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Active vs. Passive income?

Active vs. passive income. An expression that you hear from time to time is: "You can't work your way to riches".

This is broadly true and to explain how, we need to look at the differences between active and passive income.

In simple terms, an active income is when you are paid for doing a job within a certain period of time. By far the most common type of active income is a salary from an employer where you are employed to perform a certain type of task for a predetermined amount of time. For example, your job is to pick and pack goods in a warehouse between 9 am and 5 pm, Monday to Friday. For this work, you receive a predetermined compensation in the form of a salary.

Another form of the above example could be in 'project form'. Say you work as a carpenter and are commissioned to build a new school. When the school is completed, you receive a predetermined amount of compensation. The remuneration is the same whether you built the school in a shorter or longer time than originally planned by the client.

In both these examples, you receive a one-off payment for the work you have done. If you want to keep getting paid, you need to keep doing your job. In other words, you exchange your time for money and as soon as you stop working, the money stops coming in.

The problem is that the time we have in a day is limited, so the opportunity to increase income from an active source of income is also limited. Most people then look for a pay rise, a promotion or a change to another job with a better salary. Unfortunately, more often than not, a higher salary or a higher position also means more responsibility and more work, and ultimately even more time is traded for that extra pay rise.

Passive income, on the other hand, works slightly differently. It focuses on doing a job once but receiving money or other compensation in the future without having to do the job again. Passive income can be divided into two parts.

The first part is about letting money work for you. Money has no time to follow, no need to sleep, and feels no emotions. Making money work for you can be achieved in a few different ways. One of the most common is to invest in shares or funds. Let's say you buy a share in the carpentry company mentioned above. You then own a small part of that company and have the right to share in the results of the construction of the school - without having to build it yourself. If we play with the idea that the school is completed and it becomes extremely profitable for the carpentry company. The carpenter who built the school has then received his salary for the work of building it, but you, as the owner of a share in the company, get to share in the company's profits through a share dividend - in other words, you have let the money work for you, which has then generated a return.

Another example of the first part of passive income, which we at the Swedish Forex Group use, is to put our money to work for us through a trading robot. Similar to the above, we put our money to work in a way that does not require much time and energy from us. In this way, we create the opportunity to get a return on our money in a passive way while being able to spend our time in the way we want.

The second part of passive income is about doing a job once but continuing to get paid over time without having to do the exact same job again.
Artists and authors are two categories that earn a passive income in this way. An author writes a book (does the job once) and receives compensation (called royalties) for each book sold in perpetuity. Artists who release their music on Spotify, for example, receive royalties every time someone listens to the song.

Of course, not everyone will be able to write a book or release a song successfully, but luckily there are plenty of other options for building your own passive income. Some examples include dropshipping, affiliate marketing or renting out accommodation via Airbnb. The list is endless and the only limit is your creativity.
However, the most important thing is that you choose something that you enjoy doing and that there is a demand for what you want to do - otherwise it will most likely not work long enough to build up a passive income.

So, can you work yourself rich?

Well, if you have an extremely good salary and extremely low costs by reducing your spending, you might be able to work and save enough to call yourself rich. But then you have to ask yourself if this is how you want to live - limited by both time and pleasures in life.

We at the Swedish Forex Group are convinced that we want an income that is not limited by either our time or what an employer offers for a salary and therefore a passive income is what we prefer.

// Svenska Forexgruppen