Make Money—The Difference Between Active and Passive Income

RelayRides blogger Grayson Bell discussed the difference between passive and active income and explains what type of income the Sharing Economy generates for people.

There is always a desire to make more money. Most people will strive to earn more through their careers in order to better their financial situations. Once one pins down that they want to make more, they have to decide how they want to earn that income. The debate between income generation strategies has been going on for years. Which method is the best way to earn extra income?  Enter active versus passive income. Before I get into which form is better, I want to describe each income creation method.

Active Income

Most people are used to earning active income. This is income that you receive from job compensation, tips, and commissions.  If you have a job, then you are earning active income. This is the most common form of income and a source that people search for when they need to pay their bills. If you have an active role in earning the income, then it is active income.

Passive Income

I am sure you have heard of this type of income. This is the dream income generation strategy. Passive income is created with very little work or active participation. A typical example of passive income is investment earnings. When you invest in the stock market and earn interest and dividends, then you are earning passive income. The key to passive income is finding something that will continually provide income on an ongoing basis.

If you have ever watched the show Shark Tank, then you see passive income in action. These investors are typically investing in a business and then earning interest payments from said business. Depending on the deal, they may not do any work at all, but will still earn income just for lending out their money.

Active vs. Passive

Now that we understand the two forms of income generation, let’s figure out which one is better.  Well, unfortunately, I can’t tell you which one is better. The reason being that any way of earning income is good. We all want to make money and if we make it in an active or passive way doesn’t matter.  As long as we are striving to earn more money is really the key take away. Yes, earning money by doing little work is a dream for many, but most don’t get there with out earning income in an active way.

What if a certain method blurs the lines between active and passive? We can call it a hybrid. I would put a few forms of income creation in this category. While some put real estate investments into passive income, I have come to know many landlords and investors and they don’t consider their income passive.  They have to work to earn their income. Whether they are taking care of problems with tenants, looking for new tenants, or flipping a property, they have to work for their income. Yet, they don’t consider it active, because they are not working all of the time. This is why I consider it a hybrid form.

Hybrid Income?

I would also consider making money from various Sharing Economy companies; such as peer-to-peer car rental company RelayRides or Airbnb a hybrid form.With RelayRides, you can earn on average $250 per month by renting out your vehicle to others. While you can earn that money easily, there are still steps you have to take for each renter. I discussed some ways to make your rental more attractive, which takes time.

Once you put your vehicle on RelayRides, or your home or room on Airbnb, you have to field questions and requests from potential renters and maintain the property you are renting out. The work is not much, but earning money this way is still not passive. I also wouldn’t consider it active. Earning income in this hybrid form would be a great way to earn extra money on the side. You have to do a little work each month, but can earn money you normally wouldn’t receive.

No matter what form of income you wish to make, you should focus on diversifying your income. By incorporating active and passive income streams, you can reach financially success. The debate will continue as which method is better, but just striving for earning more should be your goal.