| Definition |
Income earned through direct effort, time, and active participation. |
Income earned with minimal ongoing effort, often from investments or business ownership. |
| Examples |
Salary, wages, freelance work, consulting fees. |
Rental income, dividends, royalties, interest, earnings from a business with hired management. |
| Time Commitment |
Requires continuous active involvement and time. |
Requires initial effort but little to no daily involvement thereafter. |
| Dependency |
Directly dependent on work hours and personal effort. |
Not directly tied to hours worked; income generated even when not actively working. |
| Scalability |
Limited by personal capacity and time availability. |
Potentially unlimited and can grow with investments or business growth. |
| Risk Level |
Lower financial risk but dependent on personal health and availability. |
Often involves higher upfront risk and capital investment. |
| Taxation |
Usually taxed as regular income at higher rates. |
May have favorable tax treatment depending on jurisdiction. |
| Reliability |
Generally more predictable and steady. |
Can be variable and dependent on market or business performance. |
| Effort to Maintain |
Ongoing work needed to maintain income flow. |
Initial setup effort, maintenance varies from low to moderate. |
| Goal for Financial Freedom |
May not provide financial freedom due to time-for-money trade-off. |
Key to achieving financial independence and passive wealth building. |
| Examples of Sources |
Job salary, consulting, hourly work. |
Real estate rentals, stock dividends, affiliate marketing, automated online businesses. |
| Impact of Absence |
If you stop working, income stops. |
Income may continue even without active involvement. |
Active Income vs Passive Income