Passive income is a myth.
Ok, now that I’ve gotten your attention with that zinger – hear me out:
There is no such thing as making money in your sleep.
Well, unless you’re a super rich trust fund baby (but let’s be honest – how many of us are?).
Passive income gained popularity as a term used to describe making money without having to work for it. I remember coming across this term as a teenager growing up in the 2000s. Back then I was a huge fan of MLMs (multi level marketing companies) like Nutrilife, Amway and Cosway (all of whom vehemently deny that they are, actually MLMs) who aggressively promote their businesses as THE WAY to generate passive income. I bought into the whole passive income deal and fell hook, line and sinker for their spiel.
It was only after running an MLM business did I realise that there is no such thing as passive income.
Ok, wait, I hear a dude at the back yelling:
“But Sam! If you work hard enough in the beginning, you can build a system that makes money for you when you sleep!”
Some random dude at the back
Yes my dude – you are right, in theory.
But in reality the practice is far different.
You see, by the end of the day, an MLM is a business like any other. And like all businesses, the more you neglect it, the less income it generates for you. If you’re not working hard every week, getting leads and generating sales, you make nothing.
That’s for MLMs anyway.
But what about other forms of passive income?
Let’s look at rental as another example.
Work hard, save up lots of money, take a loan, buy a property and rent it out.
Easy right? Money while you sleep! Cha-ching!
Nope.
Property gurus will tell you that there is a lot of hard work that goes into finding the right property, getting bank loans and refurbishing the house to make it liveable. But what they sometimes don’t mention is the regular maintenance and upkeep of the house, paying rates, insurance and water bills AND having to deal with nightmare tenants.
I guess you could always pay a property firm to do all that for you… but then you would STILL have to deal with the property management firm – which can be a headache all in itself (not to mention chipping away at your investment returns!).
Good luck making money while you sleep if you’re losing sleep over your property investments.
Ok ok, maybe stock markets then – they’re the textbook definition of passive income too right?
Weeeeell, ok – maybe. But even then that’s only if you are investing for the long-term – in which case you’re not going to be generating income you can live off via stocks and dividends, not for a very, very long period of time.
If you make your money through stocks via day-trading – that is the very opposite of passive income, because you need to actively monitor and trade stocks to generate an income.
“Dang it Sam! Why are you being such a downer! I just want to make some passive income that I can retire early on! Aren’t you all about the FIRE life?,”
Some random dude from the front
Uh, yeah – here’s the thing. I AM all about the FIRE (financial independence, retire early) life but I want you, my readers to be realistic about it.
Passive income may not be what you want it to be, but you can build up income investments that will pay off in the future (i’m talking at least 10 year timeframes here). I’m talking about pipelines.
I first read about the pipeline analogy back during my MLM days. Basically the story goes like this:
There is a well on top of a hill. To get water from the hill, you can walk up with two buckets of water and come down with two buckets of water OR you can walk up with one bucket of water and some tools and materials to start building a pipeline that will supply water directly to your house.
The pipeline takes years and years to build, but once it’s built, you can enjoy fresh water from the well without having to walk up the hill. But that being said, if you stop maintaining the pipeline, the water will leak, get metal/rust leaching or the pipe might fall apart from neglect.
The moral of the story is thus: Be the person that builds the pipeline – but at the same time, never forget that the pipeline needs to be maintained for you to keep enjoying the water.
Your pipeline are your investments, the water you get from it, your income.
Whatever your investments are, you need to keep working at it to build a strong pipeline that will deliver you your income in the future. And even after you’ve built your pipeline, you still need to keep maintaining it, making necessary changes and adjustments to your investment strategies and repairing/fixing (quite literally in the case of property investments) it wherever necessary.
There may be no such thing as passive income, but there certainly are ways you can put in a lot of work now, to minimise the work you have to do in the future.
Stay smart accounting fans and most importantly,
Stay positive!