There’s No Such Thing As Passive Income
By: Jovan Cicmil
Tags: Work, Investing, Passive Income, Income, Money

There’s No Such Thing As Passive Income

Many articles and videos sell the idea of passive income in the same way in which Wild West entrepreneurs sold maps that lead you to golden rivers where you just have to dip your hat and pull out more gold than you can carry. And, like wide-eyed prospectors paying for those maps, you are paying for the fleeting idea of easy money with your time, effort and, sometimes, cash money.

There is one difference though: Wild West map sellers were con men who, of course, knew of no golden rivers — or they would have harvested the gold themselves. Passive income evangelists, on the other hand, have found at least one river of gold — and that river is you! Your clicks, time, subscription fees and social media sharing make their income flow. Take the audience away, and the river dries up. As a general rule, you should beware of using any service where you are the product, but it’s sold to you as if you were the customer.

I have a couple of (what you might call) passive income streams. I have stock investments that yield dividends, Medium stories that make money, websites that pull in some profits and projects I’ve outsourced for a percentage of the value. However, I will make a case that none of these are truly passive. In fact, everything people consider passive income is just regular income where we forgot about the active part. Let me explain through examples the four types of cognitive errors that make us blind to this reality.

Sometimes the active part is far in the past. Stock investments are great, if you’re not a cowboy about it. You put your money in an index fund or a good assortment of stocks, and watch the value grow in the long run. Occasionally a dividend is deposited to your account, and you feel great. Easy money. That is, assuming you have enough money to invest in the first place. Money you worked for over the years, and money you saved by sacrificing various pleasurable activities you could have acquired instead. All investments, barring the occasional inheritance, are predicated on two things: you having earned the money first, and you making a sacrifice by not spending the money you earn. Sometimes the active part is fun. Isn’t it great that we live in an age where it’s possible to get paid for doing something fun, like putting your thoughts on paper? You don’t even have to get someone to invest in you, or persuade a business into sponsoring your blog, you literally just write down some words, publish them, and get paid. As great as that is, it’s not passive in any way — those words you write take time and effort, and if you want to promote your work there’s no telling how much time you put into that paycheck. Something being fun doesn’t make it passive. Sometimes the active part gets lost in our regular job. As a software developer, I’ve built a number of side projects over the years. Most of my work days consist of doing a lot of paid work and a little bit of passion work when I have time. The thing is, by fitting an hour here and an hour there of passion project work into my regular 8 hour days, I make myself utterly helpless in determining how much time I’ve put into various projects. Doing something that’s the same as your regular job tends to delude us into thinking it’s easy. But if you sit back and take stock, you realize you’ve spent 100 hours on something that makes $400/year. If your normal hourly rate is $50, that means it will take 12.5 years for your effort to pay off, and that’s without additional expenses! Sometimes the active part is right in front of our eyes. Something more resembling passivity comes in the form of outsourcing projects. As an established software developer, you can start a team or an agency and outsource most of the work to them while collecting a healthy percentage of the profits. You can sit back and watch the profits roll in. But here, again, there are caveats. First, you worked for years to build your reputation. Second, every time you outsource work to someone else, you are taking on all the risk and putting your name behind someone else’s work. Not to mention that the hours you spend looking for projects, negotiating with clients, putting out fires, delegating, processing payments and staring blankly into a wall worrying about everything really add up.

It would be within reason to protest that some people have it easy — they just inherit money from their parents, leave it in a trust fund and live an easy life. Well, there are some people that fit that description (not a lot by any measure), but I think we can safely assume you’re not one of them if you’re reading this article. Like in all areas of life, it’s important to compare one’s accomplishments with one’s own past, not someone else’s present. Rich kids don’t concern you — what does concern you is that you understand your own financial situation and make the best use of what you’ve got at your disposal. In order to do that, you must first understand the true costs, as tempting as it is to gloss them over.