Jan. 28, 2019
956 words long, 5 minute read
Building passive income is often cited as one of they key ways to build wealth rapidly. The idea of making money while you sleep and having to do little to nothing for it is alluring. I'm simplifying the idea, but most of the time passive income is pitched that way. Build or invest in something up front, then sit back and reap the benefits. While this sounds great, I would make the argument that most passive income isn't really all that passive.
There are a ton of great posts about building passive income streams for yourself. I suggest that you google around and find some for yourself. This post is by no means hating on trying to diversify your income and make more money. Think of this as an argument that passive income is more rare than it is made out to be.
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At it's core, passive income is making money from something without having to actively be involved with it. Passive income should have the following:
The requirement of getting a return is a function of putting your money to work. If you put your money to work you expect it to throw off some sort of cash. Most often with passive income this would be revenue, cash flow, etc.
To give a bit more context, I though I would share a list of income streams that are commonly thought of as passive:
There are a lot more possible ideas. These are some of the most common ones to give you and idea of what we're talking about. On the surface, most seem that once you have things working you can leave it and let the cash keep rolling in.
I believe that the majority of the items above should actually be considered a side hustle. Side hustles require a part time amount of work outside of your main source of income. For the majority of things considered passive income, the same is true.
If you go back to our definition of passive income most examples lean more towards actually being a side hustle. Sure, the majority of them provide great flexibility and you can take time off if you want. The reality is that even the most passive you will still have to put hours in out of your week to keep things running smoothly. You have to deal with tenants, things break, you need to keep churning out content, traffic goes down, etc. Without some maintenance, the income will likely stop coming in. If you have enough cash you can hire these things out, but then you might run into spending time managing your newly hired staff.
From the list above I think the only one that is passive early on is investing money into a financial instrument. Getting a high yield savings account or investing into a portfolio where you expect 4-6% returns is possible. It is truly set it and forget it. The drawback is that in order to live off this type of income, you already have to have a lot of money. If you spend $30,000 a year you need to have ~$750,000 invested to be considered financially independent. For those of us who want to take back some of our time from a 9-5 while we build that type of cash will likely have to put time into our income streams. At that point you can decide to try and automate yourself out of the business or FIRE. I suspect most people choose a combination of both.
I'm not trying to damper the goal of building passive income. I think it's a great goal, but requires a ton of money and time to get something to a truly passive state. Instead, my goal is to create a cash flow machine that I automate more over time. I put some sort of input in (content, effort, cash, etc.) and it spits out money. My goal for my cash machine is for it to require as little time as possible and return a bunch of cash.
A cash flow machine is nearly identical to passive income except for the time requirement. If you can free up your time, that's great! Now continue to automate more and more of your tasks. It is possible that any one of the examples we listed could be passive income, it will just take full automation of the entire business.
Honestly, probably not. I do think that using correct verbiage is important and we should be careful to label things correctly. This post is splitting hairs on the definition of what two words mean. I really like that the term side hustle is catching on, but overall I think it's a good thing that more people are trying to diversify their income. It's a great goal that can help bring in more money and de-risk your personal finances. The fact that more people are striving for something in the realm of passive income or side hustles is a net good.
I think I wrote this post more as a dose of reality to myself that anything that seems too good to be true probably is. Passive income can be had, but it requires a ton of time and cash to get to level to replace existing income. The road to getting to a truly passive level is long, but rewarding. Until then, let's keep building up our side hustles until we can automate what we want.