Too often, things that are considered passive income are more of a misnomer than financial gurus would have you believe. In reality, many of the endeavors that get described as passive—like real estate, book royalties, or online sales—require a lot more work and consistent effort than the word “passive” suggests. Here’s what you need to know about how passive income works, and why the idea of making money while you sleep is more fiction than fact.
What passive income really is
To get some definitions out of the way, passive income is theoretically what it sounds like: Money that flows into your back account with little to no ongoing effort on your part. Compared to the active labor of going to your day job, the idea with passive income is is to build a system that automatically earns you money. However, the upfront time, effort, and money required to set up such a system is not exactly a passive pursuit. What’s more, most examples cited as passive income could be more accurately described as “side hustles,” since they typically require some sort of hustle to get them off the ground and to keep them running.
It depends how you define “passive”
No business really runs itself. Most money-making endeavors take research, expertise, time, and money to make them worthwhile. Take one of the most common examples of earning passive income: Real estate. When you own a rental property, though, you’re responsible for ongoing repair and maintenance requirements—not to mention a hefty upfront investment of purchasing property in the first place.
What counts as passive varies from person to person. Entertainers or authors who earn royalties need to self-promote to make sure their work is relevant and in the public eye. Selling old clothes online, publishing online courses, creating an app, even playing the stock market game—sure, these forms of income might not be as active as a minimum-wage day job, but they’re far from kicking your feet up and watching the money roll in.
It helps to be rich first
Perhaps truly passive income exists, but it really only applies to how the rich continue to build wealth, rather than how you can get rich in your sleep. Here’s how Forbes breaks down the main ways people manage to actually generate passive income:
- Investing. When you invest, you use money you already have to make more money.
- Asset-building. This means acquiring an asset that earns money passively over time.
- Asset-sharing. Sharing in this sense means selling or renting out assets that you already own.
Money rolls in a whole lot easier if you already have it. Otherwise, it’s going to take a lot of work to get other forms of passive income (real estate, creating content, re-selling goods) off the ground.
Most instances of truly passive income are only possible if you have enough money and assets to build off of in the first place. The most reliable example of accessible passive income is a little underwhelming, but worth a shot: Earning interest in your savings account. It’s a feasible way to invest an upfront asset—in this case, money—and then earning more from it without any active labor. Otherwise, most forms of so-called “passive” income take active maintenance. Don’t believe the guru-led myths of getting rich quick off of zero-effort side hustles. A lot of those side hustle ideas are great, but they’re going to be just that—a hustle.
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