No Such Thing As Passive Income

by James on September 17, 2013 · 5 comments

fail-passive-incomeHi All,

I wanted to take a minute to weigh in on one of the internet’s biggest obsessions: passive income.

Passive income is the kind of thing bloggers love to write about: money coming your way with little or no effort or risk on your part.  When you read about passive income, you’ll usually get a list with the following kinds of suggestions:

  • Earnings from a business that doesn’t require your direct involvement
  • Royalties from publishing a book or other form of intellectual property
  • Earnings from internet advertising
  • Dividends and interest income from owning securities, such as stocks, bonds, or mutual funds
  • Rent from investment properties

People have devoted entire websites to the topic.  Some of these are sites like: www.passive-income-pursuit.com, www.thepassiveincomearner.com, www.smartpassiveincome.com, www.greatpassiveincomeideas.com, etc. The internet is full of them.

The major issue with all of these is there is no such thing as a free lunch. All investments require either labor or capital.  Most require a combination of both to be successful.  Let’s say for example that you own investment properties. Well, most of the time you should get passive income in the form of a rent check, but the maintenance of the investment requires effort (you need to do market research and show & maintain your places – or pay someone to do it).  Even stocks require time and effort.  For example, if you are into stock mutual funds, you need to research the fund, and monitor its performance quarterly to be sure management doesn’t take a turn for the worse.  To thoroughly evaluate the fund you’ll have to do due diligence

So, the point bears repeating, there isn’t really any such thing as truly passive income.   Only choices which require varying levels of capital or labor.

Thanks,

James

 

 



{ 5 comments… read them below or add one }

1 James Molet (SavvyJames) September 17, 2013 at 8:35 am

While I agree with the larger point that I believe you are trying to make – there is some level of effort required to generate income – I would disagree with your final assessment opining that there is no such thing as truly passive income. If the said effort is no longer required to be performed to receive income, I believe that qualifies as passive income. An example, one that I am intimately familiar with, is a pension from active duty service. Income is received for actions/activity conducted in the past. Nothing else has to be done, ever, to receive that income going forward. Another common example is payment/income from works produced (e.g. music, books, etc.) that certainly required effort to produce, but are able to continue the generation of income long after the effort to produce them has ceased.

2 James September 17, 2013 at 10:08 pm

James,

Thanks for taking the time to stop by. I know there are probably lots of places you could be spending your time on the web.

I think the main point of the posting is educate people about “passive income”. If you google around you’ll see a lot of sites which sell the idea. Its a problem because its the modern day equivalent of snake oil. What I think is important is that people focus on sound investing and saving as a means of securing their futures, not buying into pipe dreams about passive income.

3 James Molet (SavvyJames) September 18, 2013 at 5:22 am

James,

Agreed that too often people are looking for easy answers as opposed to taking the time to educate themselves on sound savings/investment principles. Perhaps our slight differences revolve around the definition of “Passive Income.” If it means that the person never had to expend any effort of capital in its creation, I would agree with you. However, if it means that the effort and/or capital was expended in the past, but is no longer required to continue the generation of income, I would have to disagree…because in that case, I do believe there are legitimate ways to generate passive income.

An excellent post that serves the purpose of getting people to actively think about personal finance and their relationship with money. Take care, my friend.

4 2million October 11, 2013 at 2:08 am

Well said – I fully agree with your point, passive income requires labor or capital and its often misportrayed. The dimensions of the payback may change so that there is no direct correlation to labor, but its still needed as part of the equation.

5 James October 12, 2013 at 11:55 am

2million. Thank you!!! Thats basically what I’m trying to say. There is no “free lunch”, all investments require labor or capital.

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