Feb 2, 2023
Active income vs. passive income: A breakdown for teens and adults
You’re familiar with the idea of income, and you use your earnings for a variety of wants and needs. But did you know there are actually two types of income? There’s active income and passive income, and your family can leverage both to meet your financial goals.
We’ll explain active income vs. passive income and lay out what separates them. We’ll also show you common active and passive income streams for both kids and adults.
Active income vs. passive income: What’s the difference?
Active and passive income are two necessary sides of the same coin when it comes to sound personal finance. Both are awesome to have and are beneficial, but they have distinct differences.
What is active income?
Unsurprisingly, active income requires some sort of activity to earn. You get an income in return for the work you put in. Some people also call this earned income.
As you’d expect, if you stop working or work less than you did before, your active income may decrease or stop altogether.
What is passive income?
A passive income stream generally requires an upfront setup but requires minimal work from you to keep the cash flow going. Passive income may fluctuate now and then, but it’s not tied to any active work. Instead, it may rise and fall depending on external variables, such as interest rates or inflation.
Which type of income is best?
When it comes to active income vs. passive income, the best type is the one that works for your personal situation or age. However, combining both types is a great way to diversify your income. This can help you earn more money without having to put in more hours at work. Diversification can also protect you through the ebbs and flows of life.
What are some examples of active income?
You can choose from a range of active income sources, but they all have one common feature: They require ongoing work. Here are some active income examples.
The most common type of active income — for adults, at least — is a full-time job. You work a fixed number of hours weekly — typically at least 30 or more hours — in exchange for an hourly wage or salary.
In some full-time jobs, you’ll work for commission, which means you get paid for what you sell or your productivity. The bummer about commission is you may not get paid or only get paid a small minimum amount if you don’t meet certain targets.
With a full-time job, if you’re sick or need to take time off, you have to either use your earned paid time off (PTO), make up the hours, or lose the pay for the time or productivity you lost.
For some teens or college students, a full-time job is not an option during the school year. Depending on local laws, you may be able to work full-time in the summer or during other school breaks.
Another form of employment that provides active income is a part-time job. These are normally jobs where you work a limited number of hours weekly. These jobs offer more flexibility but typically don’t include benefits like health insurance, PTO, or sick pay.
If you need a day off, you generally lose income unless you make up the hours.
Because a part-time job is relatively easy to work around school hours, this is a great option for teenagers. A part-time job is a good option for adults who are unable to work full-time due to other responsibilities. But it may be hard to balance the schedules of both a full-time and part-time job at the same time.
A side hustle is another form of active income. These can include ride-sharing, completing on-demand tasks, delivering food or groceries, being a freelance blogger, and more. There are also side gigs for younger kids, such as cutting grass, walking dogs, or shoveling snow.
Side hustles are among the most flexible for both kids and adults, as you can do them mostly on-demand and work them around other jobs and schedules. However, they are also the most sensitive to time off, as there’s not any PTO or other benefits.
Keep in mind, you’ll still need to pay self-employment and income tax when you have a side gig, even though the taxes aren’t deducted from your earnings automatically.
What are some examples of passive income?
Passive income is almost a set-it-and-forget-it cash stream. You put in some upfront work setting it up, and it (for the most part) earns you cash without it becoming a full-time job. The amount of maintenance and ongoing management will vary depending on the type of passive income.
Here are examples of this type of income.
Rental income is a common passive income idea because it can provide significant income for years to come. You may spend a large amount of money up front to make a real estate investment and rehabilitate the property. However, once you recoup the upfront cash and any maintenance costs along the way, the rental property can generate a significant income. This is not a guarantee though. In some cases, damages, maintenance, and repairs can leave you in the negative.
And if you invest in multiple rental properties, you can multiply your future passive income.
Buying rental property is generally a passive income stream reserved for adults. However, it is possible for someone under the age of 18 to buy property with the help of a parent.
Entering into a business arrangement generally would fall under active income, but not if you’re a silent partner in a business. This means you invested in the business but are not actively working in it, nor do you have a say in its daily operations. You are effectively just an investor, and you get a portion of the profits relative to the investment you made into the company.
The only maintenance you may have is the occasional board or investors’ meeting, where you and other financial stakeholders discuss — yes, silent partners are allowed to speak 🙂 — and vote on the company’s direction.
This option is best suited for adults, but teens can start looking into business courses at school and potentially college if they're interested in this type of passive income for the future.
When you turn 62, you become eligible to start collecting Social Security as a part of your retirement. While your taxes from your paycheck go toward funding this benefit, collecting Social Security requires no ongoing work, so it qualifies as a passive income stream.
With Social Security, you can start collecting a partial benefit at age 62, but you will get larger checks if you delay it until full retirement age, which is 67.
If you’re a child (or even a young adult) you’ve got a long way to go before this is a factor for you, but it’s something to keep in mind as you make financial decisions throughout your life.
If your friend wants to borrow money for the movies one evening, you can give them the $10 they need and have them repay you $12 the next week. That $2 in profit is called interest.
As an adult, you could do this on a grander scale with peer-to-peer lending. You can invest an amount of cash into a peer-to-peer lender, such as Prosper, Peerform, or Funding Circle, and that company uses your investment to make loans to borrowers. The company charges interest on these loans, and you get a cut of that interest.
At Prosper, for example, you can invest as little as $25 and receive an average 5.7% historical return on investment (ROI). That’s not much on a $25 initial investment, but if you invest a few thousand dollars, the returns could be significant.
Stock market investing
Another passive income option is investing in the stock market. Whether you’re trading individual stocks and bonds or getting into exchange-traded funds (ETFs), the stock market is a great place to diversify your passive income.
The stock market teeters on the active income category if you trade actively. However, allowing a portfolio manager or investment banker to handle your stock portfolio is very passive. You can also save cash by opting for a robo-advisor that manages your portfolio automatically, but you will lose the personal touch an investment professional offers to help maximize portfolio income.
In the stock market, you earn money in two ways. The most common way is to buy a stock and hold it as it grows in value over time until it’s worth more than the price you orignally paid for it. However, your investments can also earn dividends if the company does well. The payouts from your dividend stocks will vary based on company performance and the amount you invested.
The historical ROI from the stock market over the long term is 10% annually. Keep in mind this can fluctuate.
This is another option that’s tailored to adults; however, parents can invest on behalf of their kids and teach them how it works.
Greenlight tip: Our app allows teens to learn to invest in stocks and bonds with their parents’ help and approval.
Another source of passive income is affiliate marketing. This is when someone pays you a commission for sending someone to buy their product. You can do this as a social media influencer, a blogger, a vlogger, or in many other ways. Just create catchy content that links back to the affiliate’s products. Then, the affiliate tracks the sales from your link and sends you a commission check.
The most significant time investment is creating the initial content. From there, it mostly runs untouched. However, you may need to revisit it to update a link, change the blog post slightly to optimize it for the ever-changing search engine algorithm or write a new social media post.
As a teen, you’ll need your parent’s permission to set up the accounts needed to get into affiliate marketing.
Another passive income source is interest income. This is a far-reaching income stream that can touch on a variety of areas. But the main idea is placing money into interest-bearing accounts and investments, then the interest you earn is your passive income.
You simply deposit the money and leave it there, allowing the compounding interest — when you earn interest on previously earned interest — to work for you.
You can take several paths to take advantage of this passive activity, including:
High-yield savings account
Money market account
Certificate of deposit (CD)
This kind of passive income can be earned by both adults and kids. For example, kids can earn cash back and savings rewards with the Greenlight app.
Active income vs. passive income: It’s all about balance
You don’t need to choose between active income vs. passive income. Instead, strike a balance between the two to diversify your income streams. For adults, there are a number of options for both employment and passive activities. For teens, look into part-time jobs or side gigs for active income and then earn passive income through savings or with a parent’s help.
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