We’ve all been pitched the fantasy of handing in our two-weeks’ notice and chilling on the beach thanks to the power of passive income. I mean who would want to work for money when there’s a way to earn as much, if not more money, without giving up any of your time? While there is a ton of benefit in passive income, I think there’s also a lot of misconceptions about it which is why in this article, I will share with you 7 brutal truths about passive income you need to know!
As the decades go by, more and more individuals have explored the world of passive income and the options that exist within it. These options are vast, and many see it as a way to not only supplement their 9 to 5 income but even unlock a path to financial freedom. However, not everyone succeeds in their ventures, and contrary to popular belief, passive income is not the “easy way out”. It requires the investment of time, money and effort to build up a stream of passive income.
Now, while I want to highlight some misconceptions around passive income in this article, I think it’s worth briefly mentioning some of its benefits. First, the potential for earning passive income is quite vast. There are a ton of ways to earn an income passively and yes in some cases they will pay you while you kick your feet up - that is if all goes well. Moreover, in most cases, your passive income streams will allow you to be your own boss in that side of your business and honestly who doesn’t want that?
However, these are all the rosy aspects of passive income everyone talks about, but no one ever talks about the potential downsides. There is no discussion about the risks, frustrations and rather large amount of time involvement that is required for something that is said to be passive. Trust me, I would know as someone whose failed more times than I’ve succeeded at earning passive income so now I want to share with you 7 truths I’ve come to learn.
Truth #1: Passive Income Can Be Unpredictable
There are two different types of passive income: Fixed passive income and variable passive income and each offer their own degree of reliability. With fixed passive income, you are sure of exactly how much you will be making from that stream on a weekly, monthly, or yearly basis, no matter what happens. Unless of course that particular stream of income is destroyed.
A good example of a fixed stream of passive income is rental property. If you have a building with 4 apartments, and each apartment pays $10,000 a year, vacancy issues aside, you are certain that the apartments in your building will bring you $40,000 in rent every year. On the other hand, variable passive income streams are those which you cannot predict how much they will earn you on a weekly, monthly, or yearly basis.
A good example of a variable passive income stream is a blog. There’s no way to tell how much your blog will make. It could earn you $200 this month, $450 the following month, then nothing in the 3rd month. For instance, in one month, 5 different brands may pay you for advertising and only 1 needs promotion the next month. The inconsistencies with variable passive income are what makes it dangerous if you plan on relying on only one stream of it to support you financially. It’s for this reason that complementing your main passive income stream with another passive incomes stream or active income is highly advisable.
Truth #2: Passive Income Streams Can Die Out
No stream of income has an indefinite life. In the same way your job can become obsolete, your passive income stream can be turned off. One example of this are blogs relying on organic traffic from Google. One algorithm change can have the website seeing massive declines in traffic and overall revenue.
If you’re really serious about living off passive income, then it would be wise to set up multiple streams. I recommend you build passive income streams in both physical and digital assets so that you can be sure that you diversify your streams to mitigate risks as much as possible. This could be in the form of a mix between rental properties, blogs and dividend-producing stocks. Then, even if one dies out, you have others to support you financially.
Truth #3: Passive Income Is Not Always Superior To Active Income
And now we’re back to the argument of why would you want to work for your money when you don’t have to? As good as passive income can be, it is not necessarily better than active income. In fact, there are active income streams that many passive income streams cannot match up to. Now, you may have worked as a bartender or a cashier in a not-too-prestigious organization for a less than impressive salary, hence you might think that passive income beats active income hands down and that may be true in your situation but it isn’t in every situation.
If you have a high-value skill or can learn one, then earning active income can actually be much more lucrative than passive income. There are consultants who make as much as $500 per hour, just as there are hairstylists that can make $1,000 on a single haircut. Let’s use athletes as examples. Lionel Messi earns over $400,000 per week playing for Barcelona FC in Spain, that’s active income. Dr. Dre, an American music producer sells an instrumental for more than $1,000,000, that is also active income. In essence, don’t quit your day job just because you are enamored by the thought of making money while you sleep. There are tons of different ways to make a lot of money actively and when paired with passive income can help you scale up your income frighteningly quickly.
Truth #4: Passive Income Requires Regular Maintenance
No one may have told you this, but with passive income, you can’t just sit back and expect money to keep rolling in without some form of maintenance and rental properties are a great example. Rental properties needs to be maintained regularly for it to remain a source of passive income because the paint will eventually fade or peel off, the grass in the yard will grow too long, the roof will develop leakages, tree roots may have left cracks in your walls, and the hinges on the gates may have come off.
For you to ensure your rental building remains “alive” and worthy of rent, then you have to dedicate some money to maintaining it regularly. No one in his or her right mind will pay rent for a building that looks like it’s about to collapse!
Now, you may think to yourself, that this routine maintenance only applies to rental properties right? Well, not quite. Even online streams of passive income need to be maintained regularly.
Your website, for instance, will need software upgrades to ensure it keeps running smoothly. You will also need to consistently update its content to keep it fresh and engaging for your audience. Have you heard of a website crash? Yeah, that can happen too and you need to sort it out. With all I’ve said I’m sure you can agree that passive income is not 100% a “sit down and relax” thing.
Truth #5: Reaping The Rewards Of Passive Income Takes Time
To invest in a business venture is one thing, for that venture to start bringing in reasonable returns is another. You may not have heard this in the videos you’ve watched, but it takes a good amount of time and effort to build a profitable stream of passive income. Nothing profitable is built overnight!
Take dividend stocks as an example. Their outflows are usually paid quarterly, and depending on the value of shares you have, these dividends may not even be much, or worth waiting a whole 3 months for. You may need to re-invest your quarterly dividends into buying more stock so your dividends will increase. It will take some time for you to grow the value of your dividend checks to an amount you can deem as sufficient. Also, stocks are long term investments, you can’t buy $10,000 worth of stock today and expect it to be worth $1,000,000 the next month, unless something totally abnormal happens that is!
Rental property is another example of a passive income stream that takes time to set up. You may have to renovate the property and that definitely takes time and coordination. Also, it will take you several years in rent to recover the amount of money spent in purchasing the property. This is amidst many maintenance fees you must have incurred during these years.
For online streams of passive income, well the rewards don’t come overnight either. It will take a reasonable amount of effort to build that knock-out website or grow that Instagram page of yours. Even after the website is ready, it would still take time to generate the kind of traffic that would attract advertisers, and this could be anywhere from 6 months to multiple years! Therefore, if you want to win in the passive income game then you must be patient.
Truth #6: One Income Stream Is Never Enough
Many people think that one stream of passive income will be enough to cover their living costs and achieve financial freedom, probably because they are so used to having a sole source of income in the way of their 9 to 5 job. However, to be financially free, there has to be a consistent inflow of money from several sources. One stream may not be enough.
Imagine if you were depending on only dividend stocks to survive, what happens if the stocks crash? You will have nothing else to fall back on. What if your rental property collapses? Or what if competition knocks out your website and renders it obsolete?
Having multiple streams of passive income is a must if financial freedom is what you’re looking for down the line. With multiple streams of passive income, you can be at rest knowing many things are working for you. It wouldn’t bother you so much if one of the streams “dry up”, you’ll still have others to keep you afloat!
Truth #7: Success Isn’t Inevitable
I don’t think there’s any mentor that would be comfortable telling their students that they may fail even after all they’ve taught them. While this may sound harsh, it remains true. Don’t let anyone deceive you into thinking that setting up streams of passive income is a guaranteed means through which you’ll become rich. All profitable ventures require effort, the right planning, the right execution, a few failed attempts, and a little bit of luck to succeed. While “miracles” can still happen, and that blog of yours may blow up overnight, I wouldn’t advise you to bet on it.
You may fail in your first attempt and this may be for a number of reasons, but it’s up to you to determine those reasons and make amends in your next attempt. It could take you as many as 5 failed attempts for you to succeed once however, is that income stream sticks then you will be ready to start building more.
To sum things up, passive income is really great, and it can earn you money even when you’re fast asleep, however, it is not a “walk in the park”. There are several aspects to it that many will not tell you however I hope this article shed some light on the realities that earning passive income can entail.