where I can have passive income through rental income of tenants. As of now, I rely on my active income from my paychecks with just a very little passive income from interests on savings and dividends from stocks.

In the end, you’re looking at two basic methods to passive income: An entrepreneurial approach, or an investment approach. Which one is right for you depends on your interest, desire and inclination. The important thing is to start thinking about being more passive in your income, and more active in your life.