The core tenet of managing your finances effectively is to ensure what you earn exceeds what you spend. This principle is fundamental for financial prosperity and highlights the importance of a steady income source. Grasping where your income originates and understanding the distinction between active income and passive income is crucial.
ACTIVE INCOME
Most people earn through active income, which is generated from direct involvement in an activity aimed at producing it. This typically signifies working a conventional job. You could also gain active income from a side business or occasional work.
The term “active” in active income indicates the requirement of action or labor. Whether it involves a significant investment of your time or is strenuous, it falls under active income. For instance, even a sedentary office job that demands your mental involvement or even a monotonous role with limited challenges can be accounted for as active income given the typical strain of a workday.
PASSIVE INCOME
Conversely, passive income, as the name implies, is money made with minimal personal effort as you allow your assets to generate it for you. Many define passive income as the proceeds from work done initially (during setup) but which requires minimal effort afterward to maintain a steady cash flow. For instance, setting up a website with affiliate advertising involves some up-front work, but once established, it requires little attention while continuing to generate income.
Investments are another source of passive income. You can earn passively through dividend stocks and bonds. After your initial investment (or automated withdrawals), they yield returns in the form of dividends or interest without substantial monitoring or management.
Shifting to a position where the passive income contributes significantly to your earnings is a beneficial move. It not only improves your financial status but also provides you with leisure time. Regularly monitor your income and spending and identify methods to enhance your cash flow.
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