Side Gigs vs. Passive Income — Which One Is Better for Building Wealth?
Written by
Angela Mae
Edited by
Levi Leidy
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Roughly four in 10 Americans (41%) have a side hustle and earn an average of $2,241 monthly, according to a recent PYMNTS report. That’s a significant amount of people — and money — but is it the way to build true wealth? Or is passive income the way to go?
Here’s a breakdown of which money-making method is better for building wealth and why.
Side Gigs: Better for Quicker Debt Repayment and Savings
The average American spends between $920 and $1,558 a month on debt, as per an Experian report. This includes mortgage payments, auto loans, credit cards and other types of consumer debt.
Many of these debts come with high interest rates and other fees. Take credit cards for example. The average credit card balance is $6,618 with a typical monthly payment of $181. Annual percentage rates (APRs) tend to be quite high — sometimes in the 20% to 30% range.
Considering how expensive these high-interest debts can be, it’s generally wise to pay them off as soon as possible. With a side gig, this may be easier to do.
“Earning more active income with a side gig can help individuals avoid debt or pay down existing debt much faster,” said Tom Blake, personal finance expert at TheBudgetDiet and @TomBlakeFinance. “This can potentially save enormous amounts in interest payments from loans, making the active effort even more worthwhile.”
And then there’s the savings potential. Many financial experts suggest having at least three to six months’ worth of expenses in an emergency fund. If you’re bringing in an extra few hundred — or thousand — dollars a month, you can build that fund much more quickly.
Passive Income: Better for Less Hands-On Commitment
Of course, you can’t forget about the time commitment of each option.
Most people with a side gig (73%) do it outside typical work hours, as per the PYMNTS report. Whether you’re spending five, 10, 15 or even 20 hours a week on your side hustle, that’s some serious dedication.
The idea behind passive income is that you don’t have to invest so much time into generating wealth. Passive income isn’t totally passive, however. You may still need to commit a certain number of hours and energy to building it before you start seeing real returns.
Side Gigs: Better If You Don’t Have the Capital
Many side gigs require very little to get started, though it does depend on the gig. For example, a rideshare driver needs to have a reliable working vehicle and pay for things like maintenance, gas, insurance and — of course — taxes.
You’ve likely heard the old adage: You need to spend money to make money. Well, with certain passive income streams, you’ll need more upfront capital to truly build wealth.
“Many popular passive income methods, like investing in dividend stocks and exchange-traded funds (ETFs), require startup capital to generate significant returns,” said Blake. “Similarly, some passive income models, like running real estate rentals, can require even more startup cash to even get your foot in the door.”
Take real estate as an example. The U.S. Census found the median sales price of new homes sold this year is $413,500. If you don’t have the cash, you’ll need to take out a mortgage loan, which comes with its own costs.
There is an alternative — real estate investment trusts (REITs). These are companies that own income-producing assets (like residential or commercial properties). Individuals can purchase REIT shares and, in turn, receive dividends. There are still many other things to consider — like risk, volatility and taxes — but there is less upfront capital needed.
Passive Income: Better If You’ve Got the Time
Consider your timeline. Are you in a hurry to start generating wealth? Do you have bills and debts that need to be paid sooner as opposed to later? Or do you have time to spare?
“Knowing your time frame is important,” said Blake. “Many passive income methods can take years to pay dividends, whereas active income is more immediate.”
Combining Side Gigs and Passive Income
Both passive income and side gigs have long-term growth potential. But if you’re just getting started and don’t have much capital, a side gig may be better to start.
“In my experience, focusing on active income through side gigs is a more reliable path to building wealth in the long term,” said Blake. “This doesn’t mean passive income methods don’t work. However, most side hustlers will see more results from focusing on increasing their active income. Plus, any leftover income from active side gigs can be put into passive methods, such as investing.”
If you have the time, money and energy for both, combining them can lead to long-term wealth. Consider your options and don’t be afraid to try out a few different things until you find what works for you.
More From GOBankingRates
