Lately, organizations and individuals in the personal finance sector have been promoting the power of “passive income.”
The hypothetical construct here sounds like a dream come true; the idea is to establish a business, side gig or other recurring revenue model to attract a stream of income that doesn’t require much ongoing investment or upkeep. You remain “passive,” maintaining your full-time job while collecting the additional income, which could range from a few hundred to several thousand dollars a month.
It’s no wonder why the concept is appealing, and it’s true that many people have used principles of this strategy to save for retirement, build wealth or just live more comfortably. But does truly passive income exist? And if so, is it worth the extra upfront effort it takes to establish this flow?
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“Passive” income streams demand more time, effort and attention than the people pushing for them are willing to admit.
The Myth of Passive Income
First, you need to understand that there’s no such thing as truly passive income. No matter what, you’ll need to invest serious time and effort to establish and/or maintain that revenue. In some cases, that means spending time on a regular basis to nurture your investment. In others, that means investing significant time to build something upfront, then collect passively in the future. In most cases, you’ll also need to spend many hours learning, practicing and perfecting your approach.
Take these three classic passive income strategies as examples:
- Rental properties. Some people make decent money managing rental properties, and the gig doesn’t seem complicated; you buy a house for a decent price, make mortgage payments, find a good tenant and charge slightly more in rent than you pay per month. The trouble is, being a landlord is much more complicated than it seems; you’ll likely have tenant problems, emergency fixes and repairs, ongoing maintenance costs and the burden of marketing and advertising your property. Many landlords end up enlisting the help of a property management firm, but that also cuts the income you can make.
- Stocks and index funds. Another idea for passive income is investing in stocks and index funds. Some stocks pay out dividends, which can provide value of up to 5 percent of a stock’s price, paid out on a quarterly basis. Some investors also strive to day trade, making frequent trades throughout the day to try and snatch a quick profit. Either way, you’ll be spending many hours learning the ropes of investing — and if you’re day trading, many hours trying to squeeze out a profit.
- Websites. If you want to build a website that attracts significant traffic so you can sell ads, or make money from affiliate links or sell products and services, you should understand that it’s not easy to generate that much traffic. You’ll need a brilliant idea with flawless execution, spending months developing content, managing your community and investing in outreach to build your base.
Does this mean that side gigs can’t be profitable? Absolutely not. All it means is that “passive” income streams demand more time, effort and attention than the people pushing for them are willing to admit.
Tips on Making Passive Income Profitable
If you’re interested in establishing a passive income stream, there are some steps you can take to maximize your returns and minimize the time you have to spend developing them:
- Do your research. This should be a given. Before you pick up any side gig or hobby, do some preliminary research so you can understand what’s really needed to make a profit — and how much you’ll stand to make once you gain some experience.
- Talk to people in the game. If you can, have a conversation with someone who’s already done (or is currently doing) what you plan to do. Ask them how much time they spend, on average, and how they feel about what they’re doing. It’s the best way to get a gauge for what it takes.
- Commit to one area and improve. It’s tempting to pick up side gigs here and there, but it’s more efficient to invest the majority of your effort in one area. The better you get and the more you learn, the more efficient you’re going to be.
- Make the time investment. You probably aren’t going to be successful unless you invest the time to make it work — and that means making sacrifices. Be prepared to spend the hours necessary to turn a profit, or don’t bother starting.
Like with all financial strategies, diversification can be beneficial here. If you set up multiple streams of passive income, you could generate enough recurring revenue to replace your job or set you up for retirement; the flip side is, you’ll also need to invest more time and effort to make that happen. The choice is yours, and there are many legitimate ways to make extra money on the side, but there’s no such thing as a free lunch.