Passive income sounds pretty great, doesn’t it?
You do nothing, get paid, all without having to sell your time for a few hard-earned bucks.
This is the financial utopia that every second person with a YouTube channel, Instagram, or TikTok account has been promising you. But is passive income a myth?
Passive income is not a myth, however there are relatively few forms of true passive income. Many of the methods of passive income marketed online are inaccurate and will require a large initial time investment. Carefully selected investments are one of the best sources of passive income.
To me, it all sounds just a little too good to be true.
So, I decided to speak to an expert…
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Is Passive Income A Myth?
An interview with an online entrepreneur.
Our expert Richard, or Rich for short (appropriate nickname) manages multiple online businesses.
These include content sites, print on demand stores and digital product outlets. In his search for passive income, he founded the first in 2017 and has seen a meteoric rise ever since.
He’s here to help us separate the fact from the fiction!
Here are the best bits from our in-depth chat with Rich:
Q: Thanks for your time, Rich. We know you’re busy, so we’ll cut to the chase. Is passive income a myth?
Q: Well that was quick. Care to elaborate?
A: “Sure thing. Basically, unless you win the lottery, inherit some form of an investment portfolio, or are signed up to some type of universal income experiment, there is no such thing as purely passive income.
Even then, it’s unlikely to be 100% passive.
Take the lottery example, you still need to earn the money to purchase the ticket, go through the effort to get it, and pray to whomever you choose to strike lucky.
It’s a bit of a cruel myth when you think about it really, given that it’s so appealing… but not really possible.”
Q: So how come there is so much buzz about it?
A: “Basically this myth is being pedalled by hustlers trying to achieve this life for themselves.
One of the most commonly advertised methods of passive income at the moment is online courses.
People who create them, of course want to sell them. What better sales tool is there than saying “Buy my course, generate a passive income stream, and never work again!”.
Don’t get me wrong, I’m sure some of these courses are great, but you get the idea.
Q: So would you recommend our readers pursue passive income streams?
A: “Yes and no.
Definitely build multiple income streams!
You can only get so far by directly selling your time for money. These days, your job alone is rarely enough (sad as that sounds).
However don’t focus too much on the passive element. Get ready to knuckle down and work freaking hard.
One day the income streams may become more passive, but that day is in the distant future… Sorry!”
Q: So you don’t make any passive income yourself?
A: “Of course I do. But I worked my ass off to get there!
See how little sense that makes?
Passive income is a beautiful concept. But in reality it’s paid for my the toils of our younger selves. For most people, passive income is a myth“
Thoughts On The Interview?
Thank you Rich for the truly positive outlook on this topic!
So, it seems pretty definitive (at least in Rich’s mind) that passive income is indeed a myth.
Personally I would argue it’s more of a spectrum. For example, you could make a lucky investment on a whim and enjoy (passive) dividends for years to come.
(Admittedly, this required the brief input of making the investment. And of course the time spent earning the money to invest in the first place).
Don’t worry though, to truly put this bed, we’re going to explore what passive income is, what are the most commonly discussed streams of passive income, and much more!
If I haven’t put you off, you could also start building income streams right away.
What Is Passive Income?
I’ll start with the basics.
Passive income is income earned with zero (minimal) effort on your part.
The closest thing there is to true passive income is living off stock dividends or interest. Once your stock investment earnings cover your expenses, you are financially independent!
Does Passive Income Actually Exist?
So based on this definition, you could argue that yes, passive income technically does exist.
It is, however, incredibly hard to achieve for the everyday person.
The reason being is that you need an incredibly large amount of capital invested to see any meaningful dividends.
It is possible to create an asset that could become a source of passive income over time, but in almost every case, this requires a small amount of work to maintain.
Writers and musicians earn passive income in the form of royalties from their work, but this is only because they sat down and created something desirable in the first place.
Products or assets that have this effect are commonly referred to as “passive”.
They are residual income streams (more on this later). Whilst the terms are used interchangably, in reality, one is much more attainable than the other.
How Do You Create A Passive Income Stream?
To create a substantial, fully passive income stream, you need a large amount of cash to invest into an asset. Hopefully this increases in value, resulting in dividends or returns for you.
The reason it needs to be a large amount is that dividend-paying stocks (your best bet for passive income) have a pretty low rate of return.
Even the top earners pay dividends of roughly 4% per share. These dividends will pay you 4% of your investment four times a year – provided the stock value doesn’t change at all.
An Example Of Passive Income:
For our example, let’s call this stock ‘XXX’.
(I’m about to throw some numbers at you, so stay with me).
Say you had $100,000 invested in XXX and that thanks to a good year, you are paid your quarterly dividends at 4%.
Each payment would be just $4000, bringing you a grand total of $16,000 before any form of tax kicks in.
Could you live on just $16000 for a year? Even if you could, would you really want to?
Herein lies the truth behind the myth of passive income… It mostly helps rich folk get richer.
The Good News?
That was a bit of a sombre note, so here is the good news;
There is a lot of potential in residual income.
The opportunity that residual income presents is the chance to decrease the number of hours you may work in a week, whilst maintaining or possibly increasing your income.
This is what you should really be thinking about when we talk about passive income.
What can you do to build these streams of residual income if you aren’t Beyonce or Stephen King?
Well before you hand your money over to a self-proclaimed Guru, keep reading. We’re going to explore the most common and achievable residual income streams. We’ll also clear up why they aren’t passive!
Examples Of Residual "Passive" Income Streams
Stocks and Bonds
There will be some initial effort, as you need to gather your funds, carefully select your stocks or bonds, and go about purchasing them. Should you pick dividend stocks, these payments will be made automatically.
Bonds will have an interest return, but this is often fairly low.
Long Term Lets
If you glance down the page, you’ll notice I’ve separated long term and short term lets.
The reason being is the management of these assets is very different.
Long term lets are investment properties with long term tenants:
- corporate real estate
Your profits will depend on how much rent you charge, and how much is left after covering your mortgage and any other fun expenses you may have.
The goal is that you’ll eventually pay off your loans and get larger monthly returns.
The initial work to get one of these assets is obvious – we all know that property isn’t cheap. However, the work is ongoing.
If you don’t keep your house in a good state, no one will want to live there, and you’ll find it hard to collect that rent you’re so desperately after.
You can do this yourself, but this of course will be work, defeating the whole point of trying not to work. The alternative is to hire a property manager who will minimise your work, but this will come at a cost.
Short Term Lets
Now that we’ve dealt with long term lets, it’s time to move to their shorter sibling.
Short term lets are basically Air BnB’s. You’ve probably seen at least one YouTube ad from a “guru” offering to show you the secret to a successful AirBnB business.
There is money to be made from this method, but it’s not without effort.
If you’ve stayed in a hotel, you’ve probably had the same experience that countless other guests have had when they walked into their room: The bed was made and everything was clean and welcoming.
Short term lets are essentially small hotels, and guests expect a similar experience. Unfortunately, someone needs to clean the space after every guest. You may also need to answer questions and help guests during their stay.
Plus, you also need to market your property to make sure you have a steady stream of guests!
If you don’t do this, you’ll end up with poor reviews, no guests, and no income. Not so passive after all it seems!
Unless you’re earning enough to pay someone to take care of this for you (many owners often charge a cleaning fee), some of these tasks may fall to you.
This is an umbrella term covering everything from YouTube channels to Instagram influencers, bloggers (start yours here), podcasters, and everything in between.
We’re also going to lump affiliate marketing into this category too as it often works via these channels.
Content creation seems easy enough at a glance; shoot a video on your phone, record a conversation with your mate, or write a few of your thoughts down (basically what I do) and you’re good to go.
The problem is that simply creating content isn’t enough. You need an audience, and in the current climate, there is a lot of competition.
Streaming services, TV channels, multiple social media platforms, events, websites, and other influencers are all competing for the attention of the world. You and your phone can take on the world together – but it’s going to take work (and luck) if you want to make an impact.
YouTube is often touted as a big earner, but this is the truth of the matter:
You need a minimum of 1000 subscribers to run ads. Then you’ll only get $9.90 for every 1,000 views!
If you can build a successful content channel, be it a podcast, social account, or blog, you can start to earn larger amounts. The money only keeps coming in if you keep making content though.
This can be a pretty sweet deal if you’re creating content about something you’re passionate about!
This is often where affiliate marketing comes into play…
In short, you will promote a product on behalf of another business, and they will typically pay a commission based on the number of sales generated through your activity.
If you aren’t sending a large amount of traffic their way, the commissions you’ll receive will reflect this. The reverse is of course also true.
Information products typically come in the form of online courses or ebooks. The gist of it is that you create something once, and continue to sell it indefinitely.
It’s appealing because these products don’t expire and never run out of stock.
The flip side is that they take a lot of time to make – especially if you want them to perform well.
If people are going to pay for your course, they’re expecting to learn something. If your products don’t deliver, you can’t expect the pools of returns that you were aiming for.
Plus, the volume of this content is increasing rapidly, so you’ll need to really target your niche and market your products well if you want to succeed.
Well, I think it’s safe to say that the myth of passive income has been sufficiently busted.
Yes it sort of exists, but it’s exceedingly rare!
What is much more achievable, is residual income.
You should really start building residual income streams as soon as possible.
If done right, you’ll generate sufficient income to minimise the number of work hours you have to do… Allowing you to explore your passions.
The key is to identify your niche, target your market effectively, and create something scalable. That way, it can grow and flourish, and hopefully, your residual turns will grow along with it.
Creating a wordpress blog is a perfect place to start.
In summary, passive income is essentially non-existent, but creating streams of residual income could be the opportunity that you’ve been waiting for!
Feeling creative and want to keep reading to get more ideas? See our tips on unique side hustles!