Not sure where people are getting the idea that there’s such a thing called passive income, because there really isn’t. The only thing I can imagine as truly passive income is if one inherits a bunch of money, buys some CDs and lives off the interest. That is legitimate passive income, everything else is not.
Instead of thinking about passive income, think about how hard or soft your money is working for you. In other words, what is your money’s “Return On Effort”. The best is when the stock market is going up and you feel like a genius without having to do much of anything. Too bad the markets also go down.
PASSIVE INCOME MYTHS
* Blog. Hahaha. I may be a blogging addict, but come on now. Running a blog with regular scheduled posts and decent traffic takes a ton of time! I probably spend anywhere from 10-30 hours a week running FinancialSamurai.com and this site. The only way you’re going to get passive income blogging is if you pay someone to be your webmaster, who pays someone to find good writers and does all the marketing. Actually, I know several bigger blogs that do that, where ghost writers do all the writing for them, and virtual assistants do the rest. But, what fun is that? Guess it’s not supposed to be fun for some, as it is more about making money for them.
* Books. Ummm, you had to write the book didn’t you? Yes, you can get recurring income for months or years after your creation, but eventually it will fade to nothing, and you’ll have to write a new book or at least update the thing. Sometimes, the updates are tiny such as a new epilogue for your 5th anniversary. If you spent 2 years writing your book and make $200,000 over the life of the book, then you really just made about $100,000 a year. Don’t fool yourself to think it’s more than what it is.
* Dividend Yielding Stocks. Were you alive during the meltdown of 2008 and 2009? How about between 2001 to 2003? How about in 1997? How about 1987? You may get a nice 5% dividend yield every year, but that’s not going to help bupkis if your stock loses 30% of its value now, will it? Another common mantra is municipal bonds. Pull up the California muni bond fund NAC. Down 20% since 4Q10. Ooops! Sure, stocks may return 6-8% in the long run, but you better stick it out for the long run and not sell at the bottom or else you might as well rename this category “Passive Income Losses”!
* Land-lording. All you’ve got to do is Google “tenants from hell” and you’ll realize that being a landlord is anything but passive. You need to find a good tenant(s), hold open houses, fix things, go after tenants who don’t pay their bills, attend HOA meetings if you own a condo, and take care of your financing situation. You can always hire a property manager to handle the search and the maintenance for you for one month’s rent a year, but that still takes work.
* Online Selling. Selling and negotiating terms on eBay and Craigslist is tough work. You’ve got to analyze the market, compete against other sellers, deal with scammers, meet with people live sometimes, and watch your account like a hawk. Buying and selling on eBay is a notoriously focused thing to do as all the action happens in the last 5 minutes. You can find great opportunities, but you’ve got to really look and that’s not passive at all.
* Royalties. It sounds great to create a product that will be used by others who will pay you royalties for the rest of your life, but the likelihood is minimal. Realistically, you’ll probably end up spending years of your life trying to create that amazing product, just to go nowhere. Or, you’ll create that product, watch an initial wave of income come in, and then fade because someone has built a better mousetrap. You’ve now got to create something better
* CD Investing. Investing in CDs is as close to generating passive income as one can get. After you spend time formulating your cash flow needs and thoughts on liquidity and inflation, all you have to do is buy a CD and collect the monthly interest. You can either credit the interest back to principal, or credit another account and use the money for whatever you like. There is literally nothing you need to do once the CD is invested. Meanwhile, if you have under $250,000, the FDIC insures everything so there’s nothing to worry about either.
Instead of chasing the myth of generating multiple streams of passive income, accept the fact that there is no such thing and look to diversify your revenue stream instead. Ideally, you should aim to generate at least two other sources of income in addition to your main job. There is so much you can do to diversify, including: rental property, interest from savings, interest from CDs, stocks, bonds, private equity, and online ventures.
Unless you can pay someone to do exactly what you want and generate a profit afterward, there’s no such thing as passive income. Sorry folks!
Readers, what do you think? Is passive income a myth? If it’s not, are you a unicorn?