Today’s post is from Mr. Credit Card of AskMrCreditCard.com (check out his credit cards offer list if you need a new card). Passive income is such a fascinating topic because there is endless debate about what constitutes “passive” vs. “active” income, and what strategies work best for creating passive income.
I briefly touched on the subject last September by comparing passive income to cows. That made for a fun post! 🙂 I hope you enjoy today’s counter-perspective and open up the discussion in the comments!
Many personal finance bloggers and the mainstream media have written reviews about the 4-Hour Workweek. There is also a whole industry out there touting the concept of how you have to build passive income. I want to make a counter argument that there is no such thing as a passive income.
This is not to say that I am totally against what is said in a book like the 4-Hour Workweek. In fact, I took a lot out of it. But I think many folks will read a book like this, read Rich Dad Poor Dad, and come to the conclusion that “building passive income” is the way to go, without realizing that building any sort of wealth requires really hard work, smart work and a little luck. I want to list some factors and reasons why income and wealth has to be maintained and that there is really no such thing as passive income. I will be using examples from some popular “passive income” strategies like real estate investing, network marketing, some knowledge from the credit card industry and even big Fortune 500 companies. But I really hope to illustrate my point that passive income is a myth.
There’s always competition – We’ve been always told that real estate investments are great because they are passive income, you get ridiculous tax write-offs, etc. But one thing the “gurus” who sell these courses miss is that an area can be overbuilt and result in falling rents. Oops! What happened to my passive income? Many folks have also been lured into “network marketing”. I guess years ago, when the market was not too saturated, folks had an easier time (though I wouldn’t use the word easy in an absolute sense). But with time, new firms with new products came to the market and marketing reps had to deal with that.
In 2006, many of the prominent personal finance blogs started. Since then, lots of other folks like Mint, and Credit Karma have sprouted out not just as blogs, but with new tools! There is always competition in whatever you do. Treat your business passively and you risk being made obsolete. Yahoo, Lycos and AOL used to be the kings of the search engine. You would think that they could rest on their laurels.
Changes in rules and regulations – The new CARD Act is going to take effect soon. New rules are being enforced on credit card issuers. Folks who issue credit cards for people with bad credit will see their whole economic model turn upside down. They now cannot charge ridiculous up front fees, but instead can only charge an upfront fee that is equal or not more than $25 of the credit limits given! Issuers of student credit cards cannot market to students at college campuses. In fact, if a student does not have any income and he or she is below 21 years old, they will need a co-signer. These are regulatory changes that have been forced onto credit card issuers.
Even in the blogging world, bloggers now have to disclose if they have any relationships with advertisers and if they are paid to review products. Automakers always have to contend with any new emission standards.
Technology changes and need for improvements – Can you imagine if Apple had the same product as they did five years ago? They would be dead by now if they did not come up with new products. How do you feel if your hotel room has no Internet connection? And by the way, a hotel has to make planned renovations once every few years (once again – no such thing as passive income). Would you rent a place if it did not have Verizon FIOS but only had DSL? See, even if you have rental properties, you have to always upgrade your apartment. Any business always has to upgrade their products with new features, better features. Here is another example: American Express has been coming up with new partners in the reward program and works constantly to make their existing partners happy. Discover has to continually add merchants to their online shopping portal to make it even more attractive. Your product offerings must always be improved.
On an individual level, you also have to be constantly upgrading yourself. Even for Tim Ferriss, he has to be aware of what is going on in the publishing world, in the world of the “self-help and improvement” market. He can’t just be resting on his laurels and his “present success”.
Maintenance Cost – So you have a few real estate rental properties–“passive income,” you say. But what happens when tenants complain that their heater broke down or their pipes burst? Passive income? No, no, no. You either have to get your hands dirty or simply outsource the maintenance of your property. But even then, you have to supervise who you outsource this task to, because you want to make sure they are not overspending on repairs or being too stingy as well (hey – got to keep the tenants happy).
Let’s use another example. Let’s take probably the best known personal finance blog, Get Rich Slowly. It appears that J.D. Roth, the founder and owner, has achieved a very good degree of success. He even now has writers for his blog as he focuses on his book publication. Does it mean he can switch off and let his blog earn passive income? Of course not. He has to continue to write great content (a high bar which he has set).
Another popular scheme that folks have gotten involved in is network marketing on the theory that you build up a “sufficient customer base” or “folks who work under you”. (Disclaimer: I have never gotten involved in this). But even if you are making a good income, you still have to recruit, you still have to attend “pep talk rallies”! In fact, it is anything by passive. Because if you are really passive, your business is simply going to die one day!
Cost of supervision – Like I mentioned earlier, even if you outsource your rental property maintenance to someone, you still have to supervise them! Let’s use the Get Rich Slowly example again. J.D. has hired a few writers for him. But guess who has to supervise the writers? Someone, of course. It could be J.D. But even if it was not and he “hired an editor”, he still has to supervise the editor! So here is the message to all business owners–you can’t just check your emails, work for a couple of hours and spend your whole day at the beach! You have to make sure things run smoothly! After all, it is your business!
There is always a cost of supervision even in what is seemingly a “passive business”.
Economics of Business Change – The economics of any business can change due to a variety of factors. 2008 will always be remembered as the year of the financial crisis. It was the year that credit became scarce. For many businesses that relied on credit, they saw the economics of their business change overnight. When your borrowing costs soar all of a sudden, what was once profitable becomes a money losing proposition just due to higher financing costs. Furniture shops and retailers who could not get adequate financing were closing down everywhere. This could happen to anyone.
Ending Thoughts – I could go on and on about this topic and give more examples of why, in my opinion, passive income is just a myth. The moral of the story is that there is no easy way to success or wealth, and there is certainly no such things as passive income. There are many folks who are out of work, or are frustrated with their work, and want to start something on the side that will earn them “passive income”. Don’t fall for pitches mentioning passive income, because the truth is that you need lots of hard and smart work to be successful in whatever you do. And even if you are successful, you must maintain your edge and be up-to-date on your industry, and stay on the cutting edge.
Rental property owners have to always update and upgrade their properties. Successful (and I’ve yet to meet one) network marketers have to keep “recruiting”! And for those of you who think having a few websites can make you passive income, think again. I run one, and it is certainly work. It ain’t no 4-hour work week for me. I’m sure it’s not for Wojo as well!
Wojo’s note: No, it is definitely not a 4 hour work week. 🙂 But I love it nonetheless… What do you guys think? Is Mr. Credit Card on to something, or is it possible to create truly “passive” income? What are some examples? Mr. Credit Card focuses on a few strategies that he considers non-passive, but can we take a broader look? Dividend income comes to mind… Share your thoughts!
Photo thanks to littledan77
Fiscal Fizzle 
Thanks for the link!
You got it!!!
Spot on. I get people all the time asking me how to make passive income through a website. I tell them it might be a 6 months or a couple years before you even see any kind of substantial income. I’ve even had blogs I ran with friends fail, because it ended up being more work than they expected. The phrase passive income is really deceiving.
.-= Derek´s last post: How to Spend Your Income Tax Return Wisely …or Not at All =-.
Sorry Derek, you got caught up in my spam folder! 🙂 I’m not sure that the phrase “passive income” is what’s deceiving in that case, or if it’s a delusion that blogs are somehow passive income. Maybe eventually, to an extent, but…
As I’m sure you know (but many of those entering the field for the first time don’t), blogging is a heck of a lot of work! 🙂
So I see it more as a serious hobby that might turn into a business venture at some point…
Passive income is absolutely a real possibility. And online businesses are a great way to do it. (Approximately 2/3 of my income is from completely static websites and products.)
Blogs just aren’t in the category of passive. 🙂
.-= Mike Piper´s last post: Weekend Reading 2/19/2010 =-.
You bring up an interesting point–I think Mr. Credit Card to argue that, unless your website income is indefinite, it cannot be considered passive (in other words, if in 5 years you have to modify your income-generating strategy, then it’s not truly passive).
My thoughts? 5 years is a pretty good amount of time to earn income while doing nothing to maintain it, even if you do have to change your strategy after that time period.
Wojciech –
I think he’s missing the point on what most people call “passive” income, or at least from what I’ve read of those who tout it. (Robert Kiyosaki in particular)
The opposite of passive income is active income, which can be defined as an hourly wage or other “work” income from a job. Generally speaking, you get paid for being there and you don’t get paid if you’re not (simplified example I know, not including vacation time and other “perks”….but at its core, its income that you have to work yourself for, without any leverage)
My definition of passive income is NOT necessarily income that you don’t put any “sweat equity” into (although its possible to generate income with literally no work as I’ll demonstrate later) but rather income that is generated regardless of whether you’re actively working at the time or not.
In the rental property example, certainly, there are upgrades to be made and things that go wrong but you didn’t have to show up at an office and put in an eight hour day in order to be sent a monthly check. If you’re a small or medium-sized business owner with employees that are able to run the day-to-day operations of the business without you, you could concievably take a month-long vacation away from the business and it would still be running smooth & steady without you.
Can net income be generated “passively”? Absolutely. I built a site a number of years ago that was the first of its kind in a social networking niche that generated thousands of hits a day through natural search. I literally haven’t touched that site in a year and a half and while it doesn’t generate nearly as much income it generated me back in 2006 and 2007, I still make nearly $1000 a month from Google Adsense and CPM-based banner advertising.
Now yes, in order to build that site I had to spend LONG hours working to construct the framework of the site from the ground up, then building an audience & promoting the site through viral marketing. But once the asset was set up and started making money, there was actually very little maintenance involved.
I agree with the author that nothing comes easy and that the majority of the business-in-a-box-esque programs that are pushed by internet marketing gurus are nothing but pie in the sky and/or recycled content that you could get by reading any number of blogs. (Trust me, I’ve dropped $ on some of them) No question that that mentality is pervasive amongst a number of people who think they can get something for nothing. Building any kind of business (whether just for side income or to scale into a full-fledged company) takes long hours of planning and sweat equity before it pays dividends.
That said, once things start rolling and you can build scale, absolutely, you can start to see income that comes in whether you’re physically working at the time or not.
Just my two and 3/4 cents.
Blair MacGregor
CostRefuge.com
.-= Blair MacGregor´s last post: Fidelity Portfolio Advisory Service Review w/ Actual Holdings =-.
I think you’ve nailed the definition of what I understand passive income to be, too. As I commented on another blog today, I believe that as soon as you don’t have to be “working” for one hour, and during that hour your money keeps coming in, you’ve created a passive income source, however small.
I think a lot of people get thrown off with the word “passive” as somehow indicating a lack of effort or not having to do anything.
This is far from the truth…all income must be created and maintained (you don’t get paid just for existing…you have to create value for someone else). So if you take a “strict” definition of passive income, then yes–there’s no such thing.
But may we call it…”self-propelled” income. 🙂
Let’s just say this … if it sounds too good to be true, it probably is!
It’s way more profitable for people to sell you on the idea that you don’t have to work and you can create passive income than it is for them to make their own passive income. These guys work super hard to sell you on their books and ideas. That’s the business model that works!
Yup, I think we will all agree that building passive income is hard work, whether it’s a business, investments, real estate, or anything else…
Thanks Jason!
You may be able to take a take a month long vacation which you would not be able to do if you were an “employee”! But as Blair mentioned, even passive websites see income declines if not maintained. But having an “asset with a declining income even though it’s so called passive” isn’t really my idea of passive income..It’s passive but needs maintenance…so in the long run, it’s not passive!
.-= Mr Credit Card´s last post: 6 Days Until CARD =-.
“isn’t really my idea of passive income…” I think that’s going to be the key in this discussion. It’s very interesting how the definition of passive income is different for everyone!
In my case, the income from that particular site dropped because the search traffic fell through the floor for the terms I was ranking for organically. It was centered around specific MySpace-related keywords and did very well from April 2006 through early 2007 while MySpace was still king of the social networking heap but as Facebook started to take control, MySpace’s traffic took a huge nose dive and so did the traffic to my site.
The lack of maintenance might not have helped but it wasn’t anywhere close to the primary factor for the site’s decline. Had I maintained it every minute of every day, I still would’ve lost the same amount of traffic I did by leaving it alone.
I think we all agree for the most part that making money takes a certain amount of effort, it’s really just a semantic argument over the word “passive.”
Here’s a question… is stock dividends not to be considered passive?
I realize there is a whole gray area in the tax code about passive income versus portfolio income, but in a pure debate about active vs. passive, I think stock dividends are purely passive as long as you’re trading in and out.
As proof, I submit:
1) I treat them as a value investment (via price to book)
2) the company does all the work
3) I sit back and watch the new shares column get a little bigger every quarter.
I’m not being confrontational, just curious how you guys feel on the issue.
.-= Matt SF´s last post: Can Google’s ‘Insights for Search’ Make You a Better Investor? =-.
Absolutely (and I even mention it at the end of the post!). Building a portfolio of dividend-producing stocks, bonds, or any other investment vehicle, basically acts at passive income. Build it large enough, and you never have to work another day in your life again… 🙂 Granted, you have to maintain the investments, but how often will that happen?
Is Mr. Credit Card angry? Cause I felt like I was being yelled at when reading this! Maybe he got screwed over by a passive income online guru? Anyways… I’m usually pretty mellow, but I’m going to have to respectfully disagree with the article.
I’ll agree that the world is changing so there’s always new competition, however it seems a bit far out that the idea of passive income doesn’t exist… Have you received any dividends on your stocks lately? One could argue that welfare is, in fact a passive income stream as well (maybe that should be my goal 😉 ). Reoccurring income streams based off highly secure assets are arguably very extreme forms of passive income… Bonds will fail only if the U.S. government fails.
I understand that the idea of passive income is being overhyped, yes, but it’s basically a repackaged version of using leverage and systems to eliminate yourself from the actual work, usually derived from ownership of an asset or business. Feudal lords use to have passive income… not exactly a change in mentality, only a change in products and repackaged into a shiny new ebook.
There ARE real estate investors who have only one person that reports to them, and they only get involved if something goes wrong… (aka a building blows up), otherwise they’ve been smart enough to automate the systems, which includes the upgrading and maintenance of properties, which you dually noted. I’ve seen this first hand.
Maybe you technically got me, because the real estate investor might talk to that person an hour a week on the phone, but is that work? Real estate does have competition and market fluctuations of course, but with proper risk management, cash flow measures, and ROE a passive real estate investor can weather the storm while highly leveraged investors (speculators rather) are weeded out. Most likely he/she is investing in a diversified commercial mix and nothing as speculative or as big of a waste in investment dollars, as a single family home.
The idea of passive income, or earning income without being actively involved in a venture, is a reasonable goal if someone is willing to work hard and create the systems or assets that allow for this type of income. I don’t agree in the idea of discrediting it at all as the ideas of Rich Dad and the 4 hour workweek do increase productivity and are gateways to becoming more financially successful.
I hope Mr. Credit Card sounds happier in his next post.
.-= Ryan @ Planting Dollars´s last post: Hiking Diamond Head and Snorkeling In Waikiki =-.
Thanks for the in-depth comment, Ryan! I agree with you and some of the other comments that it’s the very definition of passive income that’s under debate. Is working four hours a week to get forty-hours-worth of income passive? As you point out, the leveraging of time is what’s key. Whether we call that “passive” or not, does it make a difference?
Wojciech,
to supplement the above comments, I have to remind you that a passive income source (after you have set it in action) does not imply that you don’t have to spend any time or energy supervising it, but the time and energy must by limited. For example, a source of passive income must not use more than one hour of your daily time.
Does that mean that the rest of time, the source will not produce income? Of course it will! Even if you have a passive attitude towards it 🙂
Agreed–I think the “rest of the time” is a key test of passive income–does it produce even when you’re not ACTIVELY working on it? Great comment.
I see passive income as hand off income. You do the leg work (and work really hard) and then set it off and just monitor it… I have many websites that earn me small passive income (in my definition) and they generally only require a little maintenance here and there but do make me cash in the background.
100% passive will never be achieved but you can find ways to take your hands away.
Thanks,
Forest.
.-= Forest´s last post: Getting Rid Of Ants =-.
“100% passive will never be achieved but you can find ways to take your hands away.” I think you’re definitely right. Defining passive as “100% passive” might be a fool’s errand, but understanding that it will never be 100% allows you to find things that are as close as possible.
I think the idea is that creating an asset can take time, but once it’s supported properly (with minimal maintenance) it will consistently produce income…your time maintaining will fluctuate based on changes, etc…Great post!
.-= Ken´s last post: Weekend Roundup =-.
I’m sure that different “passive income” (depending on how you define it) sources have different maintenance requirements, too. So if you don’t want to spend a lot of time on it, you could just select from the bunch that are relatively maintenance-free.
Ryan – no I’m not unhappy..neither have I been scammed or anything..but yes, perhaps we can debate exactly what is the definition of “passive income”..but let me state my points using some of the examples here.
Matt SF – dividends as passive income…But that is what folks who invested in GM and Ford in the 80s thought! As well as those who invested in GM and Ford preferred shares. Let the companies do all the work while I collect income. But you still need to do research because your “dividend stocks” may go bust.
Wojo – re – diversified portfolio of stocks, bonds – Build it large enough, and you never have to work another day in your life again… Granted, you have to maintain the investments, but how often will that happen? – why is it that endowment funds like Harvard, Yale and other University funds and public pension funds don’t just “maintain their investments” but actually hire a whole department of people to manage their portfolio?
Ken – creating an asset can take time, but once it’s supported properly (with minimal maintenance) it will consistently produce income…your time maintaining will fluctuate based on changes, etc – I call that building a business – excluding the minimum maintenance part. You may choose to be a non-active CEO (hence perhaps define that as non-passive) but the business definitely is not passive (even though it produces income).
Here is my problem with this whole “passive investing”. If you really take the definition as most have, which is an asset or business that can run without you or with minimal effort (however it is defined), then essentially passive investing is nothing more than “building a successful business”. Because if you have built a successful business, then you can then choose to “not be involved” and take a more “passive role”
But perhaps the greatest problem I have with this whole “passive income” thing is that it implies that it is better “not to be an employee”. It implies that it is better to work your butt off to build an asset that can “provide you with income with minimal effort once it is built”. In other words, it is better to be a business owner than an employee. But some folks are simply better as employees than being their own boss. There are many folks who have climbed their way through the corporate ladder are way better off financially than most folks who are “trying to build a passive income”. The person who is the head of research, CFO, head of sales in fortune 500 companies are much better off financially than most folks even though they are “employees”.
It kind off implies that it is better to be a real estate investor than a surgeon because you can take 1 month vacations if you want in contrast to a doctor who always has to work. What it does not factor is that some people simple love their jobs even though they are “employees” and have to always work to bring in the dough.
I guess the bottom line is we should be encouraging folks to be successful in whatever they are doing, whether they are business owners or employees! They are many successful business owner and there are also many successful employees who are much financially better off than many business owners.
.-= Mr Credit Card´s last post: Credit Vs. Debit, Is There A Middle Ground? =-.
I think we can all agree that not all of us are meant to build passive income–the wold would probably cease to function. 🙂 I would echo your comments in that, if building a business is something you believe in–go for it. If not, be happy and successful as an employee. I’ve known people of both kinds, and they are all very successful.
The dividend/investment debate is very interesting–although it’s not something I know a lot about. I would encourage those of you who have experience with investing, etc. to continue your comments and/or share good resources with the rest of us!
I don’t get it Wojo and all. There’s only one real passive income source, and that’s the interest earned on your cash savings.
The interest income from cash savings is the only 1 of 5 income sources I consider as passive. Build the NUT, and that is when you are free.
.-= Financial Samurai´s last post: Charles Farrell From “Your Money Ratios” Speaks! Part II =-.
Interesting…what are your other four?
Day job income, rental income, dividend income or losses (!) from non retirement investments (public and private), and online income. All four require work, but only interest income is effortless.
Forget about the 401K, IRA, or any retirement savings vehicles as income. count them only when one is retired, b/c it might not be there!
I recommend everybody concentrate as many of their income streams as possible to build that one great nut by a certain age, so one really has passive income to live off of.
Accumulate 25X your annual income in cash savings, and you’re golden. But realistically, 10-15X will do.
.-= Financial Samurai´s last post: How To Get Your Super Motivated Boyfriend to Marry You =-.
How is your day job passive? Do you sleep on the job? 🙂
.-= Investor Junkie´s last post: Are You Saving Too Much? =-.
LOL… yeah, I’m a zombie at work.
I was responding to Wojo’s question on what the OTHER income streams are!
There is only ONE passive income stream, and that is the interest income from savings in the bank!
.-= Financial Samurai´s last post: How To Get Your Super Motivated Boyfriend to Marry You =-.
🙂 LOL that would be passive, indeed…
I believe the four he listed are not passive, in his view.
Even technically interest earning from cash savings or dividends is not passive in the truest sense of the term. You have to do research and pick your CD, bond or stock. Then if it matures or drops in price determine if you should keep it or invest in something else. That’s the closest you’ll get to passive. It’s never set it and forget, turn off the lights and never look at it again “passive income”.
.-= Investor Junkie´s last post: Are You Saving Too Much? =-.
Good points–in the end, there is no “free lunch” with anything. The question becomes–how much do you want to leverage your time for the income you get?
Shockingly I agree with Financial Samurai. I hope it doesn’t happen too often, or our spicy tax-based relationship could be in trouble! 🙂
That said, I don’t agree that dividend income can’t be considered passive. It’s not guaranteed or stable, but if you buy the market via an ETF, you don’t have to do anything again to collect your dividend cheque. If the market goes to zero, good luck spending your worthless dollars!
The other 3, absolutely. Some bloggers crack me up with the value they think they think their creating. I think it was Steve Pavilina who says he thinks his blog will be read by robots.
People, the Internet wasn’t even around 20 years ago (and I was, so I should know!) If Monevator or Fiscal Fizzle or Financial Samurai are still around in anything like their present form in another two decades, generating money from Adsense clicks or similar, point me here and I’ll be suitably humbled!
.-= Monevator´s last post: Playing chicken with house prices =-.
No, I think the world is evolving much too fast for what we have now to ever be around in the same form in 2 years, much less 10 or 20. 🙂 So in that sense, blogging is far from passive income (and if it is…it is so for a short while). I think a “reactionary business” is a much more accurate way of describing blogging–we’re just thinkers and writers along for the ride of whatever comes our way. 🙂
Having said that, I think the Internet has changed the income game forever…but can we call it “passive?” Most likely, no.
Monevator, I believe in a year’s time, you will end up agreeing with 95% of what I write! Gotta start somewhere! 🙂
Samurai
.-= Financial Samurai´s last post: Marketing Or Manipulation? =-.
@Wojo – I like reactionary, except for its political connotations.
@Sam – Ha! In reality I do agree with a fair bit of what you write already. It’s only taxing bankers who profit from just turning up to work in this exceptional, history changing that we’ve really disagreed about. 🙂
.-= Monevator´s last post: Playing chicken with house prices =-.
Bankers just “turning up to work”? lol. Socialists unite!
.-= Financial Samurai´s last post: How To Get Your Super Motivated Boyfriend to Marry You =-.
I would have to agree fully that there is no truly passive income other than interest sort of things…
This particular goal for me is to get returns on work or an idea for the quality and value it provides, not the time put in. Work 8+ hours a day hourly or salary, and you’ll get paid a predefined amount. You could do the minimum or the maximum, but you’ll still get paid the same with little chance of increase. With businesses, investments, inventions, etc., what you make can be scaled. You could make $1/hour or you could make $1000/hour depending or factors other than time.
Regular jobs are you selling your time. Things like businesses are you selling products. In a job, you’ll be limited by the time of the day, business you’ll only be limited by creativity, smarts, management skills, money experience, etc. Once you get the hang of a business, it may not require so much time, or it may still require time but its increased popularity gives you more profits, and that is more or less where the passive comes in. Certainly isn’t easy at the start (most things aren’t) and there is always risk involved (there’s risk in holding jobs too believe it or not), but if you’re successful you are not limited in the way you are with a job.
Just one of money paths in life.
I think the scalability of business is what appeals to most people–they believe that they are “limited” (even with raises) on what they can earn at their day job because there’s an income ceiling. With a business, the potential is limitless.
That’s definitely an attractive characteristic to many people. 🙂
I look at the term “passive income” slightly different than most.
The only way I define passive income is something generates income when you are not actively taking part in it. Though with all investments you need to actively take part in it from time to time.
In my example my business generates income when I sleep. But it’s not truly passive (as I mention above there really isn’t such as thing a completely passive. Any investment must be monitored to a certain degree) as I have to work on maintaining it on a weekly basis. A completely active income: A consulting gig when you get paid per hour or a job you must attend to get paid, is not passive.
.-= Investor Junkie´s last post: Are You Saving Too Much? =-.
I don’t think you’re far from everyone else’s thoughts on this–we’ve all essentially agreed that there is no such thing as “passive income.” You either have to a. work up front, and most of the time b. maintain the income.
But in my opinion, your definition of “passive”: “…something generates income when you are not actively taking part in it…” would apply to everything we’re talking about: businesses, investments, etc. Yes, you still need to take an active role once in a while, but they are earning money when you’re not actively working on them, too (unlike a day job).
Again, the definition of “passive” is key to this discussion, I think. Maybe “continuing income…” is a better term (as in, continuing when you leave).
Yea continuing income is a better definition, but it’s not sexy when mentioned in a late night infomercial! 😉
Most times as an employee is not “continuing income” and most people would fall under this category.
Also related to this discussion and another popular catch-phase is “multiple streams of income”.
.-= Investor Junkie´s last post: Are You Saving Too Much? =-.
Yes! I’m surprised no one’s brought that up yet.
Here’s food for thought for everyone: How can we have no such thing as passive income, AND have multiple streams of income? Won’t some income sources, by physical impossibility, HAVE to be passive (at least some of the time) to make that work? 🙂
Generally agree with your assessment of passive income – although I’m not opposed the kind of passive income provided by large portfolios of marketable securities (which normally take a lot of non-passive work to accumulate…). To me, the kind of solutions that are espoused by books like The 4 Hour Work Week fit into the category of, “If this is so easy, why isn’t everyone doing it?”. That being said, I did enjoy the book and definitely got a lot out of it. I felt that the author’s encouragement to readers to re-examine their personal goals and lifestyle and look for opportunities to automate repetitive tasks and outsource to whatever degree possible, all worthy objectives and considerations.
Note – This comment was written by Dean’s personal assistant in Bangladesh. Dean is actually snorkeling in the Bahamas right now.
.-= Dean Piccirillo´s last post: Does Your Employee’s Financial Health Impact Your Bottom-line? =-.
You bring of a great point about securities.
It takes A LOT of non-passive income to make them “passive”. So even them are not truly passive. The basic tenant of capitalism is a transfer of services. Those services take time to create. So the No Such Thing As A Free Lunch applies.
.-= Investor Junkie´s last post: Are You Saving Too Much? =-.
I’ve been thinking about this since my last comment (congrats BTW b/c only good posts do that!) and I’m convinced that few investments or businesses, if any, are 100% passive.
I’m not sure the world works in such a way that you can create something, and take a completely hands off approach to it, while simultaneously getting maximum profit from that something.
Perhaps if you wrote a song that became wickedly popular and royalties streamed in non stop, or perhaps built a small business, sold a majority stake to a Gung Ho partner, and he/she was a Charlie Munger (Berkshire Hathaway’s VP) type who can take the ball and run with it, but I can’t see many situations that allow a 100% hands off mentality.
That said, I don’t think anyone should write off the idea because the basic idea is to bust your hump up front, and then spend 10% of your time grooming, maintaining, and troubleshooting the issues after the major work has been done. I’ve never read The 4 Hour Work Week, but perhaps that’s the basic idea… to create something that took 40 hours to build but 4 hours (10%) to maintain.
So perhaps the definition of passive income should include particular reference to product/business that requires a substantial amount of work up front, and requires minimal upkeep and maintenance over time. Such as stock/bond dividends, savings accounts, P2P investments (aka Lending Club), perhaps even a blog.
.-= Matt SF´s last post: How I Find the Highest Paying Dividend Stocks =-.
I think what you’re talking about is essentially the process of building many businesses–a lot of work up front, and then a hands-off approach as other people take over the reigns and you collect a residual check. I’m not sure if I could say blogging is included in that (I think it actually gets harder as you go!), but the income definitely increases exponentially if your blog is successful.
This is a well thought-out article, but a little pessimistic in my opinion.
The overall premise is true: there is no such thing as 100% passive income; but it’s not that black and white.
The passiveness of an investment is relative to the eye of the beholder. Someone who makes $15/hr at his day job, but $100/hr blogging might consider the blogging income passive.
Someone who makes $100/hr at her day job, but $1000/hr managing her real estate might consider real estate passive.
etc.
On a continuum between 100% active and 100% passive; if a job is completely active, then something like treasury bonds would be about 99.9% passive (you still have to check the newspaper form time to time to make sure your government is still solvent).
In between are things like network marketing (not very passive), blogging (not very passive), single-family real estate (moderately passive), multi-family real estate (very passive), etc.
Those of us who are pursuing passive income are trying to move down the line to get as passive as possible at the end of the day.
.-= Brian Lee´s last post: By: Mel =-.
I really like your analogy of the “continuum.” In essence, we’re not looking for “passive income,” but for the “MOST passive income”–something that’s as far as possible down the scale.
With that understanding, we can say that EVERYTHING is active income–but some are more passive than others. 🙂 Awesome!
Hey Wojciech,
I am currently living off from the so-called “passive income”. Not from my blog, but from rental properties. And yes I will have to agree with you that it will require some kind of work. (hard work and smart work)
Passive Income– doesn’t mean that you won’t need to think or use your brain. There are challenges from time to time.
What I like about it though, is that month after month, the money just comes in automatically as long as your property is rented. So the work is usually minimal as compared to a full-time job or a regular business.
I am free to go on a vacation anytime I wish. I can work whenever I want. Even though I have that choice, I always choose to be more productive everyday.
I’m sure that you will agree with me that It is easier to rent out and maintain 10 properties than to do 10 different jobs.
In short, own your business, don’t let your business own you.
.-= Productive Pinoy´s last post: Avoid Low Price Strategy =-.
“the work is usually minimal as compared to a full-time job or a regular business…” That’s a key test, I think, of any “non-active” income strategy. I really like Brian Lee’s approach (above comment) of figuring out where things lie on the active-passive spectrum, so your type of business would clearly be very passive.
Thanks for your comment!
I wanted to bring a couple of follow-up posts to everyone’s attention, if you’d like to continue the discussion:
Is Passive Income Possible? at Planting Dollars (written by Ryan)
Passive Income – Further Thoughts From Mr Credit Card – Guest Post at Planting Dollars (written by Mr. Credit Card)
Hi Folks,
This has been an interesting read. I work as a middle management executive with a multinational financial services company in Mumbai, India and am 32 years old. I actually believe in the concept of financial freedom. While earning a passive income does not mean no work at all, it does mean having more time on hands compared to our 9 to 8 drudgery. In Mumbai, rental yields are an abyssmal 2.5% of capital values for residential properties and hence, in my opinion, owning more than 1 home may not quite be such a great idea, especially with real estate already very steep (and hence the future growth potential limited).
I have deliberately saved over 50% of my income over the last 10 years I have been working. Having a working spouse and living in my own home have helped me do this. Today, I can well say that I generate a fair amount of money as interest on my investments. But this brings me to another subject. Would we want our best asset to be under utilised? I mean, would I allow a great plot of land to just idle? Not at all. So why do it to ourselves? Are’nt we our greatest asset? Sure, we’d have some years of exponential growth and some where we don’t quite make it, but is’nt that the way every asset class behaves?
True financial freedom probably does not mean sitting at home doing nothing. To me, it means having a job you enjoy or probably don’t really dislike. It means having enough money coming in every month where you are not ‘forced’ to work in a hostile / thankless environment. Now, is’nt that ‘freedom’ after all?
I strongly believe in the idea of passive income. I strongly DIS-believe in the idea that you can just generate that passive income through lazy decadence. It takes hard work, financial tenacity and creativity, and prudence to get there. And even these passive portfolios require not only maintenance, but to keep that financial intelligence in tact to ensure one bars off cataclysmic changes.
I shamefully admit I’m a big fan of Robert Kiyosaki’s teachings, but what I took out of it more than anything else was the need to be financially educated; to know what’s going on around you in the world around you. Passive income is one thing. Getting that income to exceed your expenses is completely another!