The different types of income.
The concept of having different types of income never came across my mind since young. Mind you, I had almost one and a half decades of education from a country frequently touted as having some of the best education systems in the world.
As simple as that question may be, I must say it was a new concept with mind-altering effects when I read about it when I was in university.
I was introduced to the concept of the different types of income from a book by Robert Kiyosaki, Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!.
It was not part of my university syllabus, and somehow it is not a good book to read when you are in university as it completely bombs the university system. To the extent, it made me wonder why I should continue my university education.
In a nutshell, author Robert Kiyosaki says that there are two types of income, Active Income and Passive Income. In our society, most of our activities and education are geared towards generating Active Income. Coupled with bad money management habits such as this and this, most of us will forever feel that we do not have enough money.
Robert Kiyosaki gave me a different definition of assets and income. He also introduced the concept of financial freedom to me.
Active income is simply income in which you exchange time and physical labour to get. This covers all types of paid employment. It doesn’t matter if you are a blue-collar worker or a white-collar worker.
Income flows in when you devote time and effort to work. Income stops when you stop devoting time and effort to work.
It is outright the most common income generation method.
The Pros of active income is that it is a lot easier and faster. All you have to do is to go to work and at the end of the month, you will get paid.
Generally, people will gets paid for work. And employment is generally rather easy to obtain. (Provided you are not picky.)
The Cons of active income is that income stops when you stop working. And your income is limited to the amount of time that you have in a day. In which everyone in the world has the same 24 hours in a day.
Passive income is simply income that you get without having to commit much time and physical labour. Many people thinks that passive income is income that you get by using money to create more money.
That is true. However, there are many more ways to obtain passive income, such as writing a book, creating a YouTube channel, creating a affiliate marketing system, creating a dropshipping system.
As long as the system can create income without you having to commit a lot of time and effort to it, it is considered passive income.
Of course, using money to create money is a very effective form of passive income.
Passive income are income that continues to flow in even when you are sleeping, playing and working on your other jobs.
Pros of generating passive income is that it money continues to come in without you having to put much care to it. The potential of passive income is infinite.
The Cons of passive income is that it takes a lot more time and effort to achieve a substantial amount of passive income. eg. It is not difficult to get active income of S$2000/month. However, to generate S$2000/month in passive income takes considerable more effort.
Financial Freedom is a state of life where your passive income exceeds your expenses. In other words, you are not reliant on your active income for your expenditures.
When you achieve that life status, a whole lot of options opens up for you.
It was by reading that book that I had a clearer view of how things work in society. Gone was the time where getting the high-paying job was the only solution for me.
Understanding passive income and active income gave me a secondary route of income. Upon my embarking on my journey in investment, I discovered that financial freedom is not as impossible as many people make out to be.
It takes time and is not easy, but the rewards far outweigh the initial starting effort required.