The basics of active, passive, and portfolio income

There is more than one way to earn income, each with unique benefits to bring you. The three common categories are: active, passive, and portfolio. These three categories differ based on how you earn money and how the money will be taxed.

Find out which one is right for you as we discuss the difference between active, passive, and portfolio income.

Active income

Active income, also called earned income, is income received for performing a service. You get this in the form of a salary, wages, commissions, or tips. Active income earners can either be employed by another person or corporation or have their own business.

For active income earners, the money they receive is directly proportional to the amount of time they spend working. So, the less time they work, the less money they receive.

Active income examples include driving for a ride-hailing company, writing during your free time, and freelancing as a website designer.

Passive income

Money collected from businesses or investments you are not actively participating in is called passively earning income. These include rent money, interest on savings accounts, certificates of deposits, or your pension.

Passive income is any money you regularly receive without the need to exchange work for it, which makes it appealing for many people.

Other kinds of passive income include:

• Business or investment payouts
• Book royalties
• Sales from an e-book or online course

While enticing to many because it requires less effort to earn, it does entail risk and investment in order to earn. This investment can be through time (as in the case of creating e-books and online courses), money (to purchase rental properties), or both (growing a business).

Portfolio income

In the event you decide to invest long-term and choose to purchase stocks, bonds, and other investments that don’t require you to actively perform work to earn money, this all goes into what is called your portfolio.

Any income earned by your portfolio, such as dividends, interest, or capital gains, are called your portfolio or investment income. While these may seem like passive income, too, they are taxed differently.

Unlike passive income, portfolio income is not subject to Medicare or social security taxes, and portfolio losses can offset your capital gains.

Which should you have: active, passive, or portfolio income?

The answer depends on your lifestyle and your risk tolerance. If you like having the security of knowing when your money comes, then an active income is more suited for you.

If you do not like being tied down to a 9-to-5 job and prefer having flexibility in your life, then a passive income may be the one for you.

Regardless of your preference, it boils down to what is more realistic for you. You may want to have the freedom passive income gives. But if you have just welcomed a baby and have another child who has just entered elementary school, then earning via passive income may not be the wisest choice. You may be better off staying grounded in a job that gives you bi-weekly salaries that you can rely on and budget.

You don’t even have to choose one over the other. You can have two or even all three at once. Again, it all depends on your current financial situation and lifestyle. If you have the extra money or time to invest in something that can generate passive income or to build your portfolio, this may be wise so you can have two sources of income.

Metrobank offers a wide range of investment types to suit different goals, risk tolerances, and timelines. Invest meaningfully with Metrobank today.