Quick Answer
Active income is earned by exchanging your labour and time for money; when the work stops, the income stops.
Passive income relies on a model or system that takes less time to build and maintain. It does not mean doing nothing, because research at the beginning and regular reviews are still needed.
The article's main idea is to use active income to invest in and build passive income, then reinvest the additional income instead of immediately increasing spending.
Active Income, Passive Income and Financial Freedom
You have probably heard people say that passive income is necessary for financial freedom.
What exactly is active income?
What is passive income?
If both bring in money, what is the difference?
This article explains the differences, the biggest misconception about passive income and a more important question: What is the ultimate goal?
What is active income?
Active income is earned by exchanging labour and time for money, such as a salary from a nine-to-five job.
The easiest way to recognise it is that when the work stops, the income falls to zero. That is why it is also described as temporary income.
What is passive income?
Passive income is earned through a model or system that takes less time to build and maintain.
For example, the income may continue even when you no longer have a job. That is why it is also described as continuing income.
The biggest misconception about passive income
Many people think passive income means doing nothing: put in some money, sit back and wait.
That belief also creates opportunities for money games and scams that promise you can "earn while lying down".
In reality, passive income still requires effort, such as spending time on research at the beginning and reviewing it regularly afterwards.
What is the goal?
For most people, the most direct route is investing.
Use your active income to invest in passive income until your passive income becomes greater than your active income. At that point, you no longer need to stay busy working for money.
Whatever investment tool you use, remember to review it regularly so the passive income can continue.
To borrow a line attributed to Warren Buffett:
> If you don't find a way to make money while you sleep, you will work until you die.
Many people understand that they need passive income but misunderstand its purpose.
They assume the extra income should fund more eating out, entertainment and luxury purchases.
An increase in income should be reinvested instead of used to increase spending. That is how it can support the journey towards financial freedom.
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About the Author
Remuneration Disclosure
If you choose to arrange insurance, unit trusts or PRS through me and FA Advisory, I may receive commission from the relevant product provider. This commission is calculated separately from the financial-planning fee and does not offset or replace the planning fee. I will also explain the relevant arrangement and potential conflict of interest before implementation.
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Sources and Notes
This English article is a faithful translation of YFD's already-published Chinese post, 搞懂主动和被动区别，财富自由就离你不远了！ (published 29 September 2023, updated 24 May 2024). It is an educational opinion article and cites no external sources.
Educational Purpose
This article is for general reference only and does not constitute financial advice. Every investment involves risk and requires ongoing review.
