Active income drives passive income. For example, Jane works as a full-time web designer to earn a salary. This active income brings in cash that she uses to pay rent and buy groceries.
Cash left over after all expenses can be used to buy income-generating assets. If she stops working, the money will stop coming in. Unless she has savings, she wouldn’t be able to feed or shelter herself.
Basically, active income is earned for the effort and time one puts in for a job.
For a band that performs at local events, the active income would be the payment that the band members receive each time they perform.
For freelancers, the active income is getting the payment for each project they complete for a client.
For all of the above examples, it is clear that if they stopped working, they stop getting paid. This is where passive income can come in handy.
Passive income is great, but when you still have many working years ahead of you, it makes sense to invest in yourself, such as studying for higher education or improving your skills. In so doing, you might get a higher pay or a promotion. At the very least, your knowledge and skills will stay relevant, so that you have a higher chance of keeping your job (when a recession hits and your company downsizes) than the guy next to you who did nothing to upgrade himself.
At one point, you’re going to retire and you better have saved enough because that active income won’t be coming in anymore.
Inflation eats away at our savings every year. So, for retirees, the ideal investments generate an income, which grows at a faster rate that inflation. Since the long-term inflation rate is historically 3-4%, you can’t go wrong by buying top dividend stocks which pay yields of at least 3-4% and grows their dividends by at least 3-4%. That’s just a starting point, though. There’s much more to investing. And this blog helps to explore that.
Wouldn’t it be nice to have our money work for us? Actually, that is the idea behind investing, which can be applied as a passive income strategy.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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