Passive vs Nonpassive Income Streams – The Differences and Best Strategies

If you receive income, then you receive it in one of two ways. It is either passive income or it is nonpassive income.

Passive income is defined as money you would receive without needing to be involved in the day-to-day activities of what earns income. For tax purposes, passive income is earnings you would derive from a limited partnership, a rental property, or some other venture where you are not actively involved.

Many analysts will also consider income earned through interest and dividends to be passive income as well. The IRS disagrees with this assessment, however, and classifies the income as portfolio income instead.

Nonpassive income is usually referred to as “active income.” These are earnings you receive when you are directly involved in the day-to-day activities of what you do. If you are employed and receive a paycheck on a specific schedule, then you receive nonpassive income.

It is possible to receive income from passive and nonpassive sources simultaneously. The IRS would say that you can receive income from all three types they recognize as well.

There is one primary difference between these two income sources. With active money, you must physically work for what you receive. If you are not at work, then you are not earning anything.

With passive income, your money continues to grow at all times. It doesn’t matter if you are on vacation, take a sick day, or go to bed at night. You will keep earning money.

What Are the Best Strategies to Earn Passive Income?

Although there is a popular expression that says you must have money to start making money, that isn’t always true. You don’t need to be wealthy to begin earning a passive income. You just need to know how to implement the right passive income strategy for your financial needs.

Here are some of the most common ways to begin earning a passive income.

1. Rental Income.
If you own something, then you can rent it to earn some cash. For many people, that means renting a home, a spare room, or even a treehouse out in the backyard to earn some cash. For those who don’t own real estate, you could rent out your bicycle through a company like SpinLister. You could rent out your driveway for parking. You could even rent out your lawn equipment.

2. Commercial Real Estate.
Thanks to crowdsourced real estate funding today, it is possible to invest into commercial real estate shares for as little as $5,000. This removes the hassle of maintaining the property or finding tenants while you get the chance to earn more as the equity of the property grows. Any investment creates risk, of course, so there is also the chance you could lose money here.

3. Outsource a Microbusiness.
If you have a great idea, but no time to create active income with it, then try outsourcing it instead. You’ll need to be active at first to get the business off the ground. Once you do, you can outsource the work you get to freelancers, pocket the difference between the contract you receive and what you pay others, and earn a decent income over time.

4. IP Licensing.
You can also license a great idea you might have to a company wanting to bring it to the market. Some investors might want you to present a fully-developed idea before they will consider licensing. Others may be more interested in the pitch than the presence of a prototype.

5. Become a Silent Partner.
If you invest into a partnership, being a silent partner means you get the financial rewards from the work being done without doing any of the work. You might want to offer advice or make your presence known every now and then, but in this role, you are mostly hands-off. If the business goes down, so will your investment, which means you must perform your due diligence before deciding on the right course of action.

6. Be Conservative with a CD.
One way to build income for the future is to invest into certificates of deposit. These CDs provide a guaranteed interest rate over a specific time period. By creating a ladder when each matures, you’ll be able to generate income passively without doing any work at all. You’ll just need enough money to establish your first CD ladder, then have patience to wait for the results.

7. Repurpose Your Work.
If you have put together a lot of work in the past that is no longer being used, then repurpose it. Put together your old presentations, audio files, videos, and samples into a resource that businesses can use to be more productive. This could include a membership website, ebooks, or a full kit of products that can be used repetitively. Digital artwork would even fit into this category.

What Are the Best Strategies to Earn Nonpassive Income?

Because nonpassive income is based on the compensation you receive for the actual work you do, improving how much you earn will take some courage. The first choice you must make is to stop doing what you are doing right now.

If you keep working at the same job, earning the same wages, then you will not improve your nonpassive income. You might get a raise or a bonus here or there, of course, but not anything that would be life-changing.

Have the confidence in yourself that you can earn more than you are making right now. Then have the courage to make the changes necessary to start pulling in more income.

Here are some ideas to help get you started.

1. Prioritize activities where you earn some money.
You may not be able to quit your job right away because you’ve got bills to pay. That’s fine. You can add a side hustle or a part-time job to the mix. About 20% of your activities results in 80% of your active income each day. Figure out what you do best, then focus on those strengths. In time, you’ll be able to leverage your skills and experience toward income creation. If you are working in an area that is not profitable, then stop.

2. Place the right value on your time.
What holds many people back from achieving their true income potential is that they under-value their time. You can make more money. You can’t make more time. As a general rule of thumb, consider your time to be double the value of what your hourly income should be. Then work toward responsibilities that will compensate you appropriately.

3. It is okay to refuse a job.
Some people take jobs because it feels like the best thing they can get. That commits them to a nonpassive income level which may be lower than what they deserve. If your gut says you shouldn’t be working at a certain job, then quit. If you believe that a contract is under-valued for you, then walk away from it. There is nothing wrong with you if you say “no,” even if other people think otherwise.

4. Listen to the advice of others.
People tend to perform at a level where they can begin to taste success, but nothing more. That is because most people hang out with others who think and act like them. If you don’t have money, and your friends don’t have money, then you can all be broke together. Reach out to people who are already where you want to be. Ask them how they got there. Talk about what you need to do to get there too. Choose your friends wisely and your mentors with care.

5. Remove all the excuses.
There is an interesting rule in life that goes something like this: if you make up a lot of excuses, then your bank account will keep going down. It’s like the reverse of Pinocchio’s nose when he lies. An excuse is a way to validate a lack of active income. Spend the time and energy you’d use to think up a creative excuse to think of a creative business idea instead. Maybe you need to charge more. Maybe you need to switch jobs. If you are valuable, people will continue to work with you.

A Final Thought About Passive and Nonpassive Income

Passive income tends to grow over time. When you make investments into this type of income, you are creating a future where you can reduce, if not eliminate, the need to earn active income.

Nonpassive income can grow over time as well. Invest into yourself. Have the courage to charge more for your services or ask for a higher salary. If you can take responsibility for everything that you have in life, then you can begin to change anything in your life.

Some people will see quick successes as they work toward a higher income. Others may see growth as a slow burn. Either way, as long as you keep moving upward, you’ll eventually reach your financial goals.

Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.