There are two types of income: passive income and active income. Although most individuals have heard of passive and active income, many don’t understand how they differ or how to generate passive income. Many people think that the secret to accumulating money and achieving financial freedom is to understand how to generate passive income.

ACTIVE INCOME –  Money earned from performing a service, such as working a full- or part-time job and receiving a salary, commissions, or tips, is referred to as active income. Two more types of active income are earnings from self-employment and materially participating in a firm while receiving compensation. For the majority of people, earning active money comes before producing passive income Whether from part-time or full-time work, hourly pay is a typical source of active income. A salary is another type of passive income. Another type of active income is commissions, albeit the sum might significantly vary depending on the task. Based on the calibre of the service rendered, tips are a form of active revenue. Freelance fees and consulting income are two other types of active income.

PASSIVE INCOME – Passive income is typically generated by an asset that generates income but with which the investor is not actively involved. Frequently, funds from sources of active income, such as earnings, salary, or other remuneration, were used to buy that item. Investors do not pay Social Security or Medicare taxes on passive income, and they can lower their income tax burden by taking advantage of a variety of possible tax deductions, in addition to not having to work hours each day to produce passive income. Many other methods, such as investing savings in a certificate of deposit or owning bonds, can be used to generate interest income. Another potential source of passive income is dividends from equities that are traded publicly. Apple, Nike, and Mastercard are a few well-known blue chip firms that pay dividends.