Secrets of the Rich: Active Income vs. Passive Income

From: http://www.millionaireacts.com/639/secrets-of-the-rich-active-income-vs-passive-income.html

I’ve been spending my time lately really educating myself on financial literacy. I admit my job has been so boring and not challenging so instead of killing myself to boredom, I’ve been using my additional time efficiently and effectively by adding additional knowledge on my financial education.

In addition to my article, “what’s makes rich gets richer?” I’ve recently watched a video of Robert G. Allen, the author of the best selling books Nothing Down and Creating Wealth as he discussed the difference between linear income vs. residual income.

I came to these two terms before when I first knew about Cashflow Quadrant of Robert Kiyosaki. To him, there are two main divisions of the cash flow. One is Active Income where you work for money and one is Passive Income where money works for you. In Robert Allen’s video, Active Income is also called Linear Income and Passive Income is also called Residual Income.

Now, how do you distinguish between the two? Ask yourself the following questions:

How many times do you get paid for every hour you work? If your answer is only once, then it’s active income! In active income, one hour of effort equals one unit of money one time. However, in passive income, you will get paid many times for every hour of effort. A doctor can only see one patient at a time so he gets paid for every patient that he has.

Do you have to be present to earn income? If your answer is yes, then that’s active income. If your answer is no, then that’s passive income. A lawyer earns active income by presently attending to his clients.

Did you get the picture? Passive income is a stream of income that you can own. It can be a “hands-off” income. It’s an automatic pilot. The secret of the rich is to increase their streams of income. This is done not by increasing their active income by taking a second or even a third job but by increasing their passive income. Now, where can we get this passive income?

Here are some of the sources:

Interest Income. Yes, we can earn passive income from the interests of our savings deposits. We can also earn passive income through the interests of our bonds.

Dividends. We can also earn passive income through our stock investments. Companies share their income to their stockholders by either giving them cash or stock dividends for every share they own. Alternatively, we can also earn it through the dividends of our mutual funds or uitfs. Or probably from insurance policies which also gives dividends.

Real Estate. Real estate investments can also earn us passive income. My ideal real estate is a self-liquidating asset. That is you buy a property, pay the down payment only not the whole contract price, and rent it out to tenants. The monthly rental income from the tenant itself will be the one paying for the monthly amortization of the mortgage to the bank. The rental income will be our passive income in this case.

Royalties. Ever wonder why even though Elvis Presley was now dead, he still earns income? Yes, that’s the power of passive income! His albums that he did before when he was still living continuously earn royalty income for him. For every album sold, he gets a royalty fee that’s why even he’s dead, he is still earning.

The same goes for the author of books. Just imagine how rich J.K. Rowling, the author of Harry Potter, has become. She might be getting pennies for every sold copy of her book but it gets multiplied a million times as her Harry Potter is a best seller book with millions of copies sold. Not only that, she also gets royalty fees from the film Harry Potter series itself.

Another source of royalty income is thru franchise fees. The original owner of the business gets a royalty income for every franchisee that he has. Just imagine how rich are the original owners of McDonalds now that it has thousands of franchisees worldwide.

Websites. With the coming of industrial age, successful internet entrepreneurs have also built passive income thru their blogs or websites. I have seen a few of them and one perfect example might be one of the largest adsense earners. His website, one of the largest dating websites called Plenty Of Fish, attracts millions of visitors per month enabling him to earn an easy US$1 Million per year.

Networking. This is also called MLM of Multi Level Marketing System. This is another form of passive income yet a lot disagrees to its pyramiding concept. It’s like building a team of sales people who will provide you with huge passive income as your group and sales increase.

So there you are the sources of passive income. The secrets of the rich is to increase the streams of income more on the passive income rather than on the active income so that if one stream of income dries up, there will be other streams to support them. This what makes rich gets richer.

Someday, if God permits, I would like to be an author of a book. I would personally want to have passive income from its royalty fees. Or possibly buy a real estate where I can have passive income through rental income of tenants. As of now, I rely on my active income from my paychecks with just a very little passive income from interests on savings and dividends from stocks.

Do you still have other sources of passive income in mind?

Create Passive Income With Google Adsense

Here is a nice article on Google Adsense written by Michael on June 16, 2010

Google has changed the way webmaster’s make money online. They have created a nice program called Adsense that allows any webmaster to make money off of their web pages. Adsense is completely free, and if you run a website, you can create a nice source of passive income with Google Adsense.

What is Google Adsense? – Google Adsense allows you to make money off of your web pages by displaying relevant, contextual ads on them. Every time someone clicks on the ads, you get paid. You get paid between $0.03 cents per click and several dollars per click. The amount you get paid depends on how much the advertiser is paying per click. What’s great about Adsense is that it only displays ads related to the content on your web page. For example, if your web page is about vending machines, then Adsense will display ads about vending machines. If your web page is about college, then Adsense will only display ads related to college. This increases your click-through rate dramatically.

After you have joined Adsense, you’ll want to create the Adsense code needed to put on your website. Do this by logging into your account, and then clicking on “Adsense for Content” at the top of the web page. On this web page, you have many options available to you for customizing the look of the ads. You can choose the color of the text that appears in the ads. You can also choose the background color of the ad box. A great way to maximize your Adsense revenue is to make the ads “blend in” with your website. You can do this by making the background color of the ads match the background color of your website.

The next step is to copy the code at the bottom of that page, and then paste the code into your web page. The best places for Adsense ads are right above page content, above or underneath a navigation menu on the left, and also at the bottom of a content page. Adsense ads that appear at the top a web page or on the left of the web page generally generate the best click-through ratios. The more clicks your ad gets, the more money you’ll make.

How You Get Paid By Google – Once your Adsense account has earned $100.00, Google will issue your payment either by check, or by depositing the funds directly into your checking or savings account. I personally recommend the direct deposit. It is much easier than waiting for a check to come in the mail.

A Few Adsense Tips of Success

Don’t Click on Your Own Ads! Clicking on your own ads is known as click fraud, and Google will disable your account in the blink of an eye.
Put Adsense on all of your web pages to make each page of your website an asset.
Generate more revenue by adding Adsense for Search on your web page.
Placing images above the ads has been shown to result in a higher click-through rate.
Learn how to use Google Channels.
The amount of money you make with Adsense depends on a lot of different factors. In theory, the more website visitors you have, the more money you can make with Adsense because your Adsense ads will get more clicks. Adsense is perfect for content-driven websites that have a moderate to large amount of website traffic.