Why Passive Income Is Worth More Than Active Income

Why Passive Income is Worth More than Active Income

When we talk about financial independence, we often emphasise how important passive income is. Passive income makes money for you without effort. However, it can actually be worth more, dollar for dollar.

Photo by Chris Potter

As personal finance blog Dividend Mantra explains, active income (that is, your usual salary) has a lot of associated costs that come with it. It costs your time and effort, sure. But you also pay taxes on your active income. You have to pay for fuel to get to your job, the home you're tied to near your work, and plenty of other costs. Passive income doesn't have any of those problems:

Second, there's no associated costs with the passive income. No lunches with co-workers, no uniforms, no dry cleaning, and no transportation costs to and from work.

Third, financial independence grants you geographical independence as well. You're no longer tied to one particular spot. How much would you pay your employer (or give up) to work from home? To work from Spain? To work from the mountains in the summer and the beaches in the winter? To work from… anywhere? What's the value in that?

You'll stay pax taxes on passive income, but depending on how you structure it, those can be lower. Of course, passive income is harder to generate sometimes. Investing, starting a side business, or owning rental property are hard to do. Especially if you don't have much to start with. However, they're goals worth working towards. Arguably, it's more important than simply boosting your base salary.

Active Versus Passive: A Dollar Isn't A Dollar [Dividend Mantra via Rockstar Finance]


Comments

    "You’ll stay pax taxes on passive income" - what does this mean?

      It means you pay tax on them and must declare them in your tax return. There are sections for dividends and interest earned.

        That doesn't make sense. When you "stay" something, it usually means "suspend" as in "stay of execution". So when you "stay taxes" doesn't that mean you don't pay tax?

      I think he meant "You'll still pay taxes on passive income".

      Stay Pax is K-Pax's little known older brother, but he prefers to stay out of the limelight.

      Last edited 27/04/15 10:29 pm

      It means we dont spell/grammar check and we're proud of it.

    I think the article greatly underestimates the effort involved in maintaining passive income. True, you could get completely passive income by plonking all your money in a savings account (and be lucky to keep up with inflation), but things such as an investment property or a side business will generally need your input and effort to an extent. That's before you get into risk involved in other ventures like investing in the stock market (or even property).

    The big point is if you do not have an active income 24/7 and all year.
    All your expenses are from your passive income, including tax.

    Passive income is the key to retirement (and wealth).

    If
    'Passive Income' > 'All Living Expenses'
    Then
    You can retire!

    The trouble is that most people seem to keep on increasing their living expenses (they need that fancy car, holiday house, new shiny toy) when they get extra passive income so never realise they could retire.

    Net Wealth and Passive Income are 2 numbers that everyone should be calculating at least quarterly.

      Can't assume that everyone wants to retire - some people actually like their jobs.

      Don't know why you'd be calculating these every three months though, that's probably a bit much. Your passive income probably won't change as much as your net wealth will since things like dividends and rent are a lot more stable than valuations are.

        I like my job. I'd like retirement more, though. And in any case, there's going to come a time in my life when I simply can't work. I should probably be planning for that eventuality and not relying on others, right?

        A quarterly assessment of where you are financially doesn't sound excessive to me. Once you've set up your spreadsheet once, it's just a matter of tweaking the numbers. It's not too onerous to extract your balances from internet banking and update any other data you know to have changed significantly (not going overboard like having a real estate agent out to evaluate your house value every 13 weeks).

        Working for some company or person, its something that I never really enjoyed. If I had a decent passive income, I would never work again. I would have more time for myself and to do other things that I can't do on daily basis, such as travelling around the world. My plan is to have an early retirement....

        Last edited 14/03/16 11:07 am

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