There exist several classifications of income based upon how the income is earned. These classifications include active income, passive income and portfolio income. Portfolio and passive income are inactive forms of income, as they do not require active involvement to generate revenue. On the other hand, active income is the income you earn for work performed, such as at the job you go to each day.
Active income is the most common form of income earned by individuals. In fact, this form of income is so common that it is synonymous with "income." Specifically, active income is money that you receive for work you perform. For example, employees earn active income from their employers, independent contractors earn active income from their clients and businesses earn active income from their customers. The hallmark of active income is that the more you work, the more income you will make.
Portfolio income is a less commonly known source of revenue that results from investments. Specifically, it involves money earned from investing in stocks, bonds, mutual funds and other investment instruments. Generally, portfolio income is only considered to be dividend payments on investments, and does not include capital gains from the sale of investments. Dividends are payments made by a company to its shareholders based upon profit. As portfolio income requires no active involvement besides the initial purchase of the investment, it is a type of passive income.
Active income and portfolio income are at the opposite spectrum of income forms. The principle of "the more you work, the more you earn," does not apply to portfolio income, which rises or falls based upon factors outside the investor's control. However, the passive nature of portfolio income is attractive, as it adds to one's active income without further exertion. A downside of portfolio income, not present with active income, is that you must have a sizable amount of money to invest into a portfolio to generate any meaningful portfolio income.
Portfolio income is a subset of passive income. Passive income not only includes investments, but also things like royalties and rental income. Passive income possibilities have increased with the advent of the Internet due to blogging and website creation, which have created opportunities to earn passive income via online advertising. Passive income requires a time investment to build an income stream, which makes it a long term goal, unlike active income which provides income very close to the time that this work is performed.
- "Secrets To Creating Passive Income and Becoming Financially Free - Even in a Slow Economy"; EJ Thornton; 2008
- "The Neatest Little Guide to Stock Market Investing"; Jason Kelly; 2009
- Invest Online Trading: What is Portfolio Income?
- Internal Revenue Service, "Publication 925: Passive Activity and At-Risk Rules," Page 6. Accessed Feb. 2, 2020.
- Internal Revenue Service, "Publication 925, Passive Activity and At-Risk Rules," Page 5. Accessed Feb. 2, 2020.
Andrew Mayfair has written professionally since 2009 when his article on patent law was published in the "Loyola of Los Angeles Entertainment Law Review." Mayfair earned his Bachelor of Science in biochemistry from the University of California, Davis and his Juris Doctor from the University of the Pacific, McGeorge School of Law.