In the current economy, it is more important than ever to have multiple sources of income, especially for salaried class. This is because the job market can be unpredictable and there is always the risk of being laid off. Having a combination of active and passive income can help you to weather any financial storms that come your way.
Passive income and active income serve different purposes in a financial portfolio, and having a combination of both can offer a more robust and diversified approach to wealth-building.
Active Income and Passive Income
Active income is money that you earn by actively working, such as a salary, wages, or commissions. Passive income, on the other hand, is money that you earn without actively working, such as rental income, investment income, or royalties.
There are several reasons why you need both active and passive income today:
The most important thing is to take action and start creating multiple sources of income today. The sooner you start, the sooner you will be able to achieve your financial goals.
Financial Stability: Active income, often earned through employment or entrepreneurial ventures, provides a regular and immediate source of cash flow. This is crucial for meeting day-to-day expenses and maintaining financial stability.
Skill Development and Career Growth: Active income is often tied to your skills and expertise. Engaging in active work can enhance your skills, boost your career, and increase your earning potential over time.
Opportunity for Savings and Investments: Active income allows you to save and invest. The savings can serve as a safety net, and investments can potentially grow your wealth over time.
Control and Influence: With active income, you have more control over your earnings. Your efforts and decisions directly impact how much you earn, providing a sense of control and influence over your financial situation.
Diversification and Risk Mitigation: Passive income, such as dividends, rental income, adds diversification to your income streams. This diversification helps spread risk and makes your overall financial picture more resilient.
Time Freedom: Passive income often requires less day-to-day involvement, providing you with more time and flexibility. This time freedom can be valuable for pursuing other interests, spending time with family, or exploring new opportunities.
Wealth Accumulation: Passive income has the potential to accumulate and grow over time without constant active effort. This can contribute significantly to long-term wealth accumulation, especially through compounding.
Hedging Against Economic Changes: Passive income sources, if diversified, can act as a hedge against economic downturns or changes in employment status. They provide a more stable foundation during challenging times.
Do You Need Both?
Security and Stability: Active income provides immediate stability and security, while passive income adds a layer of long-term stability and resilience.
Wealth Building and Financial Independence: The combination of active and passive income streams can accelerate wealth-building and move you closer to financial independence. Passive income contributes to wealth accumulation even when you’re not actively working.
Adaptability: Having both active and passive income streams makes your financial situation more adaptable to changes. It allows you to weather economic uncertainties and pursue new opportunities.
Risk Management: Diversifying income sources, both active and passive, helps manage risks. If one source is affected (e.g., job loss), others may continue to provide income.
It must be noted that a balanced approach that incorporates both active and passive income streams can offer financial security, flexibility, and long-term wealth-building potential. The specific mix will depend on individual goals, preferences, and risk tolerance.
If you are not sure where to start, talk to a financial advisor before making any investment towards creating an additional source of income.