Does Passive Income Exist?
Everyone is looking for a source of passive income these days.
It’s easy to understand why. The idea of doing nothing and having funds trickle into your bank account while you’re sleeping seems like a dream.
But is it actually possible? Today I wanted to talk about some of the basic misconceptions and why prioritizing passive income might not be the best move for you.
Why Passive Income is a Lie
The problem with the passive income dream is that the term is a bit of a misnomer.
First off, passive income absolutely exists… when you have a lot of cash.
You can throw a couple million in a high-yield savings account or dividend fund and live a decent (but not extravagant!) life off the interest.
You can do that with any amount of money but you won’t see anywhere near the same return if you’re not wealthy.
So what about passive income if you don’t have an enormous fortune or trust fund? That’s where things get a little trickier.
One of the more popular “passive” income strategies is buying real estate and renting it out. Easy right?
Anyone who’s ever owned real estate would disagree. There’s nothing passive about being a landlord. Just off the top of my head I can think of the following:
Making repairs including plumbing, appliances and electrical
Managing tenants and keeping the building occupied
Evicting bad tenants
That’s just the tip of the iceberg. Property management is far more than the boilerplate requirements. You’ll run into a variety of issues that you’ve never even considered.
All of a sudden your passive investment is requiring a lot of active management. That doesn’t mean that investing in real estate is a bad idea. It just means it’s not very “passive” especially at first.
That’s the case with many so-called passive income streams. Even investing requires portfolio rebalancing every now and then.
I think the majority of people think that if they are able to unlock passive income streams it will suddenly solve all their financial problems and they’ll never have to do anything. The reality is a little more nuanced.
Why You Shouldn’t Give Up On Your Passive Income Dreams
Passive income means different things to different people.
I think that passive income exists but it’s usually the result of hard work. I like to think about it as building a boat. Once you finally set sail the boat should float on its own but you still need to steer the boat and patch any holes that you acquire along the way.
Consider the example of property management in the previous section. There are plenty of ways that you can make the process easier. For instance you could hire another property manager or you could automate the process of finding good renters through apps.
Now think about investing. It’s possible to get a decent yield every month through high-yield savings accounts and dividend funds but you’d likely be better off in the long-term by simply investing in cheap index funds like VTI or VOO. Those will likely pay off far better in the future (the stock market average return is around 10% every year over the long term) than simply holding your funds in a high-yield savings account. There are also potential tax benefits to that approach.
What I’m trying to say is that you might be able to achieve some form of passive income right now but that might not even be your best move. If you’re willing to hustle, you should build the best damn boat you can before setting sail. Why try to cross the Atlantic in a dingy when you could build a yacht?
Remember that it’s almost impossible for income to be 100% passive but it’s possible to get pretty darn close.
Therefore, it’s certainly worth pursuing the passive income dream, but it’s important to realize that it’s likely a long-term goal and will require a lot of active work to achieve.
So get out there and get building!