Concepts & Principles of Passive Income

One of the easiest ways to gain financial independence is to create a stream of income, which doesn’t require you to work actively.

The idea of creating a passive income is to earn money through implementing processes, which enable you to earn an income with little to no effort once the initial foundations have been laid.

What are Passive, Active, and Residual Incomes?

‘Passive income’ essentially means earning money automatically, while at the same time, requiring less maintenance and without any of your active personal involvement. ‘Residual income’ is passive income that continues to flow in regularly after investing your time, efforts, and participation during the initial stages of work.

A residual income is one of the keys to time freedom and financial freedom. It occurs when you no longer earn for your personal efforts alone. Instead, you earn more on the efforts of others, as well as on the efforts of your money!

On the contrary, ‘active income’ is earning directly by converting time into money. Regardless of its form—whether it is a pay-per-hour job or a salaried occupation—active income is the sum of money received corresponding directly to your time spent working.

With active income, there is a ‘no work – no pay’ policy. You cannot earn when you do not work. This is the most common income in today’s society. Generally, people who have an active income can only earn based on the total time they have worked.

In comparison to the general public, a smaller proportion of people usually referred to as “entrepreneurs” earn a passive income from a broad range of sources like real estate rentals, website advertisements, dividends, interests, royalties, franchise fees, etc.