passive income

The Passive Income Myth

Gene Marks

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.

passive income myth

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.

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15 Responses to "The Passive Income Myth"
    • Sherri R | August 25, 2021 at 12:56 pm

      The real question is not just how hard we work for the income, but how the IRS defines it. When it comes to deducting net losses against your non-passive earned income like W-2’s that is the real struggle.

    • Robert W Bly | August 25, 2021 at 7:50 am

      I am actively involved in online information marketing, a business widely hyped as passive income. But “passive income” does NOT mean you don’t have to do any work. It means a business that is capable of generating revenues that are not directly a result of current labors. Example: as an author, I had to do work to write my book. But the royalty checks I continue to get today from that book, written by me in 1985, are pure passive income–I now do no active labor to earn them.

      • Small Biz Ahead | August 25, 2021 at 8:47 am

        That’s a good point, Robert. Thank you for sharing it!

    • Renier Butler | March 15, 2021 at 2:43 pm

      This article speaks of truth. I have earned great amounts of passive income last year through an investment company. Today this company is in process of liquidation. When I was earning all that cash, there were days that I felt a little useless because I did nothing. Today I have to put in some hard work to make ends meet. Yes some days I would stress quite a bit, but at least I am living life with more productive energy.

      The fact remains that we were not born to just sit and do nothing. We all have a purpose worth living for. I am looking forward to build new streams of revenue and I am today happy to work it.

      • Small Biz Ahead | March 15, 2021 at 3:38 pm

        Thank you for sharing your insights!

    • Incomeble | March 1, 2021 at 8:10 am

      I couldn’t agree with you more in this article. Making passive income is getting harder. However I do believe over time it will pay off.

      • Small Biz Ahead | March 2, 2021 at 12:34 pm

        Glad you liked it! Thanks for reading!

    • Eric | November 29, 2020 at 2:57 pm

      Passive income certainly exists – Social Security, for one, and pensions for another. These are probably the most passive. Next up would be stocks and bonds. Purchase an S&P ETF and never touch it again… it’ll throw off regular dividends, same with a total bond ETF. You never have to adjust it, perhaps rebalancing from time to time, and even that could be optional if you wanted to remain 100% in a single fund – very feasible.

      Simply put, there ARE truly passive income sources, followed by a gradient of increasingly more active investments before you reach full time employment.

      • Liz Macauley | December 1, 2020 at 1:42 pm

        Thanks for the comment, Eric!

      • Philippa | May 11, 2021 at 4:09 am

        The crypto decentralized finance movement is a hugely innovative space which abounds in passive income opportunity. Staking and lending are two ways crypto holders can enjoy impressive passive income. Returns of 8% – 12% on stable coins, with some platforms rewarding holders more than 50% apy.

    • Dinette | December 12, 2019 at 6:15 am

      I have never known of anyone that looked at passive income as if it meant doing nothing to earn. Passive income requires effort, but it is generated in ways that do not require our physical presence at every moment of the revenue process. Investments, savings accounts, online courses, are all passive income. Of course, they still require attention. Rental properties require much attention, but the owner gets paid every month without having to clock in to get paid.

      • Chloe Silverman | December 12, 2019 at 8:59 am

        Great insights! Thank you for the comment!

    • Meghan | November 18, 2019 at 7:13 pm

      Couldn’t agree more!!!

      • Chloe Silverman | November 27, 2019 at 7:10 am

        Thank you for the comment, Meghan!

      • Christopher Ellis | February 3, 2021 at 9:41 am

        The money flows from the continued work of others.
        The fact that it flows to me is because of a contract. It is by no means guaranteed and eternal.

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