Earned Income vs. Passive Income

The rich do not work for money” is probably one of the most recognizable and essential quotes in the personal finance space. The quote comes from Robert Kiyosaki, who happens to be my favorite author. By the way, “Unfair Advantage” is my favorite book of his.

I love this quote because it is multi-faceted, and the meaning takes a deeper level of understanding to comprehend its simplicity. At first, most people think that the rich do not work either because they already have money or because they are lazy.

I take the quote to mean that the rich do not earn income or exchange time for money. Exchanging time for money is yet another simple, yet unique concept most individuals do not understand deeply.

How We Built 13 Streams of Income

This article will quickly explain the difference between earned income (exchanging time for money) and passive income. People sometimes confuse passive income with money you get without performing work, but that is hardly the case. 

Let’s start with earned income. Yes, the easiest way to view earned income is money you earned from a job or activity. For my meaning, earned income is where you exchange time for cash and have no control of the value of your time. This is a valuable distinction because there are some instances where you can trade time for money under your terms.

Next, we’ll look at passive income. Passive income is money you can make while you are doing something else, even while sleeping. Some passive income vehicles are dividends, interest, rental income, royalties, pensions, and an automated business. 

Learning the ways of passive income was life-changing for my wife and me. We were both working hard for money, like most people, and we couldn’t seem to get ahead. Then, we learned that there are only 24 hours in a day.

If you are working for money, even at $1,000/day, there is still a ceiling to the amount of money you can achieve. To truly become rich, you will have to separate yourself from the act of making money.

That last statement leads directly to building a passive income stream. You see, passive income doesn’t come randomly into your account. You either have to know something, invest in something, or create something. 

Don’t Gamble Your Retirement Away

For dividends, You will need to understand dividend-paying stocks such as blue-chip stocks, index funds, and closed-end funds. For interest, you will need to learn about cryptocurrencies and bonds. For rental income, you will need to own property and leverage other means to derive revenue. For pensions, you will have to work a job for years and retirement and invest in a Roth IRA program. For an automated business, you will need to start a business and remove yourself out of it via automation, out-sourcing, and management

Now, here is where things may get a little tricky. Is exchanging time for money always a bad thing? I previously said that we want to avoid exchanging time for money, at least as a long-term goal. For instance, our goal shouldn’t be to work for money until age 70

But there are some instances where exchanging time for money can be beneficial to your financial journey. What if you become an author and get invited to talk to a group of prospective writers? 

Cash Flow 104: Create Your Long Term Strategy

At this point, you can control the amount of money you make and whether you choose to take the gig or not. You are exchanging time for cash; however, it is on your terms. As I said in Investing Insider or Outsider, you are an insider if you can control time and money. 

Most of us will start with an earned income job. Unless your parents are wealthy AND teach you how to build passive income, we are stuck exchanging time for money. Working an earned income job isn’t all bad (I have been in the military for over 22 years) because you will learn hard and soft skills as you progress. 

Some hard skills are computer networking, managing personnel, and resource management. Some soft skills are leadership, motivating others, and dealing with customers. You will need these skills as you start businesses and manage tenants. 

The question is, how do you go from having an earned income job to living on passive income? The answer is straightforward—slowly. That is right, you first need to learn the ways of passive income, then you slowly set goals, and finally, you walk the path to financial freedom. 

For example, my passive income goals are to have $6,000/month in retirement income (pension), rental income, business income, and investment income. Right now, I am currently sitting around these numbers: Pension ($5,500/month), Rents ($2,400/month), Business ($50/month), and Investing ($500/month). 

Mailbox Money: The Power of Royalties, Rents, and Dividends

As you can see, I have a ways to go. However, with this amount of passive income, my wife and I are already very comfortable. We have achieved Stress Freedom, and now we are slowly creeping towards our goals and learning more as we travel the path. We are playing the long game while most people are trying to party with earned income. 

The main takeaway is that most people will start by exchanging time for money with an earned income job. Don’t let that hinder you and lower your self-worth. You can build a solid foundation of passive income by learning how to create money. 

I have written articles and books on all the various forms of passive income, and I now refer you to those. They are retirement planning (book), business (book), investing (book), cryptocurrencies (book), and real estate (book). Finally, you will need to read about financial mindset (book). I also have a mega guide to all the books I have read thus far on my journey. Reading is the best habit you can build if you want to become rich. 

That’s it for me. I hope this is an excellent introduction to passive income. Don’t overwhelm yourself. If you can make $5/month in dividends, you can make $5,000/month in dividends. The concepts remain the same; the amounts become much more significant. That is when you become financially free. Enjoy and Happy Investing. 

  1. Free PDF Downloads: Download FREE PDF books here
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  6. Real Estate: Financial Independence through Real Estate (book)
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