It’s crucial that you understand the differences between the 3 types of income so that you can be financially free much quicker than everybody else.
What’s interesting about the 3 types of income is that 2 of them are direct opposites of each other, with the third type a hybrid of the 2.
Let’s take a look at each one in more detail.
Type 1 Income: Active Income
You earn Active Income when you trade your time and effort for money.
This is what you would call a ‘job’, and what most people have.
There’s nothing wrong with a job. In fact that’s how most of us started earning our money, including myself.
Those in this category are:
EmployeesThey work for someone else and earn a fixed salary every month. Their income is predictable, which is a plus.
Self-Employed In this group would be doctors, lawyers, accountants, architects, trainers, coaches, consultants, performers, etc. They work for themselves. If they don’t physically put in their time and effort, their income would stop. Their income each month can vary greatly from zero to tens of thousands of dollars per month or more.
I’m of the view that as long as you’re fit and able to work, you should continue to work to earn Active Income, EVEN if you are already earning Passive Income.
Because if you don’t work, you’ll be spending your free time SPENDINGALL the money you’ve earned from your Active Income and from your Passive Income – which will lead you back to square one.
I know of one former multi-millionaire who spent all the RM30 MILLION he earned from his business, in just a few years. He taught me history back when I was still in school, in the institution he ran which made him his fortune.
Don’t underestimate your ability to spend, because there really is NO LIMIT as to how much you can spend, if you’re set loose.
DO NOT quit your day job so that you can free yourself up to build your Passive Income source that is a business.
This is because a business cannot be built overnight.
The work required can take you a few weeks, months or even years to complete.
You will be earning little to nothing at all the entire time you’re doing the work.
Which means you’ll have to dip into your savings until you’ve exhausted them.
After which you’ll start to take loans from relatives and friends just to live.
Until you run out of relatives and friends to borrow from.
You’ll then go back to employment so that you can survive, and you will abandon your Passive Income project.
I should know, because I’ve been through this cycle a couple of times before.
This is income earned WITHOUT your time or effort.
You do absolutely nothing – and the money comes in every single month.
The most common forms of Passive Income are:
Rental This requires ownership of a property as well as a tenant who pays you rent to use your property. When you reach the point where all your tenant’s requests for repairs on your property are not handled by you and the repairs themselves are done by someone else,AND your tenant banks in the rental due without your chasing him to do so, you’re earning Passive Income as you yourself need do nothing to keep earning this income every single month.
Dividends Buying stocks in companies that make good profits will earn you dividends. You do absolutely nothing once you’ve invested in the stocks and simply wait for the dividend cheques to arrive. You simply need to figure out which companies are the best ones to invest in.
Net Profits If you own a business that is managed by your employees and you’re not working in it in any way, all the business’s earnings minus all costs to run the business (like salaries, premises rental, cost of products, etc) are your Passive Income.
Royalties If you’re a singer, songwriter, actor, author or have a franchise to your own brand of products, you can earn royalties for every one of your products sold by others with the right to sell them for you.The following are some of my best-selling books on multiple topics that are earning me royalties. Some are delivered online – others are sold in bookstores. In both cases I don’t have to lift a finger to earn from their sales, once I’ve written them:
But What If You Don’t Have Any Of The Above Passive Income Sources?
You may not have the money to buy property or stocks, or the skills and knowledge to start a business from scratch and run it, or the ability to write, sing or act.
Don’t worry – because there are many other ways to earn Passive Income that not only cost a FRACTION of the above, but give you a HUGE Return On Your Investment (ROI) that flat out beats the above options!
For now let’s move on to…
Type 3 Income: Near Passive
This type of income sits in between Active and Passive Incomes.
However, it’s not in the middle of both as it’s much nearer to Passive Income than Active Income.
I call it “Near Passive Income“.
Near Passive Income requires you to put in a little more time and effort to earn Passive Income, and not much more.
This little extra effort may take you only a few seconds or a few minutes to do – and you’re done!
You can be earning Passive Income after that – there’s no more work that you need to put in from that point onward.
Most Near Passive Income activities take place AS you’re doing your Active Income activities, or when you’re simply socialising or networking with others.
It’s easy to do – but most people don’t do it.
Which is really a shame, because it’s as easy as it gets!
As an example, a business can either advertise its products and pay the media (TV, newspapers, radio, websites) it advertises in.
Or it can pay YOU a commission to refer a customer to it.
Either way the customer pays the same amount to the business, but in the latter case YOU will earn from your simple referral.
A referral is a simple matter to do, and can be as easy as telling your contact where to go to buy the product he wants to buy, as you discover his intention to buy the product in the course of your casual conversation with him.
This can take just a few seconds of your time – and you’re done.
This of course assumes you have an existing arrangement with the business for the compensation – which can vary from a few dollars, to thousands of dollars.
There are many businesses who are willing to pay a referral fee for you to get new customers for them.
All you need to do is just look out for them and start referring them to your contacts who need those businesses’ products or services.
When You Add All 3 Types Of Income Together…
You’re well on your way to becoming financially free!
To know whether you’ve become financially free, we need to define what “financial freedom” means.
Definition: Financial Freedom
I define it as follows:
Financial Freedom is earning enough Passive Income that EXCEEDS the cost of your lifestyle.
This simply means that your bank account will contain all the money you need to live the lifestyle you want, at any time.
Now lifestyle costs obviously varies from person to person.
They will also increase in the future – so your Passive Income must also increase in time as well.
The costs of your lifestyle include all the things you want to buy, as and when you wish to buy them.
So if your Passive Income exceeds your lifestyle costs, you’re basically financially free.
Simply use your existing lifestyle cost as the figure that your Passive Income must exceed, for you to have a first goal to reach, before you up your goal to the next level.
Now What Happens To The Excess Income Once You’ve Exceeded Your Lifestyle Cost?
You invest the excess money into Assets That Produce Passive Income, of course.
This makes you even more Passive Income as time goes by.
The worst thing you can do is to CONSUME (or spend) as much of your excess Passive Income as you can.
This is because once you’ve consumed your excess Passive Income, it can NEVER be used again to create more Passive Income for you as you no longer have it!
NOTE: Use Money, NOT Time And Effort, To Create Passive Income
So if you have to put in time and effort to BUILD a Passive Income source, you really are earning an Active Income (assuming you’re earning money as you’re building it), because you’re not using your MONEY to create it, but your time and effort.
Yes, your time and effort may result in a business that can eventually run without you, thus providing you with Passive Income in due time.
But this can take you months, even years to achieve – assuming you reach your goal.
Until then, there’s nothing passive about BUILDING a Passive Income source.
And if you’re not earning any money while you’re building your Passive Income source, you won’t be able to build it for too long.
You’ll soon abandon it, and you would have lost the time you could have used to make more Active Income for yourself.
As Such, The Best Thing To Do Is As Follows:
Continue to earn an Active Income with your time and effort; AND
Earn Near Passive Income with just a little more time and effort; AND
Use the MONEY from your Active Income and Near Passive Income to invest in Assets That Produce Passive Income for you.
Invest Excess Passive Income back into Assets That Produce Passive Income.
Here’s The Face of Financial Freedom Again
NOTE: Financial Freedom is NOT about earning Passive Income alone
After all, if you own property and you’re left with RM200/month from your tenant’s rental after deducting your loan instalment – well, that certainly is Passive Income, but it’s not going to be enough to sustain your lifestyle.
As such, you need to create MULTIPLE sources of Passive Income, AS SOON AS POSSIBLE (because time is money), and do it with some of the money you have saved so far.
If you don’t have any savings – you must now do all you can to start SAVING as early as possible so that you can use them to earn you Passive Income in due course.
How To Create MULTIPLE Sources Of Passive Income As Soon As Possible
Simply take the 3 steps below.
1. Increase Your Active Income
You’ll want to do this without working 2 or 3 jobs at the same time.
There are multiple ways to increase your Active Income in 1 job while working fewer hours!
I’ve done it when I was still working for other people, and people I know have done it as well.
I’ll discuss this in another article as it’s beyond the scope of this one.
2. Start Near Passive Income Activities Immediately
Although Near Passive Income activities take only an extra few seconds or a few minutes to do, they can literally match or exceed what you earn from your Active Income!
The secret is in knowing which businesses to refer your contacts to, should the need arise.
Some businesses will pay you hundreds, even thousands of dollars for your referral who becomes their customer!
With the money you’ve earned under 1 and 2 above, invest it in Assets That Produce Passive Income that you CAN AFFORD, as soon as possible.
Now I mentioned that there are many ways to earn Passive Income other than the 4 ways shown above.
Some of those other ways do not require a huge investment of money but yet can earn you even higher returns!
But because it’ll take time to explain them all, I started the Passive Income Mastermind for members to discover them over time.
The Passive Income Mastermind’s main mission is to enable an individual who is busy earning his Active Income with the ability to earn Passive Income:
With just a LITTLE ADDITIONAL EFFORT; or
With absolutely NO EFFORT at all.
This is to ensure that the Passive Income source CAN be possible because if a Mastermind member has to take more time and effort to create that Passive Income source, he’s simply taking on another job.