Dear Claire, What is active vs. passive income, and why do I care?
For a lot of people you’re either a 1099 contractor or you’re a W-2 employee of those situations you are an active worker – you work for a living. This considered active income.
Passive income on the other hand is money that comes to you without you having to do much. If you had millions of dollars in the bank and you were making interest on the money and you were able to live on that interest, that’s passive income. Another form of passive income is real estate. If you had lots of rentals and you made money on those rentals every month as income, that’s passive income. Reason why this is a big deal is because active income gets taxed at a much higher rate than passive income. Passive income stream is usually taxed significantly less than active. When I’m talking to my real estate clients we talk through whether they should keep their first house that I bought and just rent it, or sell it and buy another one. We also have a conversation about being a landlord as that can be a big pain in the butt. That can involve needing to answer a call at 10 p.m. when the water heater explodes, or trying to find the tenant for your rental property – all that is stressful and it’s definitely difficult, but it’s set you up for retirement in a way that just actively working for a living never will.
These kinds of ideas are life changing, especially as you try and plan for retirement and not having to work for the rest of your life.
Give me a call and we can talk more about how it will affect you and how you can use it to the best of your ability to maximize your retirement.
I hope you guys have a great week and I’ll see you next. Take care.