Is Passive Income All That It’s Cracked Up to Be?
Passive income ideas are all the rage right now. But is passive income all it’s cracked up to be? I would say yes, with some caveats.
The caveats
For one thing, many of the things that are sometimes touted as passive income are not the least bit passive. They’re actually more like part time (or sometimes full time) jobs in and of themselves. Take blogging, for example. Unless you’ve hired people to write all of your posts for you, set up and manage your site, and promote your articles, you’re actually doing quite a bit of work in order to (hopefully) bring in some income. That’s not passive at all.
Very few things actually meet the IRS’ definition of passive income, and most of the people talking about that aren’t referring to those things. Owning rental property would be one exception, but as a former landlord I can tell you that is also not completely passive. (Even if you hire a property management company, you’ll still get calls and have to make decisions. And believe me, you need to stay informed about what’s going on.)
What’s really involved
You’ve got to understand what you’re really getting into when you try to do the typical “earn money while you sleep” thing. You can wake up to money in your bank account that you literally did nothing to earn while you slept, but you’ve sure done something to earn it while you were awake. There is no money for nothing, unless you’re talking about Dire Straits.
What we’re really talking about, for the most part, are income sources that are mostly-passive or that are really more like a side business.
You definitely can create projects that will earn you money mostly-passively, later — but you have to put in the up-front time (and the regular maintenance time too, unless you’re satisfied with just a small trickle of income.)
My Pay Off Debt app is an example of that. I’ve put in a massive amount of work on that, but it comes in spurts. I’ll work on an update for months, spending hours each night on it, and then have a few months where I get a bit of a breather.
The reality
The reality is that if you’re looking for money to just magically appear in your bank account while not doing any work whatsoever, you’d better stick to investing regularly. (Even, unless you’ve won the lottery or gotten an inheritance, you had to do some work to get that money in the first place.)
But if you’re looking for good, alternative streams of income that can help you to build wealth, spending some carefully-considered time on passive income projects is a great way to go.
And even straight stock investing isn’t always ‘truly’ passive (I have no hard definition) – you’ve still got to watch your stocks closely. The closest thing to passive would be some style of Federal bond. They may not be truly 100% safe, but in a world where they didn’t pay you’d have bigger problems than money (most likely).
I’m glad you’re against this loose definition of ‘passive’… me too. We should collectively come up with a time limit per week. Maybe an hour per day?
Maybe it would be more a matter of the amount of time invested compared to return…
You hit it dead on. Blogging is anything but passive.
While I don’t think passive income is impossible by any means, I do think it’s a pipe dream for some. Planning to live on 100% passive income just isn’t realistic. To me, the best approach is to build a real business that generates income but can eventually generate some passive income , too (and I think blogging would fall into this category)
Hm, but a lot of people do live on 100% passive income — those who are retired and living off income from their investments + social security, for example.
I agree, “passive income” does require a bit of work upfront to get going, and even then for most people it involves some maintenance work. I wouldn’t call my blog passive. It’s pretty darn active, I think.
Yeah I think anything you work on daily or very often is active!
I have often said multiple income streams is best! This is true even after you retire.
I agree, multiple income streams are the way to go!
Passive income is a misnomer in many cases. There is always some work involved even in picking out a municipal bond. I prefer to think of it as residual or recurring income or maybe even low maintenance income.
Those all sound like good (and much more accurate) names.
I agree with cashflowmantra – passive income always requires work usually. Residual income is a better word choice.
It’s certainly more accurate :)
I’m not even sure I like the word “passive”. I’d much rather be active.
I’d love to have a steady flow of truly passive income coming in, but that wouldn’t mean I’d stop working at things I enjoy.
It’s crazy how much time it takes to blog, so thank goodness it’s fun and rewarding even when money isn’t coming in. I think the closest thing I have to passive income right now are my CDs but you’re right – it took a lot of working to get the money to open the CDs in the first place! -Sydney
At least that money is busy making a little money for you now :)
I don’t believe that a particular income stream is truly “passive”. No matter what you have to put in a certain amount of effort, whether its upfront or on an ongoing basis.
I think there are very few things that would truly qualify…
For me, blogging is a full-time, very active job. It’s a good thing I enjoy it!
It’s always good to enjoy something you do :)
You are right Jackie. I perfectly agree with you that for an income to be truly passive, no effort should come directly from us. Our input should only be by way of investment, be it funds or materials. If we end up taking active part in the business, then it becomes our job. How can you call working 8 hours a day to write and promote a blog as passive?
I’m pretty sure you can’t, unless you’re really just letting an old blog sit there without adding to it.
I think that the concept of multiple streams of income often gets mislabeled as being “passive”. Just because something isn’t a traditional job, it isn’t passive! Sitting back and collecting dividends or interest is more like it.
Exactly :)
I would class blogging as semi-passive income. Yes you should regularly update it in order to keep it fresh and to keep people coming back. But you will also make money from posts you made several years ago that you don’t need to do anything with. I look at it like building a well and charging people for water (blogging), compared to going and fetching people water for a fee (employment)!
The older posts are passive, but I think you do have to continue posting to really do well.
So, just a thought, if you haven’t already had this idea or it’s in development. But, have you thought about creating a “start saving” app? One of the biggest struggles for myself is not paying off debt (that happened several years ago), it’s switching into saving mode.
Huh, that’s an interesting idea. I wonder if there’s something like that out there already. And it is hard to make the switch.
It’s tough to call blogging (what we do at least) passive income. It’s constant management, and yes, while I do make money while I sleep, if I were to give up working on it altogether, within a few months, the income would drop dramatically. A static site on the other hand is pretty passive. I have one that I do NOTHING with, including linking in to it, and it makes me a few hundred bucks a month. That’s pretty passive!
Very nice! Is that from adsense?
Dividend growth stock investing is probably as close to passive income as you’re going to get outside of being a trust fund baby or lotto winner.
I would not call blogging passive income. I’ve only been blogging for about two months, but it’s the equivalent of having a very time consuming second job, on top of my very time consuming full time job.
Blogging is definitely not passive income, that’s for sure!
My most passive income is interest from savings account, unfortunately it isn’t much. Then rental property, I pay for convenience since I live in another country, if the tenants call to have something fixed I can’t do it myself. But they are pretty low maintenance. Last would be blogging, unless you have a niche site and a VA, there is nothing passive there…
It’s not really “passive”!!! People think it’s going to be lots of money with little effort because it’s called “passive,” but “long tail” would be a much more appropriate term.