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Passive Income vs. Earned Income

Have you ever heard the phrase, “If you can make a thousand dollars, then you can make a million”? Does this phrase make any sense to you? For a long time, I thought it made sense to me, but I didn’t really grasp the concept. This is the whole notion between earned income and passive income.

Earned Income

This is the type of income that we are all most accustomed to. We head to our place of employment, we clock in for eight hours, and then we leave. We are paid based on the time we put in, regardless of the results we achieve. Sure, some of us are paid more than others, but if we didn’t show up to work for a month, there’s no doubt that the paychecks would stop coming in.

Passive Income

This type of income is a little hazy for most of us. We’ve heard the word and understand that the money is generated by something other than a job, but how is it really done? And what does passive really mean?

If your income is truly passive, that means that whether you do any work or not, the money will still continue to come in. This may seem absolutely impossible, so let me give you a few examples. Let’s say that you purchase a car wash. You hire a low-level employee, a manager, and an accountant. Together, they handle everything for your car wash. If you don’t physically show up at the car wash, it will continue to operate and money will continue to roll in. Another example may be real estate. Once you rent out your units and assign a property management company to them, all you have to do is wait by your mailbox and receive the checks.

If You Can Make a Thousand, You Can Make a Million

Are you starting to understand this phrase now? If you are earning your income one hour at a time, you will have to work many many hours before you get to a million dollars. However, if you have passive income coming in, then you are free to start other forms of passive income while they money is coming into your mailbox. Sometimes these forms of passive income are called “pipelines”. After you’ve built your first pipeline and the money is flowing in, you can build another, and then another, and then another. Through no extra effort on your part, you can double, triple, or quadruple your income. Heck, you could make 1,000x the income if you just keep making new pipelines! Therefore, if you can make a thousand, then you can certainly make a million.

 

This post is from Derek at Life and My Finances.

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1 comment to Passive Income vs. Earned Income

  • I suppose one of the major problems for many people is they cannot afford to start up with passive income. Some forms of passive income (eg property or other investments) need money in the first place. Even things like online passive income often comes second to getting paid for completing a task up front as people can’t afford to wait for the long term rewards as they need the money in the short term.