Active vs Passive Income

In the book 5 day weekend there is a discussion around scales of passive to active income.

At the moment my income is mostly active with some passive income streams. However, my goal is to get rid of the barriers to active income growth while simultaneously growing passive income streams so that I can decrease my focus on actively generating income.

The issue that I run into is that I trade my time for money. When I trade my time for money I continue to be limited on the potential that I can grow. While I may be better off than some I am far off from my goals in my view and feel like I am stuck in place while I continue to work as an employee.

The aspect of passive versus active is all dictated by a requirement for focus, time, and physical presence. When you have passive income streams it frees you up to generate additional active income streams and eventually transition them off to become more passive. I like to think about it as if you are growing money plants. Once you can get one going then it can sustain you while you go off and create another one.

My current challenge is how do I get the first one started enough so that I can step away from my current active source and focus on passive income growth.

According to the 5 Day Weekend there is a scale of passive to active income:

  1. Income from Royalties and Overrides

The book considers these as the most passive income stream.

Intellectual property, patents, copyrights, trademarks and urls are examples of this with rentals, property ownership, product commissions, and mineral rights as other examples.

Ultimately the owner of these assets have very little work to do and just monitor/maintain the income stream. The frequency of presence is very rarely required.

2. Owning a business but not managing it

This level allows you to generate an income stream monthly, quarterly, or yearly or whenever profit is produced. The owner here generally has to check on a somewhat frequent basis and monitor financial statements to verify the health of the entity.

That said, this option is more passive because physical presence is very rarely required.

3. Subscription

Membership from membership or service agreements. This option requires more focus from at least an employee staff but this is a predictable income stream. The recurring revenue here can often be automated.

4. Sales

The income here is contingent on selling a product, property, or direct marketing. The individual here could be an independent contractor or could be an employee. Working frequency could vary based on employment type and presence may not always be required as sales is mostly an outcome driven activity.

5. Owning and operating a business

This option is associated generally with self employment. While you can make a lot of money and eventually transition into the #2 level where you are not doing any of the work, initially this option is associated with working long hours and needing to be directly involved in pretty much everything.

6. Employment

This the most active an least passive outcome. Compensation could be a salary, project fee, or rate. Working is generally done at least five days a week generally onsite or if offsite there is a documented reporting structure to verify activity.

My goal is to generate a 2:1 monthly passive income ratio. The ratio means that you generate twice as much as your monthly expenses on an ongoing basis through passive income. In doing so you can reduce the stress and anxiety that you may feel on an ongoing basis. Further, you’ll likely have an active income stream to supplement your passive stream. Having a consistent 2:1 PIR gives you an exit strategy to leave your job. That said, be sure to monitor your income stream so that you can be sure that you can continue to cover your expenses over the long term.

Focus on a balanced investment strategy of small high calculated risk momentum investments and a larger balance of income growing incremental investments. The latter takes longer but it more likely to produce a consistent return. Once you get to a certain point of wealth generation the focus should be on maintaining a steady growth as the likelihood that you could lose it on a gamble is ultimately not worth it.

About the Author

Leave a Reply

Your email address will not be published. Required fields are marked *

You may also like these

%d bloggers like this: