Building wealth and ensuring financial security for the future is everyone’s wish list. If money grows on trees, how easy would it be to pluck bills without working? But that’s not the case, and that’s why adding a new layer of understanding on earned and passive income is a moneysmart way to get started.
Both are essential components in transforming your finances. We’ll dive into these two forms of money generation so you can see which one will help define your personal finance journey and start growing your wealth slowly and surely.
- Importance of building wealth
- What is an earned income?
- How to grow earned income
- What is passive income?
- How to build passive income
- Why should you diversify income streams?
Importance of building wealth
Building wealth can significantly impact your lifestyle and mindset, and it helps you achieve financial independence and security. Here are some key reasons why:
- Financial independence: Make choices about your life, career, and future without relying on others for financial support. For example, if you have enough wealth, you can retire early, start your own business, or pursue a passion even if it doesn’t pay well.
- Security: Enjoy a sense of security, knowing that you have a safety net in case of emergencies or unexpected expenses. Reduce stress and anxiety, and experience life in fullness.
- Legacy building: Leave a legacy for your loved ones or future generations. For example, you can leave an inheritance, donate to charity, or fund a scholarship program. You make a difference in the community.
- Long-term financial goals: Achieve long-term financial goals, such as buying a house, paying for your children’s education, or saving for retirement.
- Compound interest: Benefit from the power of compound interest, which allows your money to grow over time.
What is an earned income?
An earned income is the money you receive from working for someone else or running your own business. In general, it includes:
- Freelancing and consulting income
It’s the money you earn by providing a service or working for a company.
Advantages of having an earned income include having a stable source of income, receiving employment benefits like health insurance and retirement plans, and learning new skills and gaining experience in your field.
However, having an earned income can also have disadvantages. You may have limited control over your working hours, have to deal with office politics, and not be able to make as much money as you want.
How to grow earned income
Hard work is the currency of growing your earned income. You can try any of these to increase it.
- Learn new skills and become an expert in your field. It will make you more valuable to your employer and increase your chances of getting a raise or promotion.
- Negotiate your salary or commission with your employer. Don’t be afraid to ask for what you think you deserve.
- Consider starting a side hustle or freelance work to supplement your income.
- Read and always stay updated on market trends and job openings, and find opportunities that pay more.
What is a passive income?
Passive income is the money you earn without putting in any effort or working actively. It is called passive because once you have set it up, it requires little or no ongoing work.
The common types of passive income are:
- Rental property investments
- Real Estate Investment Trusts (REITs),
- Interest earned
- Royalties from creative work like books, music, or artwork.
These investments grow over time and can make you money without getting up for work daily. You call it passive income because money still comes in while asleep.
The advantages of passive income are that it can supplement your regular income, help you achieve financial freedom, and provide a stable source of income. It can also involve less work, allowing you to pursue other hobbies or goals in life.
On the other hand, you need to invest or put your money upfront — mainly in large amounts. How much you earn depends on how much you’re willing to invest. Most importantly, it requires patience and may take time to generate a significant return.
How to build passive income
Make money work for you with these valuable tips on building a passive income.
Invest in rental properties
If you have a spare room or property, you can rent it out on platforms like Airbnb or Booking.com. This can be a great way to earn extra income, especially if you live in a popular tourist destination like Palawan or Boracay.
For example, Mr. Santos bought an apartment worth ₱1.5 million and rented it out for ₱13,000 a month. In a year, he earns ₱156,000 from rent alone.
This is a type of lending where you lend money to individuals or businesses through an online platform. You earn money from the interest rate charged on a loan.
Say Ms. Cruz lent ₱50,000 to a borrower with an interest rate of 10%. In a year, she earned ₱5,000 from the interest.
Investing in stocks that pay dividends regularly can be a good source of passive income. Dividends are a portion of a company’s earnings paid to shareholders.
For instance, Mr. Reyes invested in stocks worth ₱50,000 that pay a 5% annual dividend. In a year, he earned ₱2,500 from dividends.
Creating and selling online courses can be an excellent source of passive income. If you are an expert in an industry, you can create a course and sell it via subscription.
Ms. Garcia created an online course on baking and sold it for ₱1,500 per student. She had 50 students in a month, earning her ₱75,000.
This is earning a commission by promoting other people’s products on your website or social media accounts.
Say Mr. Lee promoted a new mobile phone on his Facebook page. For every sale made through his referral link, he earned a 5% commission. He had ten successful referrals, earning him ₱5,000 in passive income.
Remember, earning passive income takes time and effort. Choose the suitable method that suits your skills and interests.
Why should you diversify income streams?
Why should you diversify income streams? Imagine a basket filled with eggs. If one breaks, you still have other eggs left. If you have one egg, you’re left with nothing. That’s why it’s crucial to have more sources of income.
Starting with an earned or active income stream, such as your day job or freelancing, is okay, and that’s a great starting point — from humble beginnings. That said, you can leverage your earned income to build passive income streams, which are sources of income that require little to no effort.
For example, save enough money from your earned income to buy a rental property. You can rent it out and make money without doing any work.
Remember, the goal is to build passive income because time is precious. As you grow older, you have more responsibilities and less time. Passive income allows you more freedom and flexibility.
These life stages are relatable — and real. You might be one of them.
- Young professionals can benefit from building passive income because it allows them to transition well if they change their status, such as getting married or starting a family. They can also save up for their future goals, such as buying a house, starting a business, or traveling the world.
- Building a passive income can help those who are married save up for their child’s schooling or other expenses. It can also provide them with a sense of financial security and stability.
- For those who plan to retire early, having passive income streams can be a great way to supplement their retirement savings. It can also provide them with a steady income stream without working.
Diversifying income streams is crucial to financial success. Earned or active income is good, but passive income is even better. Start with what you have, and use it to build a better future for yourself and your family.
Remember that earned and passive income can be excellent wealth sources, so it makes sense to diversify your income streams.
Create a well-balanced financial portfolio by investing in yourself and building skills to generate an earned income. Once you have a steady flow of money, consider reinvesting some capital into assets that produce passive income.
This isn’t overnight work. It takes dedication, discipline, and support to build wealth. The journey toward financial freedom takes time but is ultimately worth it. Do you have earned and passive income? How are you handling your finances?
Let us know your thoughts below.