Passive Vs. Non-Passive Income: The Differences And Ways To Earn Passively

All income is not created equal in terms of how it is accumulated. The money you earn to support the needs of your lifestyle is grouped as being either passive or non-passive income. Deciphering the difference between passive and non-passive income is critical come tax season, but it can also aid you in figuring out how to bring in extra cash flow.

Below you’ll find an introduction to the differences between passive and non-passive income.

What Is Non-Passive Income?

Non-passive income is what most people think of when they ponder how to make money. Simply put, it’s any type of income that is not accumulated passively.

The easiest way to think of non-passive income is by going back to the definition of the phrase. As the antithesis of passivity, non-passive income must be generated actively.

This income comes from wages that an employer pays you for a job; money earned as a direct result of work incurred, like a W-2 position, owning a business, or retirement earnings. As a whole, most adults are living off of the non-passive income that they must invest their active and persistent work in to yield a return.

What Is Passive Income?

On the other end of the spectrum is passive income. Passive income is a revenue stream earned without the direct output of continual work. This type of income doesn’t demand the recurrent effort to keep securing more revenue. Rather, it usually involves an initial investment of time and work followed by just sitting back to let the benefits roll in.

There is a myriad of ways that people can secure a stream of passive income from investments to content creation.

Many people turn to passive income to supplement additional income or as a side gig because it allows money to flow without taking time away from other responsibilities. While it sounds enticing and almost effortless, there is a lot of consideration and initial effort that must go into building a sustainable passive income.

Examples of Ways to Make Passive Income

There are quite a few ways to generate a passive income that are very different from one another. Whether you’re hoping to turn passive income into your main source of financial earnings or simply want to bring in a little extra cash on the side without continuous effort, the following options could work for you, depending on your interests and expertise.

1. Real Estate Investments

   Perhaps one of the most traditional ways of accumulating more wealth from expenditures, real estate investments can be an excellent way to build passive income. This method of wealth creation isn’t always completely passive, but it can be made quite hands-off.

   For example, many investors choose to purchase an apartment building and rent out the units. Each apartment will bring in a monthly income without much direct work besides building upkeep, which can also be outsourced if preferred.

   If you don’t want to rent a property to other people, sitting on a real estate investment can also generate passive income in the long term. Real estate tends to appreciate in value when it’s managed properly. That means you can buy a property for $200,000 and, in the next decade, sell it for double the price.

   Alternatively, you can invest a smaller sum into a real estate investment trust (REIT) if you don’t have the capital to buy an entire property. This is similar to a mutual fund in that it pools together the funds of many investors into real estate that will generate income.

2. High-Yield Savings Accounts

   A high-yield savings account is similar to a traditional account. It differs in that it provides an interest rate that’s significantly higher than the national average. The interest rate on a savings account will progressively grow the money you put in by that percentage.

   As of 2021, the national average interest rate for a typical savings account is around 0.06%. On the other hand, a high-yield savings account can have an interest rate as high as 0.55%.

   If you were to open a high-yield savings account with $2,000 and never put any other money in it, you’d receive a return of around $112 after a year.

   This sounds like a small sum of money to acquire in 12 months, but this amount can get significantly higher for every dollar added into a high-yield savings account. Additionally, it’s capital earned from simply keeping your savings in an account. Making it perfectly passive.

3. Video Content Creation

   Creating content online is the latest, and maybe even greatest, way to generate passive income. YouTube videos are a great example of how passive income can work.

   A creator on YouTube with a supportive following creates and edits a single video about a subject that viewers find useful. This could take them anywhere from a few hours to a few days to complete.

   After uploading the video, they sit back and let the views come in. If a video creator on YouTube has a minimum of 1,000 subscribers and 4,000 watch hours over the past year, they can start earning money from views on their content.

   Even years after the video is uploaded, the content creator can continue to earn income without doing any additional work.

   Content creators can also earn additional money from affiliate marketing. This is when a company or retailer pays a creator or website a commission for traffic generated through their channels.

   Many online creators use a combination of video views and affiliate marketing to build a stable income. For many, this form of passive income ends up being their main source of revenue.

4. Writing an eBook

   If being on camera or making videos isn’t up your alley, writing an eBook can be a comparable alternative.

   Like creating video content, writing an eBook requires an initial investment of effort but then allows the writer to wait for the profits to arrive from readers buying the book. An eBook is preferable for creating passive income because it doesn’t demand all the logistics of traditional publishing.

   Creating a blog can also potentially earn passive income, but it does need more upkeep than an eBook that only requires writing it once.

   The beauty of writing an eBook is that you can focus on topics that pique your interests to assist in the queries of others. If you’re an avid gardener on the east coast of the United States, you can educate other people on how to sustain their own garden during the harsh winter months.

   If you’re a personal investment extraordinaire, you can bestow your knowledge of the best ways for a newbie to make their first $1,000 on the stock market.

   It’s all about figuring out what you know best and putting that information out there for other people to bring in sustainable passive income over time.

5. Digital Files on Etsy

   Building up a business of selling digital files on Etsy can also bring in a good portion of passive income. Digital files are products that a seller creates one time and can sell continuously to many downloaders who will use these files for their own purposes. There are a wide variety of digital products that you can sell on Etsy.

   Examples of digital files that you can sell on Etsy to build passive income include:

   • Embroidery patterns

   • Budget spreadsheets

   • Greeting cards

   • Planner pages

   • Wall art

   • Educational tools

Benefits of Earning Passive Income Instead of Non-Passive Income

1. Location Independence

   One of the major benefits of earning passive income is that it allows the earner to be location-independent. Individuals who make their money solely through non-passive income are usually bound to the place where they work.

   They need to clock in to work and be paid for hours spent there doing their job or spend a substantial amount of time running their own business in person.

   This is no longer a constraint for people earning passive income because it doesn’t demand an active output of work by nature.

2. Extra Free Time

   The fact that passive income no longer involves the restrictions of non-passive earnings also means that the earner can have extra free time on their hands.

   When a person doesn’t have to actively earn every dollar they’re making, it opens up many doors to spend time on other activities or endeavors while still bringing in cash to sustain the requirements of life.

3. Potentially Retiring Early

   In addition to saving an individual time and hassles now, passive income could even lead to early retirement in the future. If executed properly, passive income can be extremely lucrative.

   This profitability, coupled with the freedom and time saved that earning passive income comes with, can allow some earners to reach the milestone of retirement much faster than their non-passive counterparts.

Tips for Earning Passive Income

While earning a sustainable passive income is a dream for many, it’s easier said than done. Though a tough undertaking, there are a few ways to increase your chances of earning extra cash or even a living through passive income mediums.

1. Acknowledge the commitment it takes. While the idea of supporting yourself financially through passive means is enticing, it requires dedication and doesn’t happen overnight.

   Before beginning the journey of earning passive income, it’s important to acknowledge the massive commitment it takes. Otherwise, you could waste your time and effort by investing yourself without knowing fully what you’re getting into.

2. Choose an outlet that you enjoy. You’ve acknowledged and welcomed the commitment that earning passive income will take. Next, you must decide on an outlet for making this passive income. The best advice you can receive in this department is to choose a channel for earning income that you enjoy.

   For some people, investing in real estate and renting out properties is both fun and profitable, but for others, it’s a burdensome nightmare.

   Likewise, the idea of creating content on YouTube can be an ideal avenue for being creative while also making money, but many people would find it difficult to allow a large viewership to watch their lives.

   Assess your likes and dislikes thoroughly to ensure that you pick a manner of accumulating passive income that you enjoy.

3. Evaluate what it will take to succeed. After you’ve accepted the commitment that earning passive income will take and landed on a route that you’ll enjoy, the next step is formulating a roadmap to success. Consider each step you must take to start earning a passive income that you can rely on partially or fully.

   For example, if you’ve decided to pursue passive income by writing an eBook, you might begin by deciding the book’s topic. Next, you’d set a schedule to complete each chapter, figure out how you could self-publish, and finally establish a promotion plan for the finished product.

   Evaluate your potential source of passive income and lay out a realistic plan of action for success.

Author

Chris Kolmar

Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.