Wednesday, January 26, 2011

Active, Passive & Portfolio Income

Do you talk to your kids about the three kinds of income? Do you know that there are three kinds: active, passive and portfolio? If the language seems a bit strange, take heart, you probably know what these words mean already and, guess what, your kids can figure them out pretty quickly too!

Agent Story Money & Me Workshop
This week I had the privilege of doing a one-hour Money & Me workshop on the topic of earning money with a split-class of 23 students in grades one and two.

(In my school-wide assembly shows I cover earning, spending, growing and sharing your money. But for the grade-specific classroom workshops I ask the teacher to choose one of those four topics.)

My goal was to introduce these youngsters to the idea that there are three ways to earn money: active income, passive income and portfolio income. And with the help of a take-home craft and a memorable story about three little ferrets who have to figure out how to earn money to put in their pockets, I'm hoping that at least one of the kids will bring up the topic of income at the dinner table. "Hey, Mom, do you have any portfolio income?" Wouldn't that be cool?

Now if you are not entirely familiar with the terminology, here's your cheat sheet.

Active Income
Think about what "active" means. It means moving, doing, being in action. When you earn money by working (either for yourself or someone else) that is what we call active income. You are working and you get paid. In a child's world, allowance is active income. Me do chores, me get paid.

Passive Income
It's really almost the opposite of active income. If you rent out a room in your house to an overseas student, you are making passive income. If you get an inheritance, that's passive income as well. Monthly cheques from the government like the Universal Child Care Benefit fall into this category of income. For kids, a good example of passive income is getting money in a card from Grandma. You don't really "work" for this kind of income.

Portfolio Income
This kind of in-coming money is both passive and active: you are largely passive, while your money works for you. Interest, capital gains, dividends and other forms of investment earnings fall into this category. The term portfolio comes from the practice of keeping track of one's investments in a portfolio or record book. If you have an investment that fits this category, show your kids your monthly statement. Point out the money that you have saved and invested and the amounts that your money has made for you. They'll get it.

Teacher Feedback for Workshop
And maybe they'll want to start saving so that they can build a portfolio of their own. My daughter uses an old exercise book as her portfolio and she does all her entries in pencil. It's a great math exercise, plus she's learning that while we don't really "work" to earn portfolio income, we have to supervise our money and make sure that it is indeed working for us.

Copyright 2011. Laura Thomas. All Rights Reserved.
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  1. That looks like a pretty serious class for grade 1 & 2. Its always interesting to see the different perceptions on how money works. You must be the first person in Canada actually teaching children about finances as they generally aren’t covered in school.

    Personally I think freedom can only be achieved from portfolio earnings. One note with being an investor is your money will outwork you. It works 24 hours a day, does not take breaks as it grows.


  2. That's great. I always look forward for money education to kids by teaching them the correct way of treating money.

    Keep it up!


  3. Well written article and great thoughts on passive income. I hope the kids pays attention to the discussion. If they do, they will find their ways to make passive income online.