Active vs Residual vs Passive Income

When you embark on your online lifestyle business journey, there’s three important types of income you need to know and be able to differentiate from each other if you wish to successfully navigate the layers of wealth.

In this article we’ll go trough the three different types of income and as a bonus add a anything-but-secret multiplier to scale them all up.

Active Income

Active income is the simplest and most common form of income (probably over 90% of the global population is excusively making active income), it’s where you trade your money for time and receive an hourly, daily, weekly, monthly, yearly income.

Referring back to the layers of wealth, it’s the income you’re making when you’re in layer one and two of the five layers.

Some examples of active income are: working a job, freelancing, consulting.

Active income is a great start, it’s an honest day’s pay for an honest day’s work, it’ll give you the opportunity to stand on your own feet, pay your own bills and even get some experience you can use later on to top it.

But if you want more control over your life and not be completely dependent on a third party for your income, you’ll need to look into other types of income to help you jump onto the next layers.

Residual Income

Residual income is any income you generate that is not linked directly to your time. You’re still doing active work in this case, you’re just not selling your time directly for money.

Residual income is your main income in layer three of the five layers of wealth.

Residual income will be mostly made through an actual business.

Some examples of residual income are: royalties, ad income, e-comm sales, digital product sales, affiliate commissions.

Residual income is great because it allows you to scale much quicker since it’s not directly linked to your time. Especially when adding it on top of your active income when navigating from layers one and two to layer three it can really start to speed you up navigating trough the flywheel of wealth.

But if you want full control and diversification, there’s one more type of income to open up layer four.

Passive Income

Passive income is income that requires practically zero work. If you can get enough of this you’ll become a true master of time and truly focus on what you want, keep building that business with reduced stress, start a non-profit or just travel the world.

Passive income is your main income in layer four of the five layers of wealth.

Some examples of passive income are: dividends, rent, intrest.

When passive income can fund your lifestyle, congratulations, you are now in full control of your time and spend it on what truly matters to you.

Appreciation

There’s one more layer in the layers of wealth we haven’t coverd in the three types of income and that’s because it technically isn’t income.

Nevertheless, it’s a great game changer and can really propel to generational wealth. It is optional, though. If you’re happy getting enough passive income to fund your lifestyle, more power to you. Four layers is all you need.

But if generational wealth is what you’re going for, you can unlock it through layer five of the layers of wealth by acquiring appreciating assets. Appreciation doesn’t provide you cashflow, but at this point you should have enough of that covered. Appreciation is where real wealth is made.

Some examples of appreciating assets are: real estate, stocks, crypto, private business.

You might have noticed that most (if not all) of these assets can also generate cashflow on top of appreciating in value, so you really might be getting a two-for-one deal and access that optional layer five automatically, keep increasing that portfolio!

Compounding

An extra multiplier that scales all of the above to the moon is compounding. Albert Einstein considered it the 8th world wonder because, if done right, it can generate true wealth.

Compounding especially helps accelerating you when navigating through the middle layers because when you avoid lifestyle creep you can reinvest all excess profits back into your business to speed the process up. If you fail to do this you might never get to the additional layers.

For compounding to truly reach its full potential, one of two (and preferably both) are required: (high) deposits and frequency (iterations/time).

This is where many 9-to-5’ers make their mistake, they understand the wonders of compounding but then fail to make it properly work for them, investing small chunks growing at a mere 9% per year. At this rate they’re too old to actually enjoy the fruits of their labor and end up just funding their funeral.

They try to jump from layer one immediately onto layer five, which is why they never gain true speed. It’s like riding a bicycle and trying to go from the lowest to the highest gear at once. You’ll almost stall. By the time these people truly get some speed their journey sadly is over.

Lots of these people give the example of doubling a penny every day and being rich in mere weeks but fail to understand that, while understanding the formula, they fail to get to the numbers that get the true results.

That’s why compounding works much better when reinvesting in your own business, your deposits will be higher and you’ll have more iterations, especially in the later layers of wealth.

Summary

Understanding the different types of income will help you navigate wealth. Where our layers of wealth article covers the theory, this article is putting it in practice.

Keep the different types in mind during life and navigate them like you navigate the layers of wealth.