What is an Income?
Income is a monetary advantage
gained by an individual or a business institution in exchange for the goods or
services they provided or for the capital invested. Income is generally used by
the acquirer for funding the everyday expenses. Most of the income are
subjected to taxation. (Income not subjected to taxation.)
Income is generally classified
into two categories:
What is Active Income?
Active income is an income where
you are paid for the work you do. This can include commissions, tips, salaries,
wages or the monetary payment you earned from a business where you have an
active participation. For example, Sam is professionally a doctor, he gets paid
only if he actively provides his service to the patients i.e. treat and cure
them from their conditions. The day he takes off from his jobs or goes out for
a vacation with his family he doesn’t earns a single penny.
Thus, the income generated from
the active involvement of your physical or mental aspects includes in active
income. Money one generates from completions of specified task/projects or by
working in 9 to 5 jobs is an active income.
What is passive Income?
The income generated from the
sources which requires minimal or no efforts from the recipient is called
passive income. It is also where you get paid over & over again for the
work you that you did only ‘once’.
The decisive factor to note here
is that passive income sources requires an extensive upfront work or monetary
investment and proper nurturing in the initial phases of its formation. For
example, James is a retiring federal employee, he invested his retirement funds
in the stocks of XYZ Private Limited. This industry provides high quarterly dividend
to all its investors. Thus, James for rest of his life gets paid in the form of
dividend without any regular effort put into it.
The alternative example for
passive income is ‘Royalty’. The amount paid by the publisher to the creator of
art in the form of money for each of his work being sold is called royalty. J.K
Rowling, the author of Harry Potter series, gets paid for her each book being
sold worldwide for the rest of her life.