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.
DIVERSIFY INSTEAD
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?
Best,
Sam
I don’t think that I’m a unicorn, but I still believe in passive income. Of course nothing is 100% effortless, but it can certainly be more passive than an 8-5 job 5 days a week!
For example, the blog. This can take a lot of work, but what if you hire some writers and also an SEO specialist once in a while, you might only have to work 5-10 hours a week. I’d say that’s pretty passive!
The same thing goes for owning property rentals. Sure, there could be some issues with the property from time to time, or maybe you got bad tennents, but most of the time, the house stands solid and the rent check comes in each month – and it happens with less than 5-10 a month probably.
Of course there is some work involved in these passive investment options, but really, there isn’t much. Then, if you get to the point where all of your “passive” investments go well, you can always sell them all and live off of the interest (which you say is truly passive). :)
Glad you don’t think you’re a unicorn!
Good point about comparing the level of effort with one’s day job. I think most of us only have at max 18-20 hours a day to do work before we burnout completely. We just need to use our time wisely!
[…] On Yakezie: Passive Income is a Myth […]
I treat passive income as I treat stocks. Some of my picks could yield nothing and some might be a jackpot! You make a crucial point about diversification. The same goes for passive income as well – have multiple streams. Some might fade out rather quickly, some might have a life more than your expectation.
Keep workin’! Life ain’t easy, but it sure is fun!
Unfortunately Sam, I think you are right…..true passive income is a bit difficult to find, although low effort income is certainly achievable in several of the categories you mention.
I prefer to just take the route of finding something you love to do so that it doesn’t really feel like work.
I completely agree. When you find something you love to do, it doesn’t feel as much like work, and putting in the hours to produce the income is more enjoyable.
Good call CNC. As for my website work, it never feels like work at all, which makes it completely worth-while!
Agreed. The bummer is when you do what you do so well that lots of people want you to pay for it and then it starts becoming a grind!
I agree. Multiple diverse revenue streams, all with a hint of passion in them. If you so happen not to pay attention to one for a while, it doesn’t blow up eg real estate.
Sam
This is a solid post and something that needs to get out there. I interviewed Ramit Sethi and I distinctly remember him saying “passive income is bullshit and blogs area a terrible way to make money.” The thing is that the people who are making money have given us this idea that their income is passive. But even when somebody does make money as a blogger, it’s a payoff from 2 years work when you don’t make shit. As another guy I interviewed said, it’s not really passive, it’s just deferred time income (kind of like you mentioned about the books). So yeah, it’s a myth. The idea that you could do nothing and earn money is ridiculous.
Srini, it is quite interesting to see those hock passive income infoproducts! Just goes to show you that with a big enough audience, you can sell anything online and someone will buy it.
I don’t think it would be gratifying not working for one’s income though. Would feel a little empty.
I like that term “deferred time income”. That is a perfect way to describe the first few years of blogging (if you are lucky to make income thereafter!).
I completely agree with you here. I thought I was working on “passive” income streams when my husband and I agreed to build a couple of websites on a commission basis. First, we had to build the sites which equated to a lot of work, now we continue to maintain them and add to them while slowly earning commissions off of their sales. I also create the commission reports on a couple of them, so this is totally NOT passive income. I love the diversity of our income, but it’s not at all what I had in mind.
So, if anyone can truly come up with a “passive” income source, let me know.
I think it depends, completely, on your definition of passive income. To me, passive income is income that continues to come in after I’ve put in my effort. Blogging does count towards that in a way. If I (or you) completely quit blogging, but left the site up with ads, we’d still get some income from it. That would be passive income. Same with royalties from a book. Once I’ve written the book, any income after that is passive because there is no further effort from me.
I think blogging income would fade completely away in about 6 months if I were to stop cold turkey. If I stopped looking at my CD interest income, the income would come in forever as long as the institution doesnt close down!
Well, I have a few sites that say it doesn’t fade completely away. Significantly dwindled? Yes.
Where’d you get that money for the CD? Surely you didn’t work for it? Cause, then it ouldn’t be passive anymore… according to your definition.
My point is more about how you define passive income. Everybody knows (or should by now) that there’s no such thing as a free income. Nobody is going to pay you to do absolutely nothing. You’ve got to work for something somehow. You’ve got to earn the money. But, if you can earn the money that you make now, plus set up a way (like a CD) to earn some money later on that same effort, doesn’t that “later” income become more and more passive as time goes on? Sure, you split a finite number an infinite number of times, you still get a finite number, but it’s infinitely small. Earn enough money (now and in the future) on your current work, and the time cost becomes infinitely small.
100% Agree Sam. That being said, I think some ways are less stressful than others. I know that blogging provides me with 0 Stress, but with a pretty good side income = WIN for Evan!
I love the idea of multiple streams of income! Trying to slowly build a couple myself
That is really good you have 0 stress with blogging. That’s a real gift bc I would save half of us do have blogging stress at some point and that’s no fun!
Perhaps you need to write even more edgy posts to have readers get all pissed off at you?! Could be fun!
Oh boy–I did an article recently about getting rewarded to lessen your carbon footprint and my Chronicle blog readers ate me alive! Most of the commenters weren’t my normal readers, but they took it upon themselves to rip apart anything to do with the environment, global warming, cap and trade, the works. I think I got a few gray hairs from that one!
This is a really good topic and discussion – salient to personal finance bloggers for sure, including many of us here.
I think there’s a notion out there that it’s possible to get income streams with very little active effort. The thing is, it takes work to get to that point.
Want to earn interest on an investment? You have to work to get the money to invest. Want to earn royalties on a book or other venture? You have to put in a lot of work up front to get to that point.
What it comes down to is that money isn’t going to come crashing down from the sky into our home, without any work on our part. Something for nothing is a falso concept most of the time.
I like the way you describe return on effort as way to look at it, as well as diversification of income streams.
I agree that blogging is not passive income! It definitely takes time and effort! You could add owning bonds to the save level as CDs, if you are just living off the yield.
I would have to disagree about blogging not being passive. You definitely have to hire people to help you out. It’s not easy to find good writers, but if they can write just as well as i can, why not?
Also i would agree about landlording not being as easy as it might seem. I don’t personally own any rental properties, but my brother and father both do. Whenever i talk to my brother about it, his face gets red, because one of his tenants causes so many problems. If you have great tenants, it can be pretty straight forward, but right now, most landlords will take whatever they can get.
Well, if you define passive income as not doing anything then I guess CDs are the closest to that definition. Even with CDs, you still need to keep an eye on mature date and buy new CDs right?
Blogging is not passive income at all. It’s a lot of work that is taking it’s own sweet time to start paying off.
I agree that diversification is the key, but it’s a lot of work. Too much multi-tasking is bad for the brain. :)
Great post. No income is ever completely passive. In some form or another, someone has to work for it. Rental property requires you to manage the tenants and other concerns, blogs and online work require constant attention, stock investng requires research and capital, and so on. Fact is that you can make money in two ways: working for it, or taking your existing capital and risking it for the potential increase in value. So is passive income possible. I think it is, but there is no form of passive income that is completely hands off or without risk. If there was, wouldn’t we all be living on the beach somewhere?
Hey Sam,
Somewhere out there, Robert Kiyosaki is shedding a tear, lol. You took on a different perspective here. It was fun to read. You always have to get the ball rolling and keep it rolling, so in that sense, I definitely agree. Thanks for the great read.
Thanks,
Timothy
Excellent post. Total passive income is rare indeed. I look more for multiple income streams, which require little effort.
I also look for what I enjoy doing and how I can make the money I am earning earn more, as that means less ‘work’ for me. Although if you love what you do it’s not really work.
I have just been through the process of writing a book, which comes out in June and it certainly was not as easy as many expect, but now its done, apart from some promotional work, the work is done. Yes it is more like delayed income, but there are more ways open to me now to create more income with less work.
Love your view here, thanks for sharing.
Congratulations-Wiley is a very important publisher! Can’t wait to see the finished product!
Congrats on the book! You’ll have to share with us how you got an agent, publishers, and all the jazz. Always interesting to learn imo.
Great post. Your points remind me of the phrase “there is no such thing as a free lunch.” There’s always work for someone when it comes to making money. If we can get to the point where it takes minimal effort on our part to earn some meaningful extra dough that’s when you know you’ve made it, but generally it takes a lot of hustling before getting to that stage.
You are absolutely correct! This post was spot on. My husband (an international expert in his field) has 6 published books. Of those, the two most recent are making decent royalties. And the publisher has requested an update of one. (It is lots of work). There is no such thing as passive income! (for long)
Wow, 6 books! That’s quite impressive. Perhaps you should start a series on your site highlighting his books?
Sam, Sam, Sam, how many bubbles are you trying to burst. I was just about to come out with my grandest product for sale with $100,000/month passive income.
I just knew it would sell like hotcakes. Now everyone knows there is no such thing as passive income.
Thanks a lot! You probably tell kids there is no Santa Claus too!
I guess I better go back to WORK!
Come on Doc, I would never tell the kiddies there is no Santa. That’s cruel and unusual punishment! Good luck w/ the 100K endeavor!
Interesting post with great points. Human nature at work. It’s a way to get away from your 9 to 5, live the dream and all the other myths we’ve heard in our life. But how many of us would go for it if after some thought, the work behind all forms of passive income could be even harder than your regular job? Perhaps that’s why so many people buy lottery tickets. Passive income for life, no work involved, just stand in line and buy your ticket! Those people are probably unicorns, too. :)
I’ve definitely dreamed of winning the lottery before. If I did, I wouldnt tell anybody and just do my own stuff, just take even more vacation until I felt too guilty slacking off and then quit!
Who says that real estate is passive? It’s soooooooo unpassive. Even if you hire a management company, guess what, you still have to make decisions on what to do when they don’t pay etc. I will never think of real estate as passive ever again. Ever, ever, ever.
Yes indeed…. after reading your tenants from hell stories, forget about it! Makes me want to sell my rental properties BEFORE experiencing all this pain that might occur!
Hmm, interesting take on passive income… The smart passive income website looks like it’s doing pretty good, but I’m sure it’s definitely not passive income!
Sam, have you considered working at Mythbusters :)
Pat is definitely doing well. But, don’t be fooled for a minute he’s not hustling and working hard at his gig. Actually, perhaps that’s part of the trick, to fool you so he can make some good money!
I am working hard so I don’t have to later. I have several businesses outside of the make money online niche that have been running for years with me hardly putting any extra work into them. (You know this!) Of course hard work is involved, but I’m not directly trading my time for money. I can stop working for a while, take a vacation, go to sleep, and I can still make money while doing so. Sounds pretty passive to me. Maybe it’s just our definitions of passive income that are different, because in the financial industry sense of the term, then yeah it’s totally not that. I have my own definition that I mention on the blog.
As far as your thoughts on blogging as being passive, it sort of is. Sure, it takes time and effort to create new content (a LOT of time and effort), but once a post is published, it’s there for the world to see and if there is an opportunity to make money in that post, there is always the possibility of earning a passive income. I’m still making good money from posts and things I published over 2 years ago on my blog.
Great topic. Hope all is well with you!
Again, I think the difference is just our definitions, and in no way am I fooling people. To be honest, I’m a little offended you said that, because that is not even close to my intention for revealing what I do on the blog.
Don’t be offended Pat. Trickig is the wrong word. I think you are doing great, and it’s brilliant to market passive income streams. As you’ve acknowledged in your comment, it definitely takes A LOT of hard work, and my point is for people to realize this and not just think they can just sit around and expect things to come to them.
I know you would feel bad if someone quit their steady job, paid you X dollars, and decided they could just read the instruction manual and replicate what you’ve been doing without much work. That’s a recipe for failure. I’d like for people to really realize nothing good comes easily. More balance is needed.
Keep up the good work!
The point is there was an initial investment, and then eventually you will need more time to keep it going. A week, a month, a year, eventually you will need to maintain it in some way.
Truly passive is no intial work and no additional work. About as close you’ll get to this is via winning the lotto or inheritance, and investing in bonds/CDs.
And don’t take what I say the wrong way either as I like your work.
there definitely is passive income. the perspective you bring up can be used to benchmark one passive income idea/venture vs. another. ROEffort is exactly what i personally measure.
consider this: an inheritance doesn’t necessarily fall into one’s lap. there are certain procedures one has to go through. then one needs to research CDs, open one up, renew them in similar kinds upon maturity, etc.
if we look at everything with that lens, then yes there is no passive income. but if you ask whether i’d rather make passive income (let’s just say the activities do not fit yoru definition of “passive”) vs. working a job for 40 years, then my answer will always be the prior.
let’s jusit’s a matter of semantics at this point :-)
MYTHbusted! I discussed this same topic awhile ago:
http://investorjunkie.com/4204/passive-income/
Seems most people who are talking about passive income are working hard for it. Each dwindling income stream needs to be replaced with a new one that requires a lot of work to establish. While individual streams can be considered passive, overall you’re working just as hard to maintain. True passive income doesn’t require additional work.
There is true passive income out in the world. The problem is that it requires capital beyond the reach of most people. I worked for a property management company back in the nineties where the partners just dropped a pile of cash and then took distributions every month. The company took care of the actual work and the most the partners did was open an envelope. That is how you make passive income in real estate.
I also disagree with your point that dividend income is not passive. Sure, if your investment strategy is to throw a dart at the listings and buy that stock, you’re in trouble. But if you put the time and effort into research and make informed decisions, you can build a portfolio of stable companies that will pay out dividends every quarter. For instance, Johnson and Johnson just increased their dividend for the 48th year in a row. Sure you would need to own a significant number of stocks for the dividend income to be meaningful, but that’s the rub. True passive income takes a lot of money.
[…] is the only true means of passive income generation. I literally don’t have to do anything for the interest income earned after I […]
Totally agree that blogging is not passive income by any means! I think I could make more money working at a retail store for minimum wage than I am now on this blog with the time I put in ;)
I disagree though with the dividend income- I would consider that passive income.
Rental income is also passive (or could be) if you hire a property manager or if you have tenants from heaven ;)
Good luck on land lording and building that great dividend income portfolio that never goes down!
Since when are dividends a percent of the amount of money you have invested? Hell, a drop in stock price actually means you can pick up more shares and increase the dividends you receive, plus reap greater profit when the stock price comes back up. For that matter how does savings account interest not count as passive? Perhaps not _stable_ in either case, but you don’t need to do any work.
[…] Financial Samurai declares that passive income is a myth (especially for blogging- and I […]
I’d have to say that passive income can be more than just putting money in CDs. I did know some friends who had dividend stocks and even through the recession they were still generating dividends. As long as you don’t sell into dips when you should be buying your portfolio will eventually come back.
Sam, I think your post is not as controversial as you may have thought. There’s a lot of money to be made online but it requires a great deal of work.
I didn’t mean for the post to be controversial. I meant for people to wake up and stop thinking money grows from trees, and one has to really work for it, and work hard to give themselves a comfortable financial life.
Cheers
You make a good point Sam. I want streams of passive income. But yes that income is going to come from a ton of work I put in. Even after that revenue is coming in, it’ll still take some work. I wonder where the phrase “passive income” started from? Any ideas?
Maybe the only true passive income is winning a $100 million lotto jackpot.
This is a great article. It really debunks the myths that corporations and marketing gurus have drilled into our lives.
The only way to make money is to work for it.
So true. Diversifying is the trick. Start a lot of passive income streams and when they overlap, you might generate a decent amount.
Haha, I agree, it’s truly not “passive” if you consider the setup effort, but some income is more passive than others. Going for index returns doesn’t take too much effort at all and still results in good growth over time. In fact, your results are likely to be better than if you go with a fund manager who tries to chase higher returns.
Something else to keep in mind is that following the herd is likely to result in average returns. Profit comes from finding discrepancies between supply and demand, and you’re not likely to do that if you compete in the same way as everyone else.
Something to add: Average returns are a good thing if you’re doing something like tracking the economy via an index fund and you don’t have any personal information to bring to the table, but a bad thing if you’re competing and competition is only going to lower everyone’s returns. If you have 1000 blogs blogging about getting out of debt and you write about the same thing with nothing new to bring to the table, you’re only going to get average returns which at that point might not be very high.
I think you can make some decent income with a nice blog…but it certainly isn’t passive. Nice article.
I you just have different definition of what passive income really is. I don’t think anybody, even the passive income gurus, would be bold enough to say that there is a free lunch out there. However if you work upfront many of the passive income strategies that you talk about will pay off over the long run. The true goal of passive income is working hard on the front end so that your end result has little or no maintenance.
Great post and got me thinkging
[…] I will increase my streams of income, particularly passive income. Although, having read this post I will now be terming my passive income as low effort income. My low effort income (LEI) includes my […]
I agree with diversification. One should know how to invest his money wisely, and that is to diversify. If you lose on a certain area, there are other sources of income you can rely on.
[…] from my online business plus whatever other income I’ve created to live a comfortable life. Passive income is a myth, except for the interest I generate from savings and CDs in my opinion. Everything else […]
Great post! I’m not really keen on the whole passive income concept(myth). Making money online is a trade that takes time to master, and implementing successful campaigns takes work. When I think of the word passive, I think of landing pages trying to funnel me to buy a hosting package so that I can never work a day in my life again.
Not as catchy, but I’d rather people called it ‘minimum monetary investment income’, or like Amanda said ‘deferred time income’.
Great article. Not sure I totally agree on the dividend yielding stocks front. I did some research on CDs but am still a little confused. What sort of interest can one expect on average to return from CD investing?
Kind regards
Ashley
Yes, i agree passive income is bullshit. It took me 3 years chasing passive income methods to realize it doesn’t exist. I love making money online and i am getting better and better at it, but it sure as hell aint passive. In fact as soon as I stopped thinking about passive income and just looked at it as online business that requires almost all the same components as a brick and mortar, things started coming together.
I agree that we need to diversify to have multiple source of income.. Not just to put all eggs in one basket. If you rely on 1 income your dead.. Anyway, Great write up! Keep writing!