Passive income means earning money while you sleep. Or at least while you’re doing something else.
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But the problem with passive income is how it is advertised as an “easy path to wealth.” In reality, creating a stream of passive income takes quite a bit of effort (not passive) and also can cost a lot of money to pay out meaningful income.
So before you quit your job to open an e-commerce store, consider these passive income lies that you’ve been told and what the real truth is behind them.
Also see passive income streams that are not worth it.
It Requires No Up-Front Effort
Passive income means earning money without your constant effort. Your bank account is filled while you sleep. And you don’t have to get a second job to enjoy the income.
But most passive income requires some amount of up-front effort or money. This means you need to put in time to start the business or create the passive income stream. If it’s an online business, you need to learn marketing, automation and multiple other skills, and spend time building the system before it becomes passive.
Even if you’re just investing money and putting in none of your time or effort, you have to earn that money somehow, so effort is always required before you can earn passive income.
You Can Build Passive Income in Just a Few Days
While you can start earning passive income by investing your money in things like dividend stocks or other investments, other passive income streams require a bit more time to see real results. Whether you’re building something online, purchasing an existing business or investing, you won’t see meaningful passive income for a few years, in most cases.
For example, you might want to build a website and make money from ads, but it could take a year or so before people start finding your site through search. In the meantime, most ad networks require a base level of traffic before you can join. So it may be multiple years before you see your first $100 from your “passive income website.”
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But good things take time, and it’s important to set realistic expectations when building passive income streams. It’s OK that it takes time, because in the long run, a stream of income that doesn’t require any further time and effort is a fantastic thing to have.
You Need a Lot of Money To Invest for Passive Income
Investing is one of the easiest ways to earn passive income. You put your money in, wait a while, and more money comes back out.
OK, it’s not that simple, but the idea is. When you invest in a dividend-paying stock or other investments that offer regular interest payments, you are earning money for essentially doing nothing.
Investing for passive income doesn’t mean you need tens of thousands of dollars to get started. In fact, most investing platforms now allow you to buy “fractional shares” of stocks, letting you invest as little as $5. Many of these stocks pay quarterly dividends, making you a passive income investor immediately.
Now, the income isn’t going to be high if you don’t put much in, but investing is a long-term game. If you put a little away each week or from each paycheck over a long period of time, those deposits compound and grow into a much larger passive income stream.
Real Estate Income Is Passive
It’s not.
Yes, real estate is a great investment that has built many fortunes over the years, but it is far from passive. The process of finding, buying, improving, renting and maintaining a rental home requires some effort (sometimes a LOT of effort).
Yes, you can hire out a lot of the processes of handling your rental property, but you still need to be the one who finds a property at a great value, negotiates the deal and pays for repairs and maintenance items. If you don’t know the market you are looking to purchase in, you have to do hours and hours of research ahead of time.
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The only true passive real estate investing are REITs. These investments let you invest in specific properties or a mix of multiple properties in a single investment fund. These properties are managed by the REIT company, and you get monthly or quarterly payments from the rents collected on the properties.
Passive Income Lets You Quit Your Job FAST
The dream is to create enough passive income to quit your job, retire to an island and sip fruity drinks on the beach at sunset each day. You might believe this can happen in the next year or two.
The reality is that creating enough passive income to quit your job usually takes a decade or more.
For example, if you choose to invest heavily in the stock market, the effects of compound growth usually aren’t felt until 10 to 20 years in. The first decade of investing is slow growth, and saving enough to quit your job might mean investing over a 30-year period.
A faster route might be building an online business with multiple streams of income, but even that can take 5-10 years of steady growth. This also is not a passive strategy in most cases, so you’ll need to put in your time and effort up front to build those income streams before you can step away from the business and quit your job.
The bottom line is that passive income is a great way to grow your wealth on the side, but quitting your job comes much further down the road.
Online Businesses Are the Easiest Passive Income Source
If you Google “passive income ideas,” perhaps 80% of those ideas are ways to earn passive income online. While building an online business is a great idea, it isn’t easy.
There is a huge amount of competition in the online space for most types of businesses, making it harder to grow a profitable business online than ever before. While tools like AI and other breakthrough technologies make it easier, they aren’t the driver of what makes a successful business.
If you want to create passive income online, prepare to roll up your sleeves and put in hard work. You need to research your market, come up with a business idea, test it out and continue to iterate until it works. Only then can you enjoy the fruit of your labor.
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You Need Money To Make Money
The simplest form of passive income is to take your money and invest it in an asset that pays interest or dividends. But not all passive income requires spending money up front (or at all).
Many online passive income opportunities simply take some up-front time and effort to get started. For example, if you want to create passive income through YouTube, you can start a channel and start recording videos on your cell phone and uploading for free. This helps you build an audience and eventually qualify for the YouTube partner program that allows you to earn money from ads.
You also can start a social media profile and begin sharing your thoughts for free. If you gain enough of a following, you can earn income from sponsors.
Both of these require action up front, but eventually you can earn money while you sleep.
Dividend Stocks Are the Best Passive Income
Dividend-paying stocks are companies that offer a regular payment to investors in the form of cash. The payments are measured as a percentage of the current stock price, usually paying out 1% to 3% APY.
But dividend stocks aren’t necessarily the best form of passive income. Here are a few downsides:
Dividends reduce the stock price
Dividends are taxed as income (unless in a tax-advantaged account)
You need a large investment to earn much per month
Dividend stocks can be great investments when you are looking for extra income, but to earn even $100 per month you usually would need thousands of dollars up front.
Bottom Line
Passive income isn’t the Holy Grail that everything says it is. It requires hard work and up-front investment.
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Don’t expect to retire next year from passive income if you’re just getting started; it takes a while to build a meaningful income on the side. While you might need to take some action to build your passive income streams, it is worth it in the long run. Passive income can help you do more of what you enjoy and eventually quit your job once your passive income covers your monthly expenses. Until then, keep working hard to build more passive income into your life.
