Passive Income Myth

Every time I hear the words ‘passive income’ my teeth grind down a little bit.  Why do I have such a hostile reaction?  Well it comes from the fact: there is no such thing as passive income!  Every source of income requires some investment of time and effort on your part.

Don’t believe me? Let’s go down the list of few of the common ones.

  1. Dividend Paying Stocks – You think this would be a easy one to say it is passive, but most people seem to forgot the up front work of researching the company and then following the news on the company to protect your investment.  You don’t have to read every news story on them, but you should have a clue on what the company is doing by reviewing the annual report.
  2. Real Estate – If you never had to look after a rental unit, people like to think that it really isn’t much work.  They can be so wrong!  Bounced cheques, late rent, repairs and upgrades and that doesn’t even include the work of showing the place to get tenants in their in the first place.  Granted you can hire someone to do this for you, but that still requires the work to get the unit and research a company to look after it for you.
  3. A Blog – To be honest, this one always surprises me that people think blogs don’t require work.  Have you every tried setting up a WordPress installation?  Granted it isn’t hard, but it takes time to get all the plug-ins that you want loaded up and running right.  Then creating content, linking to other blogs and rising up your page rank.  It all takes time to get up and running even if you turn it into a static site down the road.
  4. Small Business – Depending on what you do here it can be set up fairly easily, but getting sales still takes time and effort on your part.  After a while the business may require less handling, but in the beginning you can bet you will be putting in lots of hard work to get it running right.

This isn’t to discourage you from going after these kinds of means of making money, but do keep in mind some front end work will be required no matter what you pick.   Granted if you like doing that kind of work, it won’t really feel like a burden at all.  So make sure to pick what will work best for you.

So what do you do beyond your day job to earn more money? Why did you pick that method?  In my case, I do #1, 3, 4 since I cover off #2 by owning a REIT instead of a single unit because as much as I like real estate I’m not interested in owning a unit directly.

14 thoughts on “Passive Income Myth”

  1. I definitely agree with you. I tend to consider bonds and real estate as my passive income because before they started earning me money, I had to do research, but now I have bond fund managers I’m comfortable with and a property management company I am extremely comfortable with. For the amount of income they generate they require very little effort on my behalf. Not a totally passive investment, but great supplements that are mostly passive to my more active day job.

  2. I write a blog like yourself and yes they are work. I don’t think it qualifies as passive yet.

    I also work with a local teen clinic on different health projects which pay me some extra cash.

    I guess when it comes to passive income my investments would be the only ones that count.

  3. Good points. I know I’ve used the term “passive income” in blog comments here before. I think when people say passive income, they are referring to income that if you worked out the hourly wage you earned from managing it, it would be much higher than what you might earn at your regular job.

  4. You are 100% correct… “It’s not free money…” My thoughts are that any income will require a combination of “work” and “risk”. The more “work” you are willing to do yourself, the less “risk” you will expose yourself to. (and vise-versa) ie. buying a stock based on a tip from a friend, co-worker, advisor, family member; vs. doing the research yourself. or buying real-estate because your realtor told you it’s a great deal in an excellent area; vs doing the research to come to that conclusion yourself.

    Ultimately I try to make sure that both my money and my time are invested wisely to achieve the balance of return & risk that I’m comfortable with.

  5. I disagree. If you buy mutual funds, you are paying others to figure out the best bonds and/or stocks to buy, and in return you give them a piece of the gross return. It is not different than paying someone to clean your house. Sure, you probably did some research to make sure the cleaning service was reputable, but once you picked one out, your work is over. Your house gets cleaned and you don’t have to do any more work.

    I did some research before I bought the mutual funds which generate the income needed in my ER. But once I set them up a few years ago, they are on autopilot, sending money to my checking account every month like clockwork. I don’t have to haul my sorry ass to New Jersey any more to collect the paycheck I now get from my mutual funds every month without having to lift a finger.

  6. Degree: the risk with your house cleaner is that you end up with a dirty house (she doesn’t show up? she does a crappy job?) However the risk of having someone else manage you life savings is something I would consider a little greater. not to mention the risk of leaving your investments on “auto pilot” for 3 years without revisiting and re-evaluating your holdings.


  7. I guess it just depends on your definition of ‘passive income’. I don’t know what the dictionary definition is, but in my opinion, ‘passive income’ is income from something that is not your day job, but not necessarily something that requires no work.

    The way I see it, some ‘passive income’ requires a lot more work than others!

  8. My view on Passive income is: It’s income that doesn’t need investment of time on an ongoing basis. You set it up at the beginning, then the money rolls in with minimal effort.

    My passive income is real estate, stocks, angel investing, and soon a small business.

  9. I agree with Perfect Dad’s view. I do review my investments from time to time, such as when I get the semi-annual reports and overall when I review my asset allocation. But that effort is minimal.

    I don’t have a financial adviser making the actual decisions on which funds I invest in. But the funds I invest in have fund managers who do oversee the day-to-day operations of the funds.

    Spending an hour or two a month reading reports and reviewing my spreadsheets for a $1M portfolio (taxable and IRA) which generates at least $50k a year is a lot easier than hauling my sorry ass to New Jersey 100 days a year (my last P/T work schedule) to earn just over half that amount in salary!

  10. Dave S Says: Buy sovereign bonds. Here in Ontario, Ontario Bonds or, Federal Bonds. Once purchased the interest can come straight into your account. The work to gather the interest income is about as ZERO effort as you can get. Buying good quality sovereign bonds or, in Canada, bonds of any of the major banks will earn you effortless income. No Canadian bank has failed in some time the last one failed several decades ago, but I am talking about the major banks. You actually can have a stream of income which requires no effort.

  11. Starting up a blog is definitely not “passive” no matter what you call the income. I figure if most people calculated the hours they put into their blogs they would be making well under minimum wage (if their blog is any good). Sure you can make cash more efficiently by making boring ‘niche’ sites that are built to make you money, but true blogs require a ton of work. Luckily I truly enjoy the process and the challenge!

  12. Well, I for one disagree, income indeed can be passive. I say this as a guy who works full time online today and I do work hard. I do a podcast 5 days a week and it is my main source of income.

    Yet much of the income from memberships is passive, if I stopped working tomorrow, money would continue to come in for a long time. Yes I had to work to get it there but you to prime a well pump too.

    BTW installing a word press blog can take bout 30 seconds, but I do know what you mean about dressing it up and all.

    Also for passive income, I built a lot of small time websites in the past, we are talking sites I haven’t touched in years. They still produce a few hundred dollars in adsense each month. If you don’t touch something for 4 years and you still are getting a few hundred bucks off it is passive, despite the work that went in initially.

    I have some telecom style sites I built from 2001-2005, I haven’t so much as looked at them since about 2007, they still produce a monthly income from new customers and residual billing of other customers. I can’t live on it but it is another 2-300 bucks a month. At the height of local phone competition and when people used land line for long distance they made me a lot more, the amount of work I put into them was massive and when I stopped 4,000 dollar checks dropped to checks for a few hundred bucks but if you don’t even LOOK at a site for over 4 years and you still get paid, well, I call it passive.

    I have a really crappy blog because the theme broke and I don’t care to fix it. I haven’t blogged in it at all since 2008. It was about SEO and online marketing, but it has PR and I set it up with a link selling company, they sell links in it, I don’t do a thing with it. The money is small, 50-70 dollars a month, but it is as passive as it gets.

    Passive income is NOT about doing nothing and getting something as in TINFL, what it is about is doing work for a while and not having 100% of your income tied to your daily effort. If you blog daily and make a solid income or in my case podcast and post those on a blog, yes you are still working.

    Yet if 50% of your traffic and business come from yesterdays efforts (the longer you work the bigger this number becomes) than that component of your income becomes passive.

    Look I understand the sentiment of the post, I mostly agree with the angle but to take it as pure fact is dangerous. Why? The passive component of a well designed business quickly becomes the largest portion of total income. Allowing business owners (even just a very well run blog) to make more money doing what they love then they ever could with a 1 to 1 exchange for daily out put.

  13. Oh let me say though I love your blog and I LOVER YOUR GOAL, it was recommended to me by a listener to my show. The comment was in a recent episode about creating your own vision of personal liberty.

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