Article: The TRUTH About “Passive” Income

Passive income sounds pretty great, doesn’t it?

You do nothing, get paid, all without having to sell your time for money.

This is the financial utopia that every person with a YouTube channel, Instagram, or TikTok account has been promising you. But is passive income a myth?

Passive income is not a ENTIRELY a myth, however there are relatively few forms of true passive income. Many of the methods of passive income marketed online are inaccurate and will require a large initial time investment. Carefully selected investments are one of the best sources of passive income.

The biggest obsession in personal finance today is “passive income.” I see more and more headlines like “10 passive income ideas in 2020” or “How I make £500 per day in passive income”. The reason more of these videos are being created is because they are getting clicks. The reason these videos are getting clicks is that everyone seems to love the idea of generating passive income.

There are, however, several misconceptions that serve to confuse investors. Unfortunately, it is these misconceptions that are preventing many investors from realising truly passive income and potentially limitless wealth building opportunities

You can build up streams of passive income but if you think it’s some kind of “set it and forget it,” you’ll be very disappointed or very ripped off (and sometimes both).

All passive income sources will require work, usually a large amount of research up front followed by a sizeable amount every year. It may also require you to do some real work too.

It can be financially lucrative but it’s not without work.

If you’re online searching for the secret thing that’s going to make you rich with no effort, I’ve got bad news for you.

It doesn’t exist...

The internet often uses the word “passive” to sucker people into clicking. 

Everybody wants the idea of free money so it’s hard for creators to resist selling the unrealistic dream.

Basically, unless you win the lottery, inherit some form of an investment portfolio, or are signed up to some type of universal income experiment, there is no such thing as purely passive income.

Even then, it’s unlikely to be 100% passive.

You need to be extremely cautious of anyone who tells you that you can make money without working for it.

Having an online business is not effortless

Having an investment portfolio is not entirely effortless

Having a monetised social media profile is not effortless

What Is Passive Income?

I’ll start with the basics.

Passive income, is income earned with zero (minimal) effort on your part.

The closest thing there is to true passive income is living off stock dividends or interest. Once your investment earnings cover your expenses, you are financially independent.

If you scroll to my YIELDNODES monthly updates posts on the Patreon, that is passive income. Many people would be able to live off of that. However, the money to fund this investment didn't come from thin air, I had to make the money FIRST to fund that investment to then generate an income stream.

So based on this definition, you could argue that yes, passive income technically does exist.

It is, however, incredibly hard to achieve for the everyday person.

The reason being is that you need an incredibly large amount of capital (money) invested to see any meaningful dividends or return on investment.

It is possible to create an asset that could become a source of passive income over time, but in almost every case, this requires a small amount of work to maintain.

Why Is Passive Income Misunderstood?

Passive income is misunderstood because no source of income can be attained with zero work. The closest you can get to this is putting all of your money into an index fund, or if you have a very high risk tolerance, by putting it into crypto and collecting the dividends. You could make it nearly passive by making the contributions automatic.

The only one I’ll concede is automated investing where it goes straight out of your bank account into some form of asset. Even then prices can go up and down so there’s no guarantee.

The problem is we tend to glamourise those in passive-like industries without stopping to think about what their actual days are like or how they got there.

For any product, you need to continue to get customers in the door and the traffic needs to come from somewhere. If you stop producing content then it won’t be long until your supply dries up.

You’re going to need to either update your products, work to generate leads, or pay someone to do it for you. Sorry…but not sorry to shatter your cocktail on the beach dream.

The question isn’t how can you make money without any effort. The question is how can you maximise the return on the effort you put in.

The answer is scalable income. Where you do the work once and each additional sale doesn’t take up much of your time.

Real Passive Income Requires Work

When you think about passive income, it’s important to recognise it for what it is – work.

You might be able to do it on weekends and at night, but it still requires work. It may earn money while you are doing other things but it still requires work.

Passive income is not passive. Passive income requires work. Sometimes a lot of work.

Passive income does offer one benefit that that your full-time job doesn’t – it decouples the effort from the rewards. When you work a 9-to-5 job, you get paid when you show up. If you stop showing up, your employer will stop paying you.

When people think about passive income, they focus on how they can earn money without working. While that may be true, it’s inaccurate. They are being paid for work they already did, they’re simply earning it when they’re doing other things.

The other misunderstanding is that effort leads to rewards. Effort doesn’t always lead to rewards. It can lead to losses, sometimes massive losses.

What is “not” passive income?

Any kind of freelancing job cannot be defined as passive. You exchange your time with money, so you don’t earn money if you stop working. It’s the furthest thing from the passive income you can imagine.

Sometimes you may think that subscription products are passive income. Well, it’s not true at all. A subscription software or teaching service must be constantly fed with some new value you work on. Otherwise, people will stop paying for it. That’s why, for me, subscription products are not passive income.

Day trading is not passive income. To be honest, it’s pretty difficult that trading becomes an income. Every day trader knows that if they stop trading, money will not come. 'Algorithmic trading' is often considered passive income, but any algorithm needs to be maintained, retrained, tested, checked, monitored, constantly improved. This stuff is not passive at all. Maybe at the beginning it may seem passive, but in the long run, you’ll figure out that you have to work hard to make an algorithm earn money for you constantly.

The Good News?

Residual Income: An ongoing (and sometimes indefinite) stream of income that continues even after the active workload has completed. For example, royalties, dividends, interest, digital product sales, rent payments etc…

The opportunity that residual income presents is the chance to decrease the number of hours you may work in a week, whilst maintaining or possibly increasing your income.

This is what you should be thinking about when we talk about passive income.

You can’t just create a product and put up a sales page expecting it to bring in real revenue for you overnight.

Like anything else in your business, it takes time and effort and passive income is not the cocktail on the beach lifestyle everyone thinks it is.

Till next time.