To truly understand what is passive income, you will need to understand what is active income.

Active Income

Active income is any income that you are actively pursuing and requires you to work in order to receive that income. In other words, active income is the direct exchange of your time for money and it stops if you stop.

For most people, active income is their one and only source of income – which is usually from their jobs.

Here are some examples of active incomes:

  • A teacher needs to teach in order to earn his/her salary.
  • A real estate agent needs to represent either the buyer or seller of a real estate property in order to earn the commission.
  • A lawyer needs to meet with clients and work for them in order to earn his/her fees.

In all of the above cases, the person needs to be working or exchanging time for money.

Passive Income

By contrast, passive income is money that will come in even when you are not actively working for it. It will be coming in when you are hanging out with your friends and even when you are sleeping.

How is that even possible?

Let me explain.

Passive income does not mean free money and it certainly does not just come out of nowhere. In order to earn a passive income, you will need to put in time, effort, and money upfront to set it up.

For example, rental properties are a common source of passive income. However, you will need to put in some work and money before you can start making any money from it.

Let me elaborate.

First, you will need to spend some time to either research or work with a real estate agent to look for an investment property. Next, you will need to spend money to buy your investment property and possibly spend a little bit more money to fix the place up. Then, you will need to look for tenants and screen for good ones. Once you have found your tenants, your passive income would start in the form of rent payments.

So while the goal is to create streams of passive income, do understand that creating those streams is a very active endeavor. You must do the work first before you can enjoy the results.