In the world of finance and investing, there are two main sources of income known as active and passive income. These two forms of income represent different approaches to earning money and can have a significant impact on an individual’s financial wellbeing.
For example, did you know your investment returns or dividends in Raiz would be passive income? Understanding the distinction between active income and passive income is important for anyone seeking to control their finances and work towards their saving goals.
What is Active income?
Active income refers to hard-earned money received from performing work such as salaries, commissions, and income from your businesses.
If you have put on some time, energy and effort towards earning that income, you know it’s active income.
While active income provides immediate financial rewards and a sense of stability, it often requires ongoing effort and time commitment. This means if you stopped working, then so will your active income from this business.
What is Passive income?
Passive income refers to money received from house rentals, royalties (like how Michael Jackson got paid for his music until now!) or any income that is earned regularly with little or no “active” effort.
Income you receive from investments – could be dividends, interest or capital gains – are also considered as passive income. For example, if you invest in Raiz, your passive income would be any potential dividends or capital gains from your deposits.
Benefits of Passive income?
While most people will have active income from their jobs, not all will have considered how passive income can help your financial wellbeing in the long-term. Relying solely on active income can be risky because it is dependent on your ability to work and earn money. If you experience a job loss, illness, or any other circumstance that affects your ability to work, your income could come to a halt.
Passive income plays an important role in building your savings over time. By reinvesting the profits from your passive income streams, you can leverage the power of compounding (link to compounding blog). This means that your wealth can grow more exponentially over time.
Is Active or Passive income more important?
To maximize your long-term financial wellbeing, you need both! Without active income, you may not have the initial savings to build passive income, but without passive income, your active income may not go as far as it can. By combining both active and passive income streams, you can work towards your saving goals further and faster!
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Important Information
The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.
The information on this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.
Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.