This is an Other Side of the Fence article, in which I take the opposite viewpoint of a popular idea and/or debate a specific thought.
When scanning the personal finance blogosphere I ran across a guest post over at Fiscal Fizzle that read “There’s no such thing as passive income.”
That’s a pretty bold statement and I couldn’t resist clicking on it to see what the writer had to say. Basically the writer argues that there are streams of income, such as MLM, real estate, and other assets that provide income, but they need to be constantly monitored. There’s always going to be competition, he argues, so nothing is truly passive.
Before I post my opinion let’s take a little walk through passive income land to understand the concept fully.
What is passive income?
It’s money that you make while you’re sleeping… right? All you’ve gotta do is find some automated system, set it up, then let the money pour in, which sounds as easy as getting payday loans! I think I saw some adsense ready websites for sale somewhere online the other day, perhaps those will bring me passive income?
In reality, the formal definition of passive income is this:
“Income from a venture in which an individual does not directly participate.”
Pretty exciting stuff, huh? For once, not participating can be fun, unless of course you’re also referring to the rat race!
What Ventures Will Provide You With Some Passive Income?
Good question, and let me count the ways. Below I’ve listed a few ideas, from which you can earn passive income. Keep in mind that although these are possible, they require a ton of hard work or cash up front.
Information Products – Build an informative product, either a book, dvd, tutorial, or anything that’s valuable to people. Package it in an easy to use format, set up a store on Amazon or create a website that is automated with paypal and walla! – you’ve got a passive income stream… that of course depends on if you sell anything. Much like blogging you’ll not only have to build the product, you’ll have to market it as well, which could be automated. The definition gets a tad blurry since your work is done up front, but you’ll be paid in a passive manner on the back end.
Venture Capitalist – Investing in companies and riding the wave of the entrepreneur who’s creating the product, rather than doing the work yourself. Anyone who invests in stocks is following this same principle.
Investments – Bonds, dividend stocks, or even investing as a silent partner in a real estate portfolio will all give you passive income.
Online Income – This one is a bit touchy, but if you have a niche website that is established and has “online equity” via backlinks and ranking in Google, it’ll be awfully hard to get knocked off the top spot. If done right the website can be completely automated and produce passive income. The trick is to build a website that doesn’t require updating and is built around timeless content.
Royalties – Depending on your artistic ability (you have it if you believe you do, you don’t if you think you don’t) you could work hard and create media of some sort which would collect royalties. Whoever owns the rights to popular artists such as the Beatles is doing very well… that is if be bought low enough to make a good return on his dollar.
Essentially, the common bond to all these is having the ownership rights to something that provides value to others and is not easily replaceable. If you want to create passive income you’re most likely going to have to create something of value and make sure you own it. The reason most people don’t achieve passive income, is because this is one of the hardest possible things to do.
Passive Income Doesn’t Mean Getting Rich
If you pursue and even accomplish passive income, it doesn’t mean you’ll become rich. The two are often thought to be synonymous, but passive income usually gives you more time by eliminating as much need for work. You may only need $40,000 a year in passive income to live the life you want, but that doesn’t mean you’re rich. By working towards passive income you’re taking steps to build wealth rather than simply be rich.
Personally, I’d rather have $40,000 a year in passive income today than $1 million 20 years from now.
Passive income does exist, and it is gained by those who are smart enough to structure their lives and businesses around automation and/or the ownership of things others value. Working for passive income will be a more treacherous journey, but the fruits of your labor will be well worth it down the road.
What do you think? – Is passive income something that’s worth shooting for?
Do you believe in passive income and how do you plan on achieving it in your own life?
Image from McGraths
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{ 25 comments… read them below or add one }
Passive income is something that I am shooting for on a couple of my blogs. I have one that I haven’t posted on for a couple of weeks and yet I it has still made me close to $50 from Adsense since then.
If you can build a web property that get’s a lot of search engine traffic there is no reason why you shouldn’t be making passive income!
Tom | Build That List´s last blog ..The Aweber Code….And Why You Need To Promote It!
I think passive income definitely exists and it’s achievable. Where people fall into a gray area (and as evidenced by the guest post on my blog you reference), it’s the definition of passive income that usually causes a big debate.
I do not think “passive” income means you do no work whatsoever. I think the key component of passive income is that it must continue, even when you’re not working on it, “actively” participating in its production. You might have to give it some maintenance and love once in a while, but you don’t have to “be there” to make money all the time.
As soon as you can even take one hour off, and the income continues, I think you’ve created a passive income source, however small.
Definitely possible and Wojo’s right on target with his response. Minimal effort should be required and you should know that there are no emergencies: if you’re not around, you’ll never have to worry about your venture failing.
I think this is a good summation Ryan.
I wouldn’t completely separate building wealth from being rich though; it is possible to be both. Donald Trump has a lot of wealth tied up from his assets (condos, casino holdings etc.) but also works long hours actively in his other business ventures.
Leverage is also a key factor in differentiating passive and active income. If you’re a small business owner and you’re a one-man shop, you’ve basically created yourself a job; you don’t have anyone working hard FOR you. Whereas larger business owners have systemized tasks & have multiple people accomplishing tasks in half the time that a one-man operator business can.
Blair MacGregor´s last blog ..Fidelity Portfolio Advisory Service Review w/ Actual Holdings
While I think it is worth striving for, I wouldn’t make passive income my sole source of income. I’ve always envisioned keeping a “day job” yet earning dividends on market investments or having a rental property. A more interesting question to ponder would be how much “passive” income would you need to quit your day job?
For now, I would say no amount of money in the world. But my interests outside of work are extremely limited and they aren’t anything I would want to spend 10 hours a day doing. Maybe as I grow older and have a family that might change…
Investing Newbie´s last blog ..Word to the Wise
Love how you broke everything down, Ryan! I think, personally, that niche websites and ecommerce (through drop shipping or affiliate products) is the way to go.
What a way to break everything down and to disspell any myths.
Moon Hussain´s last blog ..Why Automating Your Proccess Is The Only Way To Stay Sane
Passive income is alive and well, those who do not think so, have not taken the time to do the research. I use to work in a hospital years ago, Curtis Mayfield was a patient of ours.
He told me he had not worked in a decades, yet the royalties from his music paid the bills. I watch a man who was completely paralyzed buy his daughter a car straight up cash, that image still resonates will me. He also told me that if I ever created something to ALWAYS maintain ownership of the property.
MJ’s estate owns the Beatles Collection which made him more money than he spent on it! And will make his estate or who ever owns a ton a money from now until forever, as you said great content never goes out of style.
I am writer, also know of the guy that created Married With Children he is a millionaire and works only because he wants to, the path to passive income is only limited by your imagination.
The closest definition to passive income I can come up with, and we can all do is have a warchest of cash that brings in risk free interest income.
There are currently 5 different income streams coming through, and only the interest income on my savings is what I consider passive.
Build $3 million in the bank, and you got $10,000/month in passive income at 4%. Forget everything else, rental property, books, blogging, etc.
Financial Samurai´s last blog ..Charles Farrell From “Your Money Ratios” Speaks! Part II
Ryan,
As always – enjoyed reading your article. You always have some paragraph that clearly stands out and it was the last one in this case.
It seems like there’s many misconceptions about passive income as “Wojo” points out. Couldn’t pensions even fall under the definition of passive income?
To expand on royalties. It doesn’t necessarily have to be media, it could also come from a patent on an invention or trademark on a brand.
Is passive income worth shooting for? Yes, but it really depends. Are you trying to supplement or replace your current income? Are you trying to avoid work or create a legacy? Are the monetary returns or the product/experience more important?
FinEngr´s last blog ..Can Shrinking Yields Be a Good Sign?
What do you think? – Is passive income something that’s worth shooting for?
I think that you’ve given a good overview of tools to use to generate ‘passive’ income. I am now looking at stocks as a way to generate extra income and that has been quite an adventure.
It’s definitely something worth shooting for. If I can even get an extra $200 a month, that is some extra padding that is more quickly bringing me to an ultimate goal of retirement/working because I want to. In the end, everyone wants to work because they want to right?
Do you believe in passive income and how do you plan on achieving it in your own life?
I do believe in it – I think it takes a lot of hard work, and unless one is a super genius/very lucky, a heavy investment of time upfront is required. I plan on doing it through:
* information websites
* my own personal website
* stocks – with a focus on dividends and short selling
* writing books
Would love to hear any specific strategies you have about your posted passive incomes sources. Thanks for the article!
Jeremy Johnson´s last blog ..How To Be A Hot Nerd
Despite the seeming cop-out I’d have to give the ‘it depends’ answer. The key is in what an acceptable income level is for yourself. If you can provide for your needs then yes, passive income is a great avenue. Key point, you will only get out what you put into something. If you treat your venture like a hobby, you will reap a hobby income. Treat it like a business and work it at as such, and the results will be significantly different.
I’m a big believer in diversifying your income, more than passive income. I would rather have 5 sources of income that earns X dollars, than 1 source of income that earns the same amount.
Love the site, keep up the good work Ryan.
RJ Weiss´s last blog ..Optimizing Vs. Minimizing Food Cost
I’m a dreamer – so yes, I think it is possible, however earning passive income is not something that happens instantaneously – it doesn’t just generate out of nothing. There’s got to be some initial and strategic efforts put forth – what I like to call planting seeds in the right soil…
Every step I take to build my blogs is a step in that direction in my opinion – I’ve had doors open for me that wouldn’t have been possible had I not been blogging. So, I’m going for it!
Kiesha @ Highly Favored´s last blog ..Introducing Kiesha
Hey, someone has to be on the Other side of the Other side right! I guess that’s me, kinda’
No doubt there is passive income. But regardless of the approach you take, web properties, stock investments, venture capital or rentals there is work that must be done in the beginning for sure and probably some along the way.
That being said, it is definitely worth the effort. To your point of taking 40K now instead of 1 million later, I’d rather work my arse off now so that I can have a stream of cash later in life. Samurai-san has it right. Amass a fortune and let the cash do most of the work for you. Unfortunately he doesn’t think that inflation will matter and only wants 3 million when he really needs $5 million!
Keep up the great work!
LeanLifeCoach´s last blog ..What Is Your Learning Style?
From what I can see
passive income = the results of having built a successful business
Possible when after building a “successful” business, you decide not to “participate”. If your info product is lousy, or your website is lousy, or if nobody likes your music, then sorry, no “passive income”.
And I guess if you claim having a portfolio of diversified dividend stocks and bonds is “passive income”, then it can be achieved by being an “employee”, a highly paid one that is (most folks in upper management fall into this category).
Hence, I think we are too liberal when we use the term passive income. Passive income is the result of “being successful in whatever you are doing, whether you are an employee or a business owner” and choosing not to “be actively involved thereafter”.
once again, passive income results from simply being financially successful in whatever you are doing. It could be anything from
1. owning a few laundramats
2. owning a chain of car wash
3. earning $50mm in your lifetime as a CEO and then retiring.
why limit it to venture capital, online income, royalty income etc?
aren’t we substituting being financially successful for an easy cop out in “passive income”? We can be hugely financially successful whether we own a business or are employees. And in whatever business we are in for that matter.
Mr Credit Card´s last blog ..Credit Vs. Debit, Is There A Middle Ground?
Hey Ryan,
Top work brother, I think it’s important to get some sort of passive income, but I think in reality (don’t know yet, but will soon) I think it maybe slightly difficult to do when your focusing on the big earning potential too, what do you think?
TheInfoPreneur´s last blog ..30 Mins And Your Help Has Given Me A Plan
Types of income fall on a continuum between completely active and completely passive. A job is completely active, the closest thing to completely passive is something like treasury bonds (but you still have to check the paper every so often to make sure your government is still around!)
Most of us who are pursuing passive income are trying to move down the continuum to get more and more passive.
I think that the key to making a succesful passive income is to realize that it doesn’t mean not working at all. Creating and maintaining a passive income- an income where the number of $ you make are not limited by the number of hours you work- means working smart not working hard. Set things up and let your money work for you. Of course you will have to keep monitoring it, reinvesting and keeping up with what’s going on, but it means you don’t need to be slaving away from morning to night in order to make money.
Ryan,
Good point, Ryan. I will comment thi spost following the analogy of your blog: “Planting dollars”. Everything in life including money follow the law of Harvest. Now, imagine that you prepare the soil properly, you plant some seeds of apple, you take care of the small trees, and someday, you have some healthy apple trees giving you hundreds of apples without requiring a big investment of energy from you. Of course you can get your own apple trees, but you have to sow them first!
All the best,
Boris
Boris´s last blog ..Your mission, should you decide to accept it…
I like to dream about passive income too. But like anything we need to work at it to achieve it and depends on how much time we wish to devote to it too.
Great post I really enjoyed reading it.
Passive income is like a dream, We must believe and work for it to realize. i believe with my online presence, i’m going to design a passive income system.
harvestwages´s last blog ..Top 5 Social Media Business Models For Entrepreneurs
Passive income would be awesome. I am a proof of concept type of guy. I have done my reasearch and I realize that blogging is not a get rich quick scheme. But the thing is I am starting to enjoy blogging and communicating with people, even though for the most part it has been writing about topics I am interested in.
So what does proof of concept mean to me. Well first generate enough site traffic. If I see a steady increase month over month, that is the first step. I am still motivated. Now assuming I have reached X number of visits per day, then I will start implementing adsense.
So basically learn to walk before run approach to passive income.
The Simple Machine´s last blog ..Quick ways to start Saving Money this week.
I hear that blogs sell for a P/E of around 2. In other words, it sells for two times annual earnings. Granted, blogs are a new way to make money “passively”, but it suggests that the risk of not having the price earned back is rather large. Essentially, buyers are demanding a 50% yield, which is somewhere between sub prime and payday loans. Conversely, bonds and stocks tend to sell at 5% [earnings] yields which indicates that they are safer and more passive because they require less monitoring/effort.
Early Retirement Extreme´s last blog ..Guest post on Monevator about extreme retirement
I think there are different degrees of passive income. For instance, CDs and bonds could be considered passive income even though the interest is relatively small.
Rent from real estate and blogging income from advertising is usually larger, but you have to put a lot more work into getting these off the ground.
In general, I think there’s a direct relationship between the size of the passive income, and the amount of work necessary to create it. So in that sense, it might not be entirely passive.
I’m trying to do it now through my blog!
Darren´s last blog ..Business Advice – What We Can Learn From Amish Success
I have an affiliate site that I spend about 5 minutes a week updating and brings me in now over $1000 per month. The domain is now over 5 years old and has gotten indexed very well in google. It is the one income stream I am generating that is almost completely passive. I have a couple of stocks in my Stock Portfolio that I am going to start expanding over the next year. I hope this could potentially become close to passive as I would spend maybe a couple hours a week monitoring it and doing the homework required to maintain it.
MakingAMillionDollars´s last blog ..Is It A Good Time To Buy A House in 2010
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