Because my career no longer fits the previous cubical format, the topic of making passive income often comes up in a context which can be frustrating. Earlier this week, one of my team members mentioned their plan for building passive income streams and it tipped me over the edge, so I thought I would share my perspective which is:
Passive Income does not exist – Aim for Residual Income.
Passive Income is a dangerous myth which is perpetuated mostly by smooth salesmen only because it sounds good. The reason it doesn’t exist is because it goes against the fundamental principals of society, human nature and money including:
- Money flows towards where value is being actively created.
- People innately recognize value in others. Elliot Jaques had quite a bit to say on this in his insightful (but expensive) books.
- Inaction is usually a sign of fear which brings competition and predators.
- Progress in all societies is based on the human desire to compete and grow.
- You need to control money, otherwise it will control you. I had a reminder of this just today and being passive is not exercising enough control.
This is the first article of several in this series. if you get it already, then subscribe for more on Residual Income. Otherwise, if you are not yet convinced that Passive Income is really a myth then keep reading. It is good to understand the difference so you can start moving away from Linear Income (Income that you earn that is time bound to your own efforts)…
Although passive income is a myth, you can earn Residual and easy income. For example:
- You can earn from your efforts invested earlier – this appears passive to outsiders.
- You can earn through doing things you love – can also appear and even feel semi-passive.
- You can position yourself for windfalls – looks passive, but is usually the result of good positioning, education and attitude.
The Most Common Passive Income Myths
Here are the points that have been raised by people telling me about their ideas for generating passive income. If you don’t want to read them, then just remember that true passive income streams simply do not exist. Passive income is a myth which can really destroy your chances of becoming rich and even your happiness if you are not careful. I’ll go through Residual income next though so sit tight …
Myth #1: Buying a franchise is a great way to make money with minimal work
Reality: Franchisees essentially buy themselves a job – imagine you go up to McDonalds and ask them if you could pay them to work for them. That is exactly what people who purchase a franchise do. Now that said, what the successful ones do is they buy a system with a higher than average chance of success then work like mad to make it work well for them. Once it is running, they train people up to replace themselves and then look at expanding. Expanding may look easy, but it also involves risk and effort.
Why the myth: Survivor bias is in play here. Survivor bias means you never get to see all the people who bought franchises who end up only earning a minimal amount or worse getting severely burnt by the experience. You only see and hear about the successful ones (the survivors) because many people don’t talk about their failures.
Myth #2: I’ll take over my parents running business and that will be easy
Reality: Those businesses are running systems and are incredibly valuable, because the business takes inputs (raw materials like flour) and turns it into money(bread). But they are also very fragile, and they need to evolve over time because of the laws of competition.
Why the myth: People tend to look at a business at a point in time rather than an entity passing through time. It is just perspective. The business must evolve or it will become less profitable and die. Thinking of it as a passive income stream will kill it.
Myth #3: I have found this system (eg shares, property, online ) and it is an easy way to make money …
Reality: The systems you find are really like franchises. There will be work involved, otherwise the person who invented the system would have scaled it and profited from it rather than running courses. Now that doesn’t mean you can’t make money, but it’s not passive and in all likelihood, you will need to learn the system well enough to customize it in some way to make it your own if you are really going to profit. Also, like franchises, the various systems available tend to have a lifespan, so treat them as an apprenticeship for building your knowledge and expect to need to add value yourself. Finally, the risk profiles of some systems change overtime, so your experience is crucial to your success.
Why the myth: People promoting these systems (assuming they are honest) know and love them, so it feels easy to them – see below.
Myth #4: I will make money online, that’s a great way to make money fast and easy.
Reality: The scale of the Internet is fantastic it gives access to a huge market and opportunities for innovation never before available. Fast money comes through this scale and yes you can do it all from home (there is too much glare at the beach). But the internet evolves quickly and competition is fierce, so it is by no means a way to earn passive income.
Why the myth: People get confused by hype and scale. Sure you might read you can make a million dollars blogging, and it is possible. But if you look at someone who made a million dollars online with say a year’s work, that will make the work look relatively small compared to the rewards. But if the earnings had only been a few dollars, then it would appear quite different. There are no guarantees on the Internet and there’s no easy passive income either.
Myth #5: I’ll outsource* myself
Reality: Well this is what prompted this post, and while outsourcing is fantastic, it is not passive. As anyone who has been in a corporate leadership position will tell you, people management is over rated by those who have not done it. Expect heartache and pain, but also expect to get lots more done and find personal rewards along the way.
Why the myth: You get lots more done outsourcing, but just because you get lots done doesn’t meant yo stop working. you only work less in relation to your achievements than when you work as an individual.
Myth #6: I’ll earn money from my roof with a solar system
Reality: Thought I’d throw this in since I’ve got one and it is an example where over 20 years you do earn money and fairly passively, but you have to save first so it is living of earlier efforts.
Why the myth: People forget the upfront efforts needed to achieve a “Passive Income”. They also under estimate risks – there is always the possibility of hail or fire…
Myth #7: I have heaps of money and will live off the interest
Reality: Interest rates are almost always lower than the inflation rate, so eventually this strategy will see you run out of purchasing power. Of course there may be times when higher interest rates are available, but only for short periods of time or with increased risk (ie of losing the invested money)
Why the myth: Interest appears passive (which it pretty much is) but people tend to under estimate risk (until they get burnt) and although everyone knows that prices march continually up, it is difficult to get a good feeling for this. Some things get cheaper while others get more expensive, but on average they go up. [Governments need inflation to maintain efficient economies]. Also, people tend to think of retirees when they think of this strategy, but retirees do a peculiar thing which is to reduce their average spending each year (fewer holidays, fewer new gadgets, etc), so that saves them from being bitten by inflation quite as badly.
Myth #8: I have or will build a property portfolio and live off that.
Reality: If you have to build it then when you come to reaping the rewards, you will be following a residual income strategy. If you inherited it and plan to live off it, and take a truly passive income approach then eventually you will loose your fortune due to squatters maintenance bills, etc. This is the classic scenario seen in England with their historical manor houses.
Why the myth: Land is arguably the best strategy for true wealth creation on the planet due to it being an absolutely finite resource – The are not building any more! Distance is also an issue, so land near to any kind of human activity (cities, mines, beautiful places, etc) can increase in value quickly. So this the scarcity principal has land going up in value each year on average around 10% for literally hundreds even thousands of years of human history.
So what can you do to earn easy money?