Active and passive income

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By Shirley Maghari

Gaining Momentum

Tuesday, September 2, 2014


FINANCIAL independence is on everyone’s goal.

We strive to align our energy and time into reaching the point when we don’t have to work so much and yet we can still afford to maintain the lifestyle we choose to have.

We work and save, hoping that someday we can put our money into investments that can earn sufficiently enough to cover our expenses.

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But before we can achieve financial security, we must first generate enough income. There are two ways of earning it: either through active income or passive income.

Investopedia defines each term as follows:

Active Income - income for which services have been performed, including includes wages, tips, salaries, commissions and income from businesses in which there is material participation.

Passive Income - earnings that an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved. Passive income does not include earnings from “active business participation."

In simple terms, active income is that which you receive earnings from full hands-on work, while passive income lets you earn while exerting little or no effort at all. Passive income may include dividends from shares of stocks or bonds invested in.

We try to target increasing our passive income as we view the reality that we cannot actively work forever. In fact, more and more people are envisioning themselves retiring as early as 45 to 50 years old.

We are now more aware that there is so much to life than slaving away until you’re old and beaten. We want to do so many things in our bucket list. We want to travel while we can still walk for long hours without any aid. We want to enjoy quality time with our family and friends. We want to spend more time pursuing higher education just for the pleasure of it. We want to indulge ourselves with the hobbies we have to put off because we devote the majority of our time actively working. All these can be answered by gradually increasing our passive income.

This is not to say that we don’t need active income. In fact, any investment starts with building up our savings through active income. For most of us, we need to maintain or increase our active earnings precisely because this is the way in which we can afford to invest in the instruments that can secure our passive income. Achieving a higher salary or increasing our profit by working hard in our businesses can help fund those investments.

Since investments earning passive income are set for long-term and would need a significant amount to start off, maintaining and increasing our active income is a safe way to secure our needs and that of our family’s while we are still waiting for the rewards of the passive income to come in and stabilize.

And we have to remember that in planning any investment, it is our responsibility to do a careful study to assess the potential risks and benefits associated therein.

With the right attitude in saving, the current situation of working for money can eventually lead to our goal of having our money work for us.

Published in the Sun.Star Bacolod newspaper on September 03, 2014.

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