Is Passive Income a Myth

The truth about passive income

In 2005 I read a book called "Rich Dad Poor Dad" by Robert Kiyosaki that introduced me to the idea of passive income. It was the first time the concept of putting your money to work for you clicked in my brain. Immediately after reading that book, I wanted to find a way to get that passive income for myself. The best way or path I knew how back then was to get a house somehow and rent it out. Why did I choose this method? Because it was the one Robert talked about in his book, and I knew a few folks who were doing this.

My First Attempt at Passive Income

Before this, I knew some basics of personal finance, like budgeting and spending less than you make. I knew "saving and investing" was necessary. But I didn't understand what investing was and thought it was gambling. You're rich by picking the right stock and hoping it goes up in value. I knew nothing about it, and finance jargon was confusing; I handed my money to a broker through my company-sponsored plan or myself to invest it for me. When I got dismal returns, I couldn’t see the light at the end of the tunnel for retirement.

Conceptually real estate just made more sense to me. You buy a house and rent it out. Sometimes you need to fix it up, but the tenant pays you money to live there. It’s simple math-wise, s It's I pursued this first “passive” path. Later on I learned that real estate could be passive but definitely not at first and not as passive as you want.

While building a real estate portfolio and making many mistakes, I started to dig into other investments. Everything from index funds, insurance products, side hustles that could turn into an income stream, and everything else. Through that experience, I’ve learned something aboout passive income and whether or not it’s a myth.

The answer in short is that there are different levels of passive income. Even different types of income.

Earned income is what you expect—income you earn by doing something. A w2 job, contract work, commissions, etc., if you stopped working, the payment would immediately dry up. The amount doesn’t matter in the classification whether you make $1 an hour or $1 million an hour. The idea is that if you stopped working, that money would dry up.

Passive income is income you can make even if you aren’t actively working on it, or the amount of work is minimal even if you stopped actively feeding it. This income can dwindle or increase, however. Typically (not always), it can reduce when you stop working on it or monitoring it. So for passive income, there are different levels of passivity, from almost earned income level involvement to being passive and everything in between.

The most passive is index fund investing. Putting all your money in the S&P 500, Total Stock Market Fund, or Total US Fund would be highly passive. Managing a business where you are actively involved but get outsized returns is almost active. Managing your rental real estate is more passive than a business but still pretty active. Hiring out your management to property managers is more passive. Creating content, you collect royalties, is super active initially but becomes more passive. This one, in particular, if you stop feeding it, will most likely dwindle.

Conclusion

The Myth of passive income or the misunderstanding is around acquiring it. It takes work to get it. The rewards of the work compound over time, and the rewards start to outsize the job, but in the beginning, the work outsizes the amount of money you will get. When building a business, most entrepreneurs didn’t make money or have high earnings for years until the company started raking in the dough. Still, those first years are usually where most of the work happens, especially at the individual level. Sometimes building a business doesn't result in any income or it becomes actively earned income. That's the risk.

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Updated on 11/1/23