Are you working for money? Most people are. Unfortunately, only a few people work because they love what they are doing. If you are one of those people who gave up their dream job for a high paying job, don’t worry there are ways on how to turn this situation around. But first, you need to first understand how money works.
By definition, an income is the money that you received from work or from your investments. Without income, you will not be able to pay for your living expenses.
There are two types of income: active and passive income.
Active Income is the money that you received for the work or services that you rendered. Examples of this are your salary, commissions, wages and tips. It is termed as such because you actually need to be active, do something and spend your time, effort and energy before you can receive the income. If you stop working, then your income will also stop.
All salaries of employees are considered active income. Professional earnings of lawyers, doctors, architects, engineers and other professionals who have their own clinics or offices also fall into this category. The income of a managing member of a business is also considered active income.
Kinds of Active Income
There are two kinds of Active Income:
- Salary Income – is the payment that you receive as an employee.
- Profit Income – this is the money earned by entrepreneurs by selling goods or services for a profit. It is considered active as long as there is material participation involved.
The poor and the middle class mostly rely on active income. That is one of the reasons why they are stuck in the rat race all their lives. They think that hard work alone is the solution to their financial worries. Problem occurs when that one source disappears; which is one of the lessons people learned during the pandemic. Many were caught off guard. Because of the lockdown, a great majority of people were not able to worry. As a result many lost their single source of income.
Never depend on a single source of income.– Warren Buffet
Statistics will show that many successful persons during their prime ended up broke upon retirement. Even if your income is high, it is never enough. You are still restricted by your age and your health. Thus, many people go broke once it is time for them to retire.
Active income also constricts your time. There are those who earn lots of money but they never have time for their families because their time is not their own.
Don’t let making a living prevent you from making a life.– John Wooden
Do You Work for Money?
If you go to work because you HAVE to not because you WANT to, that’s an indicator that you are working for money. Even if your income is high, that does not change the fact that you are still a slave, only a rich slave. Don’t be a slave to money. Don’t let money control you. Learn how money can work for you.
Do You Let Money Work For You?
This is one of the ways in which rich people think differently. The rich understand that to become truly wealthy, you need to create multiple streams of income. Relying on a single source is simply too risky. And besides, they know that the more sources of income they have, the faster it is for them to reach their financial goals. That is why the wealthy focus on earning passive income.
Passive income is money earned where there is little or no active effort on your part. It is not directly tied to a certain number of hours at work. It is what they call “earning money while you sleep.”
Kinds of Passive Income
There are five major sources of passive income that you can choose from:
- Interest income – is the money that you earn when you lend your savings to someone else. You can lend your money to an individual. You can also lend it to private corporations or the government in the form of a bond.
- Dividend Income – is the money that you earn from being a partner, an investor or a shareholder to a business. Company earnings are also distributed to shareholders from the that you own.
- Rental Income – is the the amount of money that you collect from your tenants from leasing your properties
- Capital Gains – is the profit that you earn with the appreciation or the rise of value of your investment. You can earn capital gains from your real estate properties and other investments such as antique and vintage items, art work, jewelry, foreign currencies, luxury watches, and even luxury bags and some limited edition items. You can also earn this from the stock market when the market price surpasses the average purchase price of your stocks.
- Royalty Income – is the money that you received for the use of your artistic or literary works. It could be in the form of patents, copyrights or trademarks. You can also earn royalty income from your blogs or vlogs.
A wealthy person is simply someone who has learned how to make money when they’re not working.– Robert Kiyosaki
So do you want to work for money all your life or do you want to make money work for you? If you want to have a life where money works for you, you need to have passive income. The key is to start with active income. Then, slowly build your wealth through the money jar budgeting system. And before you know it, you will be enjoying your retirement earlier than your contemporaries.
Updated version. First published in Pinoy Smart Living on 05.02.2019