“Active income is meant to buy assets that provide passive income that pays for our lifestyle.”
I’m not sure who originally said the quote above, but I believe this is one of the most powerful concepts in finance and money. I suggest you take a few seconds to reread the quote and really think about what it’s saying.
Why is the distinction between active and passive income so important? In short, it’s the difference between working for money, or having your money work for you. Passive income is earned without the need for active involvement or regular effort. This can include income from investments, rental properties, and businesses that require minimal maintenance. Active income, on the other hand, is earned through regular work or effort (aka. your time), such as from a salary or wages from a job. Passive income is a powerful tool for achieving financial freedom and stability, and there are several reasons why passive income is often considered to be better than active income.
First and foremost, passive income allows for more freedom and flexibility in how you spend your time. With passive income, you are not tied to a specific schedule or location, and you can earn money even while you are not actively working. This can allow you to pursue other interests, travel, or spend more time with family and friends. Another great advantage to passive income is that it’s generally taxed at much lower rates than active income. Active income can be taxed as high as 37% at the Federal level, while passive income is generally taxed at the much lower Capital Gains rate of 20%.
Here’s a simplified look at the potential difference, using just a 32% earned income tax rate:
The overall savings is not just the 12% difference in the tax rate, you actually end up with 18% more in your pocket by moving the same $100,000 from the active to the passive income bucket. It’s not what you make, but what you KEEP that matters most!
Additionally, passive income has the potential to be much more stable and consistent than active income. With active income, your income may fluctuate depending on the job market, the national or local economy, or other factors outside of your control. With passive income, however, you can potentially earn money consistently, regardless of the state of the economy or other external factors.
Passive income can therefore be a great way to build long-term wealth. This is particularly true when it comes to investments in real estate, from which you can earn passive income via both the rental income and potential appreciation in the value of the asset.
With a steady stream of passive income, you can even reach financial independence, where you no longer have to rely on active income to cover your expenses or trade your time for money.
In conclusion, passive income is a powerful tool that can help individuals and families achieve financial freedom and build long-term wealth. Its benefits include time freedom and flexibility, reduced tax rates, and massive wealth-building potential. Investing in passive income streams can be a smart move for anyone looking to achieve long-term financial success.