The Passive Income Myth

The Passive Income Myth - Is Passive Income Real?

Passive income.

Those words still excite me as much today as when I first heard them a decade ago.

Learning about creating income streams that you didn’t need to work for blew my mind.

It’s what started this journey of pursuing financial freedom.

But is passive income real, or is it a myth? Can you really make money while you sleep?

To give you a nice, wishy-washy answer – gotta keep you reading after all – YES and NO.

There is such a thing as passive income, but it’s probably not what you think.

The Passive Income Is Easy Culprits


Promises of passive income has sold more books, online courses, and mentorship programs than any other get-rich-quick buzzword.

It’s the big juicy worm that none of us can resist – who doesn’t want to make money doing nothing?

But, here’s my gripe…

Passive income is sold as something that’s easy to create.

We’ve all had our Facebook and YouTube feeds infiltrated with ads promising you the millionaire lifestyle in six months if you sign up for the “free training”.

“You too could be travelling the world, driving a Lamborghini, and have a smoking hot missus if you just take a look at the model I’ve created for generating unlimited wealth.”

Yeah, passive income sells.

But these “gurus” aren’t telling you the truth about passive income.

In fact, I’d bet those gurus only have active income that comes from selling bullshit courses.

While you can create passive income; it’s not easy, and it won’t happen overnight.

YOU WILL NOT BE ABLE TO QUIT YOUR JOB IN SIX MONTHS BY FOLLOWING A COURSE.

The Truth About Passive Income


As much as I still get excited about creating passive income, I’m also growing to hate the phrase.

It gives false expectations.

It doesn’t let on to the years of sacrifice, dedication, and hard work required to grow a self-perpetuating money tree.

And let me tell you with brutal honesty; if you want passive income, you gotta put in the work.

Building a business or portfolio of investments that’ll replace your job income requires work – YEARS of work!

From a standing start with no money or resources, it will take a minimum of two years of relentless hustle.

TEN YEARS is a more realistic expectation of the time required to create job replacing passive income.

Where the hell am I plucking these numbers from?

Well, I’ve got my own experience to draw from, and that of the many investors and business owners I’ve spoken to.

But if you think about it, it’s common sense.

To create passive income, you front load the work so that you can reap the rewards on the back end.

This might look like:

  1. Building a business and then outsourcing the day-to-day management
  2. Saving your wages, investing, and then living off the investment income (a.k.a. the FIRE route)
  3. Building a business, selling it, and then investing the funds (a hybrid of methods 1 and 2)

All of these strategies require work and time.

That’s the unsexy truth about passive income.

Yes, you can start generating passive income immediately – sticking a pound in a savings account is going to pay you interest.

But if you’re looking for enough passive income to quit your job – which is the number one reason most people get drawn to passive income – expect it to take 2-10 years (or more).

That’s a realistic expectation of the time it’ll take to accumulate enough assets or build a business that will sustain your lifestyle.

AND, here’s the other dirty, little secret…

There’s no such thing as truly passive income.

Every investment requires some degree of maintenance and ongoing analysis.

You simply have investments that are more passive than others, which I refer to as the sliding scale of passivity.

The Sliding Scale of Passivity


The amount of work that’s required to sustain your “passive” income greatly affects your return.

Fixed income investments where you lend your money and don’t really have to think about it – such as term deposits – offer the lowest ROI.

Investments that require upfront research or work, or an ongoing time investment – such as dividend-paying shares – will offer a higher return.

The general rule is:

The more passive the investment, the smaller the return.

To illustrate the sliding scale of passivity, here’s the return on investment I receive from my various sources of passive income.

My 5 Passive Income Sources (and how much time they actually take)

 

1. Savings Accounts


I have a couple of savings accounts that I use for saving for my goals, putting money aside for tax, and holding my emergency fund.

They pay a pathetic amount of interest (0.01%-1.2%), but they require no ongoing time commitment.

All of the banks I save with are protected by the FSCS, so I stick my money in them and pretty much forget about it.

2. Peer-to-peer (P2P) Lending


I use Ratesetter and Assetz Capital for P2P lending. I’m currently achieving a return of 5.2% with Assetz Capital and 3.5% with Ratesetter.

As I don’t pick individual loans and rely on the platform to carry out the due diligence on borrowers, P2P takes up little time.

I log in to my accounts once a month to check my balances, read messages, and reinvest any income that’s in my cash account.

3. Shares


I invest in the sharemarket through index funds and ETFs (exchange-traded funds). I don’t try to pick individual stocks as I don’t have the time or desire to do proper research on companies.

Index investing is a long-term, buy and hold strategy. I won’t beat the market, but I’ll achieve its long-term average return, which is about 8-10% per annum.

I choose to reinvest dividends at the moment, but the dividend yield is about 1.5% – meaning I could receive 1.5% of my share portfolios value as a dividend pay-out if I wanted the cash.

The way I invest in shares makes it a very passive investment.

I’ve also set up a standing order to invest in index funds every month no matter what the market is doing, which means I benefit from pound cost averaging.

4. Property


Buy-to-let property is where I choose to invest the majority of my money.

The way I invest in property is very hands-on – I find my own deals, manage the refurb project, and manage the tenancy.

But treating property investing more like a small business than an investment allows me to achieve a very high return on investment – I achieve an ROI of 35%+ on a few of my properties, and I’m averaging 25.6% across my portfolio.

And that’s only considering rental return! The return is GREATER If you also take into account house price growth over the long term.

But, the trade-off is my time.

Sometimes I only spend a few hours a month managing my portfolio. But when I’m doing a refurb project, I’ll put in 14-hour days for several weeks.

5. Online Business


I have a boxing website I built a few years ago. It features articles on boxing technique, training tips, and reviews of boxing equipment.

Any equipment I mention is linked to Amazon, which allows me to earn passive income through Amazon Associates.

When I was working on the site, it was averaging around £250 / month – it has the potential to earn ten times that if I were to put in the time and effort.

I’ve not touched the site in over two years, and Amazon still sends me £100 in affiliate commissions every month.

Online business can be extremely lucrative.

A website that costs less than £50 to start has the potential to earn thousands every month.

BUT… in exchange for low starting capital, there’s a BIG time down payment required.

You’ll need to learn new skills and put in the time to create a website that attracts an audience.

And you’ll need to keep creating new content if you want to sustain your income.

At the very least, you’ll have to put in ten hours a week to grow and maintain your site. If you can dedicate more time, there’s the potential to build a substantial income stream quickly.

Online businesses aren’t passive in the beginning, but you can outsource tasks as your income grows.

So, Is Passive Income Real?


Passive income is real, but it comes with a couple of caveats.

  1. You’ve gotta work hard in the beginning to create passive income streams.

Every passive income source I have, I’ve had to work for.

I had to put in time at my job to earn money that I could then invest.

Or I put in sweat equity to refurbish properties or build websites that now run on autopilot.

You can’t shortcut the work, so buckle down and enjoy the process.

  1. There is no completely passive investment.

Every investment has some ongoing time commitment.

Even savings accounts, my most passive investment, I still check every month.

It would be foolish to take your eye off your investments altogether.

But as an investor, I enjoy managing my portfolio. Investing is a fun game to me.

And as your passive income grows, you’ll get the same enjoyment out of tweaking your portfolio and getting the best possible return from your investments.

Math is fun when you’re making money – especially while you sleep.

2 thoughts on “The Passive Income Myth”

  1. You actually share my opinion regarding passive income streams: they are amazing, but it takes a lot of time and effort to build them! This is one of rare posts that reveal the truth. Most of the articles write about passive income streams like it’s something easy to achieve and I don’t like that.

    1. Glad you’re of the same opinion, Marijan. I try to tell it as it is so people aren’t disillusioned when they’ve been investing for a couple of years and only have a dribble of passive income coming in. Passive income is great – and it can be life-changing – but it’s certainly not easy to create.

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