Software developers are skilled workers that are in high demand and the majority of developers make a good annual wage from a full time job. However, developers also possess unique skills that allow them to create digital products that can be built once and sold to many customers repeatedly.
Within this distinction lies the key difference between passive income and active income, with software developers being in the prime position to benefit from the leverage that comes from passive income.
In this article, I'll be breaking down the main differences between passive income and active income, detailing the benefits/drawbacks of each and the route to building wealth via both types of income.
Here are the topics I'll be touching on in this article:
- What is active income
- Examples of active income for software developers
- Benefits of active income
- Drawbacks of active income
- How to become wealthy from active income
- What is passive income
- Examples of passive income for software developers
- Benefits of passive income
- Drawbacks of passive income
- How to become wealthy from passive income
- Key takeaways
What Is Active Income?
Active income is about trading time for money. You actively exchange your own time for a corresponding monetary value. This is how many traditional jobs work, with a business paying their workers a set monthly wage.
There is an agreement that if a worker commits 40 hours a week to a business, that company will directly pay them for their services. Whether that be $80,000 a year or $130,000 a year, there is a direct active income agreement.
Similarly, in a freelancing/contract role, you’ll agree to a fixed hourly/daily rate, which again is a simple exchange of a set amount of your time for a set amount of money.
Examples of Active Income jobs for Software Developers
Let’s take a look through some examples of active income to further demonstrate how this works.
Full Time Software Developer Job
In the US, it’s reported that the national average salary for a software developer is around $107,000.
To receive that $107,000, a software developer would have to work for a company during the working week. Most commonly, the weekly amount of agreed hours are 40 hours. This equates to a 9-5 Monday-Friday.
Although a salary like this doesn’t seem as obvious a form of active income as an hourly rate job, it still works out the same. In fact, you can change a salary figure into an hourly rate with some simple maths.
Let’s say that a typical worker will work for 50 weeks of the year, with two weeks off for a holiday. Based on a 40 hour work week, that’s a total of 2,000 hours a year that a software developer must put into their job.
Dividing the $107,000 by 2,000, you get an hourly rate of just shy of $54 an hour. The active income for a typical software developer would therefore be trading one hour of their time for $54 before taxes.
Freelancing
Considering that software developers have skills that are only ever-increasing in demand within our tech-centric world, they can often land freelancing projects. In this scenario, a business will pay a software developer either a fixed price or an hourly rate to work on a project.
Between hourly and fixed-price contracts, fixed prices are normally the better to go for if you’re a software developer. If you can accurately scope out a project and quote a figure, you’ll be able to increase your active hourly income by working faster than your prediction.
If you quoted a business $1,000 for a project that you think will take you 8 hours, but you do it in 4 hours, you’ve effectively doubled your hourly rate.
Still, this is falling into the system of trading time for money and is therefore active income.
Consulting
No matter the industry, consulting is about providing expert advice to businesses. While that may be directly getting involved in the coding process, it could also just be guiding the process, offering strategic input or advising the team.
Much like freelancing, software engineering consultants are paid either an hourly rate or a fixed price for a large project.
Mentoring
Mentoring, also known as tutoring, is the process of teaching someone with less experience than yourself skills in software development. Most frequently, this takes the form of an hourly rate, with someone paying you for time.
Considering that you’re trading your time for that money, this is also an active income stream.
What are the Benefits of Active Income?
Active income is by far the most common and traditional form of generating an income. In fact, our whole society is built upon it and for good reason too.
Here are the key benefits of active income:
- Healthcare, Pension, Work Benefits - Many employment schemes offer their employees financial security in the format of offering pensions and healthcare as part of their compensation package.
- Routine - Having a set work schedule also means that you can plan your life out around your working commitments.
- Leave your job at work - If you’re working a traditional job, when you clock out, you don’t have any obligation to think anymore about your work. When you’re at home, you can devote yourself to anything but working.
- Can be easier to visualise - If you’re a person that’s motivated by money, then active income allows you to easily motivate yourself. An hour worked is an hour paid.
- Clear career roadmap - In a 9-5 job, people can see the career progression and all fight to impress their superiors bosses to get promoted to ultimately receive a pay increase.
- Easier to slack off - In a full time job, you can normally get away with running in 3rd gear without major consequences. Some people like to drift through life not really trying too hard and just receive their salary regardless.
On the flip side, active income definitely isn’t a perfect working model. Let’s take a look at the downsides of active income.
What are the downsides to active income?
One of the big problems with active income is simply the time constraint issue. Whilst a freelancer or consultant will have a fixed hourly rate or day rate, there are only so many hours in the day and days in the week. As such they will hit a paywall ceiling.
Similarly, a full-time worker who has an annual salary is similarly time bound, with fixed compensation per month worked.
By the way, when you really think about the word ‘compensation’ it’s somewhat depressing. They’re literally “compensating” you for the time that you would rather be spending doing other things but you’re spending that time performing a job for them instead.
No matter what form of active income you participate in, there will always be a cap on your earnings. The only way to boost the amount you earn is by either increasing your hourly rate or try for a pay increase (usually few and far between 🤣). Apart from that, active income always hits a wall.
So, these are the main downsides to active income as a software developer:
- Time Constraints - As per the above, your income will always be constrained by the number of working hours in a day/week/month.
- Huge Reliance On Your Employer - If you get fired, laid off, or put all your eggs in one basket, then a change in circumstance can leave you completely without an income source. Unfortunately, I have personally been in this situation. A company I worked for went bust one day without warning and left us all with no job and no pay coming in at the end of the month.
- Pay Review Please - In a full time role, you’re at the mercy of your employer as to when you receive a pay review. They should be regularly carried out but we’ve all been there where they’ve been postponed and when they do eventually come, 99% of the time they’re underwhelming despite huge efforts on your part.
- Sickness - If you’re a freelancer/consultant/mentor and you’re too ill to work then you will not receive any income for that period. Conversely, one of the few perks of being a permanent full time programmer is that you get paid full pay for any sick days you take off.
- Bitter-Sweet Holidays - In permanent employment, you have to be content that you've made just enough to pay for a couple of weeks of vacation to taste the freedom outside of a 9-5 job before heading back into the hole.
How To Become Wealthy As a Software Developer through Active Income?
With active income, as the amount you earn is directly tied to the hours you work, there are only a few levers you can pull to become wealthy.
- Work more hours - Quite simply, if you’re receiving an hourly rate, the more hours you work, the more you get paid. If you pull off incredible hours, the amount you take home will increase.
- Get a promotion - If you’re on an annual salary, if you receive a promotion, you’ll be getting more each year and therefore making more each hour.
- Savings and Investing - By saving a part of your income, you can invest in more stable locations, such as index funds, to slowly build up your wealth.
- Resisting Lifestyle Creep - If you commit to saving a percentage of your income, rather than an amount, you’ll resist spending more money as you make more money.
Eventually, you hope to spend long enough on the hamster wheel to justify a senior management position. Perhaps, one day you might receive shares in your employer’s company or that your higher salary outweighs your outgoings sufficiently. Only at this point will you really start to build wealth. It’s a long and hard grind.
What is Passive Income?
Passive income, as a direct contrast to active income, is any income that is not tied to the hours you put in. For example, if you own a property, each month you’ll gain a rental income. Generally, you don’t have to put in many hours per month to collect this rent, it happens (mostly) passively - hence the name.
Some of the most common forms of passive income online are selling digital assets. You can sell these digital assets to many people over and over again. This is what makes it passive, as you make it once and sell it to many.
Whole industries have been built on this process, with Software as a Service (SaaS) becoming a common method of paying for software. Think of large scale SaaS platforms like Spotify, Zoom, or Netflix - each take a monthly fee for using their platform.
Examples of Passive Income for Software Developers
Typically, programmers work in the digital domain, existing in virtual spaces. Due to this, they’re perfectly aligned to create digital products that can be turned into passive income streams. Let’s take a look at some of the most common passive income streams for software developers.
Micro SaaS Apps
A Micro SaaS App is a piece of software that users will subscribe to on a monthly or annual basis. Micro SaaS apps usually solve problems for a specific niche audience, making their users’ lives easier or their businesses run more smoothly.
By creating Micro SaaS Apps, you’ll be able to generate a recurring monthly passive income. That’s because once you’ve put in the initial hours to create the app, you’ll be able to sell the product to many people. Each month you can add new features, support and grow your user base.
Critically with Micro SaaS, you are no longer being paid per hour, but rather for the result of your efforts in building a great product.
This is the secret to how you can achieve a disproportionate income from the time you invest. For example, this relatively modest looking chrome extension is run by one developer and it nets him a disproportionate $32,000 in monthly passive income recurring revenue!
Micro SaaS apps are the best time leveraged model for us software developers to follow to achieve passive income. This leveraging of your time is the true power of the Micro SaaS business model. There are an incredible range of benefits to Micro Saas apps for you to consider and it’s worth contrasting these benefits with the equivalent in the paid per hour world.
Themes and Templates
If you’re a front-end developer with a great eye for design, you can also create themes and templates such as WordPress themes and Shopify templates. Both of these subsets are heavily in demand, with entrepreneurs needing programmers to create plugins to help their storefront stand out.
By creating either a Shopify template or a WordPress theme, you’ll be able to invest a few hours creating and then publishing the design. From there, people can buy your product from the WordPress and Shopify stores, giving you a stream of passive income.
The more themes and templates you have available to buy, or the more buyers you have, the larger this passive sum will be.
Online Courses/eBooks:
Developers have an endless thirst for learning and they’re able to do it anywhere and anytime due to versatile e-learning tools and mobile apps.
Opportunities in making paid educational content can be lucrative if you’re well experienced in a particular technology or platform, then you can make money by sharing your knowledge through online courses or e-books. There are platforms like Udemy where your course can be a source of passive income after publishing it.
Similarly, creating eBooks and selling on platforms like Amazon are also good opportunities to create a product that can be bought by many people.
Benefits of Passive Income
As a software developer, you’re creating a digital product that you can, in turn, sell to hundreds or thousands of people. Once you've finished creating the product, the hours you need to put in to maintain the product are minimal in comparison. As people start to buy your product, you’ll receive more money and increase the return on the hours you’ve invested.
For example, one of my first Micro SaaS apps was my first ever chrome extension which I built for Merch By Amazon creators. It took me about 10 hours over a weekend to learn about chrome extensions enough to cobble the app together to make it functional.
For simplicity’s sake, let’s say it took me 10 hours and I sold it for $10 (although in reality it was $12.99). The number of people that purchase, can drastically alter the return on hours invested:
- If 1 person bought, my 10 hours would have netted me $10 at a rate of $1/hour
- If 10 people bought, my 10 hours would have netted me $100 at a rate of $10/hour
- And if 100 people bought, my 10 hours would have suddenly transformed into $1000 at a rate of $100/hour
In my case, it turned out that 246 people bought this simple app, netting me $3,052 at a rate of $305/hour which ain’t too shabby!
The power of this income model is in the disproportionate leverage of your time. It can be an exponential form of income, making it the direct opposite of the active relational income.
Here are the benefits of passive income for software developers:
- Disproportionate income - As your income is no longer constrained by working hours and is instead tied to the success of your product, your income is hugely scalable.
- Location freedom - With the passive income examples I’ve demonstrated, you don’t have a need to be in one location. Without a central office to commute to, you can work from wherever you’d like, giving you location freedom.
- Time freedom - Not having a specific work routine will allow you to work when you want, giving you complete time freedom.
- Supplement Active Income - You can create and build passive income streams while also working on your active income, effectively boosting the amount of money you can take home in a year.
And that’s just the beginning! Passive income has a huge range of benefits you can begin to reap.
Drawbacks of Passive Income
Although the benefits of passive income heavily outweigh the drawbacks, it would be wrong to suggest there aren’t any at all. With passive income streams, you’ll likely run into the following challenges:
- No guarantee - After you’ve put all the hours into building up the stream, there is no guarantee that it will take off. Due to that, you could end up wasting time if one of your endeavors fails.
- Isolation - Building your own streams of passive income can be a solitary pursuit. Many people find that they miss the sense of community they can find in more traditional workplaces
- Fluctuations - If you’re selling a seasonal digital asset then some months you may make lots of passive income, while some you may make comparatively little. This fluctuation is something you won’t find with active income, through which you’ll have a more clear idea about how much you’re going to make in a certain month.
How to become wealthy with passive income
Considering that passive income has no relation between the hours you put in and the amount you make, this allows you to quite literally make money in your sleep. Passive income as a software developer will allow you to escape paid per hour work and begin to make some serious money.
Let’s take a look at a roadmap to become wealthy with passive income. For this example, I'll use creating a Micro Saas Application, which is one of the best ways of creating a passive income stream as a software developer.
At a high level, the 10 step plan to building a Micro SaaS app is quite straightforward:
- Find a great niche
- Identify problems within that niche
- Generate Micro SaaS app ideas that solve these problems
- Validate your proposed Micro SaaS app ideas
- Build a Minimum Viable Product (MVP)
- Build up the pre-launch hype
- Launch!
- Prepare to Scale
- Scale
- Sell/Exit
Once you’ve built and scaled your Micro SaaS app, you’ll want to focus on optimising the key SaaS metrics. This will put you in a great position to command the highest possible valuation if you choose to exit for a cash lump sum payment by selling it to investors.
Key Takeaways
When your income is tied to the number of hours that you work, you’re unlikely to ever become truly wealthy. Considering that 54% of US citizens are living paycheck to paycheck, active income is a work scheme that is designed to keep people working until their retirement.
On the flip side, passive income allows you to liberate yourself from hourly work. But, of course, this pathway contains an element of risk. While you may have a successful application or WordPress theme, you could also fail. Failure is part of the process and you must throw both fear of failure and perfectionism out of the window.
If you’re interested in creating a passive income stream as a software developer, then creating a Micro SaaS application is one of the best methods of doing so. What’s more, this is something that you can begin working on in your free time, building it up while still working your 9-5 like I did.
If you’re in need of inspiration of Micro SaaS ideas then why not check out my Hackernoon article on 7 Micro SaaS ideas.