what is passive income
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Making a great income is good, but how you earn it is more important.

Posted 2 month(s) ago

What Is The Difference Between Active And Passive Income?

Active income is money you get as a direct result of the work you put in.

This is where the expression, “Time is money,” comes from. 

Active Income = Time x Rate*

This applies to salary and freelance workers even if their wages are not directly tied to their time because their work requires regular hours to be put into a project or role

Passive income on the other hand doesn’t require the person to be actively involved.

Once the person possesses a certain asset (like an ebook, rental property, website, etc.), this revenue source generates money regularly without any or much effort. 

The IRS defines passive income as income made through “trade or business activities in which you don't materially participate.”

In other words, it’s something that doesn’t require you to participate on a “regular, continuous, and substantial basis.”

Common Examples of Passive Income:

Common Examples of Active Income:

  • Owning a Rental Property
  • Forming an Affiliate Partnership
  • Investing in High Yield Bonds
  • Loaning Money to Individuals  (Peer-to-Peer Lending)
  • Acting as a Silent Investor in a Business
  • Holding a Royalty
  • Working a Day Job
  • Freelancing
  • Coaching or Consulting
  • Leasing Land
  • Participating in the Operation of a Business You Have Invested in

*This is not an exhaustive list. To see if your income qualifies as passive-income, keep reading.

What Is Considered Passive Income? 

Truly passive income requires little to no effort and is typically earned on a regular basis.

Passive Income = Product Usage x Rate*

As you can see from this equation, your income is independent of your time.

Here’s a quick questionnaire to see whether your activity generates passive income:

  1. Do you have to create new content to keep earning money?
  2. Does the asset or business require maintenance or updating?
  3. If there is some kind of emergency with the business, are you aware of it?
  4. Do you continually (more often than not) have to check on the status of your income?
  5. When a decision is made regarding the business, are you consulted?

Passiveness is a spectrum (some things will always require more effort than others), but if you answered no to most of these questions, then your income stream is most likely passive.

If you answered yes to most of these questions, then your income is probably a form of semi-passive income.

What is Semi-Passive Income?

Semi-passive income is a close relative of passive income, with the exception that it requires more active participation. Time does not exactly equal money in this case (as is the case for active income) as your income is supplemented by the value of an asset.  

Semi-Passive Income = (Time + Asset) x Rate*

For instance, if you list your car on carSHAiR’s platform, you would have to put in initial effort to take some pictures, enter information about your car, and provide your insurance and banking details.

After that, you would still need to put in time to respond to drivers’ requests, arrange drop-offs, maintain the vehicle, etc.

However, the income you generate from this venture is much greater than what you would get if you were just paid for your time.

This is because the value of your asset, once it has been bought or created, is fixed and does not need to be “recreated” for each transaction.

In other words, you’re not starting from scratch every single time like you would for a 9 to 5 (when you must accumulate your hours).

Is Passive Or Active Income Best for Me?

More often than not, it’s beneficial to have a mixture of both active, passive, and semi-passive income.

To put it in perspective, the average millionaire has 7 different streams of income. 

By getting involved in different streams of income, you’ll increase your net worth, reduce your financial risk, and build a sizeable nest egg for your retirement. 

What is the best part about hosting your vehicle on carSHAiR?

As a host on carSHAiR's peer-to-peer car rental platform, you have the opportunity to take a liability (your car) that sits in your driveway while not in use, and monetize it.

Using this new source of income can help pay down your vehicle loan quicker, accelerate other debt or investment goals, and enhance your lifestyle.

No matter what you decide to spend your money on, carSHAiR offers an opportunity to create a new income stream with no upfront cost. 

Be sure to check out our host articles to help you list your vehicle on our platform.

*These are rudimentary formulas used to demonstrate a concept and are not meant to be used in any calculations.