Active Income vs Passive Income | They are not the same.

I remember it just like it was yesterday. It was on a hot summer day many years ago and a 14-year-old Joey traded 5 hours of back-breaking labor-intensive yard work for about $90 of cold hard cash. This newly obtained wealth was glorious.

A little suburban yard work was always a piece of cake for me. This is because the average lot size of a suburban yard in my neighborhood was just a tiny fraction when compared to the 10 acres of property I had to maintain growing up in the South East.

But I am getting ahead of myself. Here is a little context first. As a teen, I had a little side hustle lawn business in addition to my McDonald’s job. I was killing it financially. I also played a little football in the neighborhood from time to time. Here is where things started to get a little tricky. One day, I was playing wide receiver. I had just caught the ball after an amazing throw. I then started running towards the goal for a touch down full speed ahead! One kid grabbed my arm while I had the ball. This slowed me down as I tried to break free. It looked like I was going to get free so I kept pushing forward trying to break the tackle. Meanwhile, another kid behind me was running full throttle with all his strength in hopes to catch me. Shortly after the first kid grabbed my arm the second kid caught up and tackled me with all his strength. It hurt like hell. As a result, I went face down into the ground shoulder first and of course, there was no padding.

After all the smoke cleared, I soberly stood up. I was dizzy. I also noticed that my right shoulder was now pushed up angled towards my right ear. I could barely move my right arm.

After a rush to the hospital, I had learned that I had bent my collarbone and could not lift more than 10 pounds on my right arm without excruciating pain. Needless to say, this negatively affected my income since both my jobs were physically demanding trading time for money which is called “active” income.

At the time of my injury, I really started to research what my income options were since I was temporarily disabled. I pondered the many ways one could earn money without having to be present.

 

Enter Passive Income

Generally speaking, the main difference between active income and passive income is effort.

Yes, if you work millions of hours per week you could definitely make a lot of money. But your brute effort is very limited. On the other hand, passive income happens in the background and is normally fueled by your accumulated savings.

Here is a real-world scenario of passive income in action. When I was mowing grass I would earn roughly $25 per hour on average (I charged per yard). I would do this job part-time as a teenager earning somewhere around $700 per week. This was just bonus money and at the time of my injury, I managed to save up $10,000 to invest in a Mutual Fund.

Now, let’s examine compound interest in action. Using today’s numbers, if I were an 18-year-old opening a Mutual Fund, by the time I turn 32 (my current age), my money would have nearly tripled without any effort whatsoever on my end!

Also, this is assuming I literally stopped contributing to the account. You see, at the Average Joe household we are aggressive savers. We live an awesome frugal oriented lifestyle that inadvertently puts money in our pocket as a consequence of the choices we make.

Example:

Combining healthy calorie killing habits with your side hustle grants you extra money and a great physique as a consequence.

As mentioned earlier, I lost my lawn mowing income during the winter because of snow. I knew that fall brings leaves and lots of them! So I started offering leaf raking services for a few families in my neighborhood.

Similar to lawn mowing, I charged $25 per half an acre of land.

Like I said earlier, I combine healthy calorie killing habits with my side hustle. To this day, I am a binge reader. And listening to these books while I make hundreds of extra dollars raking leaves keeps me super healthy. Not to mention the knowledge I gained by listening to audiobooks. In the day, I am pumping my muscles and my brain with info that will benefit me down the line. Actually, audiobooks are how I learned all about investing and passive income.

Down the road benefits: Since I live a debt free life this extra money will go directly into the retirement funds. My side hustles have already enabled me to max out my ROTH IRAs, while also keeping my body fat lower than 11%.

Note: My weekend hobby is not only generating income but also reducing my net expenses since I spend all day working and not driving around. Adjusting your body to be content without spending money is the key to wealth generation. This is because, in addition to saving me money today, I am also fostering a lifestyle that won’t spend money tomorrow.

 

Back to passive income

As you saw in the chart, the money just keeps on growing without me being present. To this day, the money in my retirement account has earned more than my initial investment of $10,000 and is on its way of earning more than my annual salary. Essentially, my money is an employee in the background generating more employees and giving me all the revenue. And these employees never get sick nor want a raise. With compound interest, time is your best friend. The earlier you can get started the better.

 

Generating passive income with Real Estate

As you may know, I am currently working on fixing up a repossessed home. Eventually, this home will be a revenue-generating rental property. Since I paid cash for this home, I have no monthly payment on the property. Similar rental homes in the neighborhood generate $1200 per month in revenue for their owner. Not to mention there are a plethora of tax benefits we can discuss in another post.

The money generated from my first rental property will then be invested in mutual funds and the dividends from mutual funds will buy another rental property. As the money from my rental properties and mutual funds grow I will be well on my way to early retirement and true financial independence.

 

Summary

Active income is great but limited by your own effort. When you became old active income will not be an option for you since your physical abilities are limited. Passive income can leverage compounding interest and is your best friend with the ability to earn you millions regardless of your physical abilities.

Don’t forget, life isn’t fair. At any moment in time you could be temporarily injured or even worse, permanently disabled in the blink of an eye. For this very reason, I urge you to consider working your butt off to buy a ticket on the passive income train. The sooner you catch a ride on this income earning ride the better.

In my situation, lifestyle choices created an ability for me to benefit from passive income. I am not in any way demanding that everyone work manual labor during the weekend. I simply just demonstrated how I combined a few activities to create passive income. I then showed you the power of passive income in action.

My aim with this site is true financial independence. And if we all continue to innovate ways of contributing to passive income we are well on our way.

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