Many people are not aware of the difference between Passive and Active Income. Sadly, most people have no idea how it affects their life now, and in the future. We are not taught in school about the differences in Passive and Active income and we go through life wondering why the rich get richer and the poor get poorer.
Part of the reason many people don’t know why the rich get richer and the poor get poorer is that we are all taught to believe the same theory; we should go to school, get good grades, get a good job, in turn we will work hard, earn a good living, and live comfortably until we retire at the age of 65. So how has this theory led us astray?
Passive and Active Income -How it affects you!
Let’s delve into the subject a little further an reveal what affect this has really had on us, and our society. Unbeknown the majority of people, the age of retirees is rapidly increasing. The age of retirement is predicted to be changed by governments once again. In the 1930s the age of retirement was in the vicinity of 60. As time passed on it has been slowly pushed up to 65, and there are ever more discussions to increase the age to 67 and beyond (possibly 70+). The argument given for this debate is that the life expectancy is increasing and we are capable of working longer. This is true, our life expectancy has increased over the past 50 years or so, however despite the increase in life expectancy, the majority of people aren’t happy being forced to work “a few more years”. We are living longer, but this doesn’t mean that we are able to enjoy those extra years. Without being disrespectful to the elderly, most people who are over the age of 67 begin to have a hard time doing the things they enjoy. As the saying goes; people would prefer to start life off old, and die young.
The sad fact is that most people die within a few short years of retirement. It is hardly worth working all those years only to be physically incapable of enjoying them. Moreover, much of the younger generation are trying to enjoy themselves as much as they can before they settle down because they know once they do, they will have little time to enjoy their life. No one wants to go on world cruises, sky diving, hiking, skiing, and traveling the world doing exciting things when they have a heart condition and arthritis in their leg. Life was meant to be lived to it’s fullest, it was meant to be enjoyed while you still have the time to do so. You shouldn’t have to spend your younger years doing the things you want, putting yourself into debt and then working for the rest of your life until you retire old and frail. You should be able to enjoy your life the whole way through!
The Rein of Economic Hardship
The facts just keep stacking up. By 2014 the age of retirement will be the same for men and women as world economies try to tackle the rush of retirees known as the ‘baby boomers’. When Social Security was started there were 16 people working for every one person on the program. Today the ratio is 3:1, in the next 12 years it is projected to be 1:1..! These figures are increasing all around the world. We already have market cycles of recessions and depressions which severely affect many families, what further tax implications will we have to endure to offset this huge increase? Will we end up working solely for the bank and the government?
While the population suffers, the careless world leaders make rash decisions only to keep themselves in power. They make promises of changes with worthless merit during time of election and then neglect to follow them through. Young adults are not leaving home until the age of 30+ due to economic hardship, as they cannot afford to purchase their own house, or live by their own means, while parents are forced to support their children as well as paying exorbitant taxes. Economists have been warning world leaders for years about the economic turmoil which the ‘baby boomers’ will introduce. Unless we take control of our own situation, who is to say what till happen to the generations following the ‘baby boomers’?
The fact is that already out of 100 people at the age of 65;
- 25 are dead
- 20 have Annual Incomes under $10,000
- 51 have Annual Incomes between $10,000 and $35,000 (the Median being $18,000)
- 4 have Annual Incomes over $35,000
- and only 1 will become a Millionaire!
If you’re thinking this wont affect me, think about how it will affect your children. You might not be affected by the economic hardship, but your children certainly are, and if you can’t prepare yourself and your family you might be in for a shock. Some of the richest countries in the world have turned over like a dead fish, and there are no guarantees that it won’t happen to your country. Although it might be nice to dream, the solution to the economic problems doesn’t lie in a new world leader who will supposedly fix all our problems while we sit back and relax. The answer lies within the public. It lies within yourself. That is what drives the economy, and that is what will solve the financial problems of the world. Instead of squabbling over trivial issues, the public need to take a step back and get a firm grasp of financial literacy and what they can do to change their financial situation, rather than relying on the next politician.
The question is: How can we change our financial situation to turn things around? And the answer to that is more simple than you think. The gap between the rich and the poor is merely an education barrier. It is purely because one group of people know more than the other group. It is not because they are smarter, better educated or talented, it is because they know a few simple discrepancies in the handling of money. One of those discrepancies is knowing the difference between Passive and Active Income.
What is Active Income?
Active Income is what many of you know, and is most likely your primary income source. Chances are you have a Job in which you work 9.00 a.m - 5.00 p.m and you receive a weekly pay cheque. The amount of income you receive is determined by your skills, education and what sector you work in. In many countries you may receive sick pay, holiday leave etc, however you must remain in your job to receive an income. If you were to leave your job for 6-12 months you would have no way of paying for your food, bills etc, and this is commonly known as an Active Income.
The benefit of having an Active Income is that you receive money for your efforts immediately. If you work for a week you expect to be paid at the end of the week (although this is not always the case). If you are highly skilled or astute, it is often possible to have a higher income for less work, such as actively trading or being self employed. If you manage your work wisely and improve yourself rather than just trying to get through each working day, you can find yourself in a much higher paying job or profession.
Active Income serves you to have instant income for the work you do. The only downfall to active income is that it can be compared to having to carry buckets of water from a well to your home every day in order for you to have fresh water. Obviously, each day that you wish to have a fresh supply of water, you must carry buckets, and after a long period of time this become tiresome and is hardly the most effective or astute way of getting water to your house, as you are well aware.
What makes the difference between the rich and the poor is that the poor only focus on active income, while the rich focus on both Active and Passive Income. It’s prevalent for the majority of the population to assume that you can have one, but not the other. There is always a pressure to choose. What the rich have known for years is that this just isn’t the case. The rich don’t believe in choosing one or the other -they find a way to have both. The rich know that Active Income means they must continue to carry buckets of water, and that is why they choose to have passive income as well.
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