Oh yes, there is a difference. More than you know.
You may already know there is a difference and you may know generally what that difference is, but it’s likely you don’t truly grasp the implications of those differences. For the record, there is nothing wrong with either of them. But if you want to maximize your returns down the road, you do want to make sure you really do have a solid feel for how these two differ.
Definitions: Active vs. Passive Income
Using Investopedia, which should be in every investor’s browser favorites, the definitions of active income and passive income are as follows:
Active Income: Income for which services have been performed. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation.
Passive Income: Earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved.
Investopedia goes on to explain that passive income does not include earnings from “active business participation”. To go a less formal route on defining these two terms I’ll tell you my own interpretations of them:
Active income means you are doing something in order to receive that income. Some kind of work. Some kind of effort. You are not hands-off. You have to exert some kind of energy and time towards earning that income. Passive income means you are earning regular income with little to no effort required to keep it coming. You are for the most part hands-off.
Source of Income vs. Your Goals
Why does it matter which one you are earning if it’s all income?
Oh it matters. It matters because accomplishing your goals depends on understanding these terms very clearly. What is the most common reason investors give as to why they are getting into real estate investing or why they …read more