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Investing Glossary

Active Income

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Active income refers to income received for performing a service. Wages, tips, salaries, commissions, and income from businesses in which there is material participation are examples of active income. The most common types of income are active, passive, and portfolio.

For income from a business to be considered active rather than passive, the owner must satisfy the requirements for material participation, which is based on hours worked or other factors.

Active income is income earned as a direct result of a specific effort. In other words, input is correlated to output. Active income is money received for performing a service, such as working a full or part-time job. Earnings generated from self-employment or materially participating in a business and getting paid are two other forms of active income. The majority of Americans support themselves from active income. For most people, active income is earned before passive income can be generated. Oftentimes investors work a full-time job to earn active income, then reinvest as much as possible to begin building a passive income stream from things like rental properties.

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