Types of Income - Passive Income vs Active Income etc.

Everyone knows you work and you get paid. That is only partially true. When you go to work and clock in, your income is earned income; you put in a week’s worth of work, they pay you for what they think your time is worth (of course, you agree with it by not asking for a raise.) But there are two additional categories of income that many do not realize.

Portfolio / Paper Income

This type of income comes from dividends from stock holdings or the sale of stocks or bonds. Many of us already have this, even if we don’t own stocks. Raise your hand if you have ever received a statement from your bank, usually in January, on the interest accumulated from savings or interest-bearing checking accounts? (How many of you still have your hand raised? Put it down, you look silly.)

Passive Income

This type of income is the best because often times it requires the least amount of ongoing work. Passive income is when you do something or create something that pays you indefinitely (or for a set period of time.) Passive income can be business holdings, rental income, or royalties.

Star Wars and Passive Income

A great example of the power of passive income is the story of Sir Alec Guiness. Sir Alec starred in a movie called “Bridge over the River Kwai.” Years later he saw the movie was being played annually on TV, but he never received any royalties for its performance, mainly because he didn’t negotiate for any. So, in the mid-70’s he was approached to do a sci-fi movie. Sir Alec was not a fan of the sci-fi/fantasy genre, but he saw that more and more of these movies were being made and if this one was any good, he could negotiate for royalties and get a little more once he retired. So, he decided to do it, and negotiated for royalties, much to the mockery of his co-stars. Sir Alec asked for only $20,000 up front (not much even by 1970’s standards) and 1% of items with the movie’s name. So, Sir Alec made a little movie with George Lucas called STAR WARS. All of his co-stars said they wish they would have followed suit with their negotiations, even Harrison Ford said if he’d done that, he would never make another movie. Sir Alec Guiness passed away in 2000, but reaped the rewards of the new STAR WARS trilogy, and the toys and all “officially licensed” products.

That my friends is the power of passive income. Now you and I may never get the opportunity to be in a pop-culture changing film, but there are ways to do this, just not that much that quickly.

Related posts:

1. Generating Passive Income