Everyone desires to generate a steady, passive income with little work required. However, understanding that some effort is needed in order to achieve and sustain this type of venture can be quite useful for those who are interested in learning more about these opportunities.
The difference between passive income and active
Achieving financial independence through passive income could provide you with the opportunity to have a life of ease and autonomy. This extra money can be the ideal foundation for achieving business objectives, satisfying travel dreams that have been on your wish list forever, or even reducing home mortgages so that interest rates are kept as low as possible.
Unlike passive income that provides a return on investment with minimal effort, active income requires one to be actively engaged in order for them to reap the rewards of their labor. Most people’s main source of active income is typically from an employee salary at their job.
Having more money often means having a better quality of life and increased choices. Think about the possibilities: retiring early, extinguishing credit card debt faster, saving even more or investing in passive sources that will keep on giving.
Key differences between passive income and active income:
- Effort required: Active income stops when you stop working, while passive income continues with little to no ongoing input.
- Time investment: Passive revenue often requires significant upfront time or capital investment but less ongoing time commitment.
- Income consistency: Active income is generally more stable, while passive income may take time to establish and can be inconsistent.
- Tax treatment: The Australian Taxation Office treats some forms of passive income differently. For example, the Work Bonus for pensioners applies to active income but not to passive income from investments.
- Long-term potential: Passive revenue strategies are often favored for building wealth over time and preparing for retirement.
Types of passive income
Generating passive revenue has never been easier, with copious options to choose from. These can be separated into three distinct classes: Capital gains profits, Rental earnings, as well as Interests, dividends, and royalties.
Examples include:
- Rental income from properties
- Dividends from shares
- Distributions from unlisted property trusts
- Interest from term deposits
- Royalties from copyrighted material (e.g. books, music)
- Income from limited partnerships
Don’t forget to pay your taxes! All revenue you have earned during the fiscal year is subject to income tax, and that includes passive revenue. If you do not pay your tax debt, can you get a loan?
You may be able to write off certain costs as deductions on taxes – most of which are expenses related to making a living. Other non-work-associated expenses might include donations for charity; managing your own finances; insurance premiums for income protection coverage; and investments such as interest payments, dividends, or other types of investment capital gains.
