Active vs. Passive Income: A Beginner's Guide to Getting Started

Many people think that passive income is this magical solution to all their problems and if they can just find it, life will become blissful as all their money troubles will disappear overnight. This couldn't be further from the truth. Yes, passive income is a great way to supplement your current income and increase your cashflow so you can reach your financial goals faster but it's not as easy as some gurus want you to believe. Active income, on the other hand, is the regular paycheck you get for doing actual work. This article will help you further understand the differences between active and passive income as well as introduce some ways to get started building passive income streams.

What is active income?

Active income is  money earned through a process of exchange. This can be anything from your salary for working for someone else to money made by providing goods or services that are bought and sold. The more effort you put in, the greater your income will be.

This is the income we all know and love because it's something that just keeps on giving - every hour worked earns money, or  money spent buying a product or service becomes revenue for that company. The most common instances of active income are from wages/salaries and self-employment.

Small businesses are a great example of active income generation because they provide a tangible good or service in exchange for money. Every time an item is sold, an entrepreneur receives active income.

Pros and Cons of Active Income

Active income is something that you generally have a fair amount of control over. You can choose to work as much or as little as you want and your salary or hourly wage payout will change accordingly. The more time invested, the higher the reward - which is great if you need to generate quick cash but not so ideal if you want to do something entirely different with your time.

Some of the advantages and disadvantages of active income:


  • Can be earned quickly if you're in a position that provides more opportunities for earned income

  • You can set your own hours or schedule (depending on the active income source you choose to pursue)

  • As long as you have the knowledge or skills required to do whatever it is you're doing, making money isn't too difficult  (note: this is not the case for everyone!)

  • Can be much larger than passive income (if you're very good at what you do)


  • The more time invested, the better the payout. This can make it difficult to balance with other commitments like family or leisure time, unless your work schedule provides for hours outside of normal working hours.

  • You're not always in complete control of your income - if there's less work available you might get laid off or someone else can take your place easily if they know what they're doing

  • You're generally paid per hour worked, rather than for a set number of hours. This means that if you end up working more hours than you intended, the amount of money made is less than you expected

  • As mentioned before, active income requires some form of skills or knowledge. This can come with a high cost such as traditional college degrees or specific trade-based schooling.

What is passive income?

On the other hand, passive income is money that is made with little-to-no on going effort, other than monitoring. It comes from assets, investments or other means in which money is made while doing something else. The most common form of passive income is the result of investing your time and money into something that provides you a source of long-term revenue. This means that you're not living off all of the money you make, but rather setting it aside and using it to generate more income in the future.

Pros and Cons of Passive Income

As opposed to active income, passive income is much more difficult to build but the rewards are well worth it. This type of money requires a larger up-front investment in most instances, but if done correctly can provide you with long-term revenue for years to come - even while you're sleeping!

Some of the advantages and disadvantages of passive income:


  • Requires time and effort up-front but once the process is established, it runs on its own with little-to-no work required from you.

  • You don't have to be available every hour of the day to make money. If you have a business or some source of income that requires your time, you can simply do it part-time and increase the passive income generated.

  • Greater potential for long-term returns on your initial investment

  • Higher earning potential than active income because of all the free time available to utilize in active income pursuits.


  • Requires a larger sum to begin with (which might not always be available).

  • While it might not require a full time effort, passive income does need to me managed, and some times adjusted to meet general financial or market conditions 

  • If done wrong or without enough knowledge, can end up costing you more than you expect. For example, if not planned out properly passive income could require more maintenance than active income.

  • Passive income can complicate taxes depending on how it is structured. There could be capital gains or self-employment implications depending on where you live, so it's important to make sure you understand the implications from the start. 

How to start growing your passive income sources

The first step to becoming a successful passive income earner is knowing where your money will be coming from and how it works. You should always set out with a goal in mind and map out the course you need to take towards getting there.

Some of the most common areas used for generating passive income are:

Investing in the Stock Market

Investing in the stock market can be a great way to generate passive income, provided that you have a large sum of money you can afford to keep in the market for a long period of time. To do this, you'll have to have a fairly good idea of how the market works, what corporations are worth investing in, how dividend payments are structured, and so on. If you're just starting off in the stock market, there are a number of companies that offer robo-advisors which can manage your investments based on real-time and historical data and can bolster your investment income. In addition, many companies offer 401-k's or IRAs for employees to save money for the future while earning interest. By developing a robust selection of investments that span these options, your portfolio income can serve as a source for earning money without direct involvement. Note that the stock market is volatile and, as with any investment, you risk losing all the money you put in at any given time.

Real Estate

Another common form of generating passive income is through real estate - whether it's rental property or reselling homes/properties for profit. You'll typically see this method advertised by people who are already successful real estate investors because it requires a large initial capital investment, but you can apply the same basic principles to acquire properties yourself. This is one of the highest cost to entry passive income sources as you'll have to purchase real estate before seeing any passive income generation come out of it. In addition, real estate can come along with high costs, especially if you are trying to generate income off of rental properties, because things inevitably go wrong and you'll be on the hook for fixing anything that does. If you have the ability to develop this passive income stream, rental income is a great way to earn extra money, but it may require you being actively involved in some cases.

Referral Programs

Referrals are a great way to generate passive income. You simply refer someone to a company or product you're already familiar with, they enjoy the service/product, and then the company compensates you for referring that person. Some of the most common referral programs are for credit cards, utilities providers, insurance companies, and even mortgages. Oftentimes, these referral programs compensate in the form of credit to put towards a product or services you have already used. Mainvest has a referral program that provides compensation for referring a small business who launches to raise on our platform with the choice for credit on our platform or cold hard cash. You can get started referring businesses to raise capital and make passive income here.

Investing in Small Businesses

Mainvest is on a mission to make passive income actually feel passive. By allowing investors to invest in small businesses with as little as $100, we've created a passive income opportunity for people who want to watch their money work without the necessity of materially participating. Our investments work on a revenue sharing model where businesses offer investors Revenue Sharing Notes that entitle them to a percentage of a business' revenue until the note is repaid with interest accrued, or the note reaches maturity. Investing in a Mainvest business is a great way to build a passive income portfolio while also earning active income through other sources. To learn more about how our platform works and start combining this passive income source with other active income sources, read up here.

Which one is right for you?

In conclusion, active income and passive income sources are relatively easy to understand and differ in the amount of time and effort needed to make both. While active income sources generally refer to a typical 9-5 job where you are paid for your time and skills, passive income sources can span a much wider range of opportunities. The good news? You can do both at the same time! Passive income is meant to be passive and not take up too much of your time so you can use it to earn money through active income pursuits. Utilizing both enables you to potentially bolster your annual income and set you on a path to financial freedom. Some passive income sources are more passive than others and it's up to you to decide which ones are best fit for your risk profile, portfolio, and personal finance habits. Want additional insight? Our friends at have some additional insight. Read more here.

posted October 20, 2021
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