Active income is income received for performing a service or income from business where there is active participation. Examples of active income are salaries, wages, commissions, tips, fees and business income. A person spends a lot of time and effort in the activity which generates active income. Active income source requires a person’s presence in most cases and also needs significant involvement. There will be no active income without active engagement.
If you work for a company or a person – be it manual labor, office work, home based work then you earn active income. If you are self employed then also you earn active income. People doing full time jobs, part time jobs, freelancing and contract work are all earning active income. Active income is the most common type of income for most households worldwide.
Understanding Active Income
Let’s understand this concept with a few examples. Deepak has a full time job in a software company. He works 8am to 5pm daily from Monday to Friday. He earns a salary of Rs 80,000 per month. This is active income for Deepak as he is spending a large amount of time daily on the activity.
Ravi works as a delivery boy in a ‘Pizza joint’. He works part time from 5pm to 10pm daily including Sundays. He earns Rs 20,000 per month from this part-time job. Ravi is spending a significant amount of time (5 hours daily) and effort (delivering pizza) in this activity. So the money he gets is active income for Ravi.
Preeti is a graphic designer. She works from home on a part time job. She earns Rs 30,000 per month from this job. Here, though she is not physically present at work she is still actively engaged in the activity. Also, she is spending a significant amount of time on the job everyday. So the income earned by Preeti is active income.
Benefits and Limitations of Active Income
Active income is a certain source of income. It is dependable and predictable. It also comes at pre-determined periods (eg. last day of each month). All these factors help a person to plan, save and invest their monthly earnings better. The problem with active income is that it is time bound. A person will earn active income only as long as he/she is able to work.
How to take advantage of active income and passive income?
Active income and passive income are inter connected. When you earn more active income, you can invest more to earn passive income. If your active income is meeting all your expenses and still leaving a significant amount of money, you can invest more aggressively in passive income sources.
When you earn more passive income, you can afford to take risks like explore new career avenues, go back to studying for a MBA degree or any other course and change careers. More passive income in the long run, can provide you with financial freedom and allow you to make time for things, activities which are more aligned with your life goals. Having active and passive income sources, opens up many possibilities and opportunities for a person.
