Let’s debunk the passive income myth outright: truly passive income doesn’t exist. Passive income is a term that is loosely thrown around to define a revenue stream that takes little to no effort to manage. Many people agree that passive income can describe real estate pursuits, peer-to-peer (P2P) lending and sometimes dividend stocks. But really, what is it? Who wouldn’t want passive income? The ability to be your own boss, work from home, choose your own hours—it’s all very enticing.
The types of passive income that people typically associate with the term—like lottery winnings, capital gains, stocks, interest, retirement pay, etc.—actually don’t fit the ‘technical’ definition outlined by the IRS and its ‘Passive Activities.’ Before you jump the gun on investing in an avenue that will lead to a potential passive income revenue stream, let’s cover the basics.
Is Passive Income Real?
When I was just starting out in accounting back in the mid-1980s, one of my largest clients was a cable company located near Philadelphia. The company has since been sold to Comcast, but at the time its owners were three siblings who seemed to do very little to run the business. It was passive income for them, right?
Their dad had spent millions in cash and sweat laying down cables and infrastructure in many local areas and now his children were reaping the benefits: monthly checks for cable service that were dutifully mailed in by the company’s tens of thousands of customers, which required no more than a small administrative staff to handle. What a dream! The perfect business, right? Lots of money coming in without so much as lifting a finger.
It is the dream—and I envied the owners of that company. Like an author, investment manager or property owner, they could sit back, put up their feet and just let the cash roll in. It’s the ultimate goal of everyone who runs a business. What a way to make a living. So easy.
Yet unfortunately, so unrealistic.
That’s because that isn’t real life. Passive income isn’t what you think it is. If you think you’re going to build a business where you can sit back and be passive, then you’re surely fooling yourself. There is no such thing as “passive” income. It’s a myth. Why? For two reasons.
Myths of Passive Income
1. For starters, no business runs itself
Even my cable company client had its share of challenges. New contracts had to be negotiated. Employees came and went. Weather interfered with service. Competing companies offered better deals. Technologies changed and required continuous investments. No one was just sitting around. Both the owners and the managers of this company—even as the checks were “rolling” in—were running to answer questions, dealing with complaints, negotiating with politicians, and doing their best to appease the community. They were grateful for the current cash flow but worried incessantly about where the cash was going to come from in the future. There was nothing passive about this business.
In fact, there’s nothing passive about any “passive” business. Investors who earn “passive” money from interest and dividends must stay on top of their investments, lest they suffer losses. Authors, playwrights, and actors who earn royalties must ensure that their art is still relevant and that they continue to produce new works in order to keep their prior works in the public eye. Property owners collecting “passive” rents must worry about repairs, maintenance, regulations, and other competing properties that could take away tenants or turn their income-producing asset into a liability. All of this takes work. None of it is as passive as it seems. Which brings me to my second reason why passive income is a myth:
2. Most people who own businesses aren’t just ‘putting their feet up and collecting checks
That’s because almost all businesses in 21st century America are active businesses. They’re restaurants, shops, gas stations, landscaping companies, and roofers. Their owners are running around every day searching for more work, collecting overdue payments, negotiating better prices, and struggling to find good people to employ and retain.
We all have this vision—this fantasy—of sitting back and doing nothing to earn a living. But life doesn’t work like that, and neither does any profitable, ongoing, sustainable, valuable business.
Is Passive Income Worth It?
Of course. But understanding what passive income entails is crucial. Sure, maybe you’ll make your millions one day and then be able to sit back and be passive while the interest and dividends roll in. I hope you will. But to get those millions, you’ll have to be anything but passive.
To me, passive infers sitting still. Leaders don’t sit still. People who want to get ahead and succeed in their lives and businesses don’t sit still. That’s why passive income is a myth. Nothing in life is passive. Some people who own rentals, perform equipment leasing, or own real estate may argue that statement, but even that income is not technically passive, anyway. Trusts, royalties, stocks, bonds, interests and dividends, guarantees payments, salaries, wages and 1099 commission incomes all are ‘nonpassive activities.’ Passive income IS worth it, but it’s still work.