Active Income vs. Passive Income

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Author: Ms. Taing Souheang

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Posted on 07-Jun-2018

Financial literacy is essential for everyone in living a self-sustainable life. When people are financially educated, they earn and use their money effectively which could lead them to achieve financial freedom in the future. Financial freedom refers to when one does not have to worry about his/her expense and force him/herself to work. To become financial freedom, we should understand the different types of income as listed as followings:

  1. Employees (E): are the people who have a job with regular tasks to work and get paid from salary, wage, tips, and commission.
  2. Self-Employees (S): are the people who earn income from running a small business by themselves, for example, online sellers and local market sellers. They need to actively manage their business in order to earn the income.
  3. Business Owners (B): are the people whose revenues are generated from their business in either medium or large size. They hire other people to work for them. Also, they do not need to involve directly in the process of company as their employees would do those job instead of them.
  4. Investors (I): are the people who use their money to create wealth through investing and earn profit from the assets they have purchased as well as interest rate, dividend, or other capital gains.

Employees and Self-Employees are earning active income as these people can earn money only when they are working. Therefore, if they want to earn more, they must spend more time and effort to work. On the other hand, Business owners and Investors generate passive income as they put people or money into work for them without using much time or effort.

You can pursue more than one source of income. However, if you are committed to develop your career path but still could not cover your living expense, you can choose to earn extra income through investing. For example, you can start investing in stock exchange whereas you do not need much knowledge or capital to begin. You will receive dividend once a year and gain profit from selling stocks as well when the price goes up. You can start investing from now on with the minimum of 1 share or around KHR 4,000.