What everyone ISN’T saying about passive income (Part 1)

Nothing in this life is free, as the old saying goes.

Chasing a passive income portfolio in today’s world means a trade-off, plain and simple. Here’s what you need to know to be prepared and cut through the noise.

It seems as though everyone is talking about passive income generation, and even more so today. With the pervasiveness of social media, mobile platforming, and yes, a global pandemic, more and more people are taking to their desktops to find ways to develop more income.

And with this growth, there is the accompanying spurt of online gurus and so-called marketing experts. Social media, with its reach, is more rife than ever with them. There are seemingly countless ads now on how to generate and develop a passive income portfolio, from countless youtube ads, youtube channels, and instagram ads.

And the lure, the proposition, is ever more tempting. The promise to generate a “six-figure income in just seven months”, or how to transform your current, lackluster business model quickly into a seven figure one, all sounds so tempting.

No doubt there are indeed those who have generated a fast income from alternate sources, but it’s important to note these are outliers and not the norm.

For the most part, nothing in this life is free, and creating additional income must come at a cost for most of us, whether that be in the form of investment, or time.

Understanding the trade-off

Everything in life is based on a trade-off. To start, I think it’s helpful to understand what we’re giving and what we’re getting in return. It helps to look at income as two, simplified types:

  1. You can invest your money in existing assets, both long term and short term: like buying real estate, or traded capital (stocks, bonds, exchange traded instruments, currencies)
  2. Or you can create assets, which is an investment of your time and effort – like building a house, or a website (which would drive traffic and ad space); writing the next viral music sensation, making youtube videos for millions of views, or providing input on a paid survey, etc. – essentially making some form of output

The first category are traditional investments that one buys in exchange for money, and over time, hopefully the investments will increase in value, or provide dividend returns. And theoretically speaking, you should be able to put more in and get more back. For example, pretending that we could buy a government bond which gave you 5% return completely risk free (completely out of touch with today but bear with me):

if you put in 100 dollars, you’d get 5 back;

for 200, you’d get 10; for 1,000, you’d get 50; and

for 1,000,000 invested, you’d get 50,000.

Obviously, but the more you put in, the more you should get back in absolute terms (not percentages – 5% is always 5%!). In this case however, thinking in absolute terms helps illustrate my point: the amount of investment is commensurate with the amount of return.

FYI this category is often not an option for some because of

  1. risk – assets can depreciate, or volatility can erode value (like the stock market)
  2. upfront capital – real estate and other types of assets (like some direct stock investments) are quite pricy, and difficult to get in to
  3. knowledge – investing often requires a good understanding and research
  4. access – brokerage accounts, currency accounts, exchanges, banks (mortgages) all control the access
  5. diminishing returns – with near zero or negative interest rates, and increasing tax scrutiny on property markets, investment can be negative over time

So the trade-off here for these investments is your money, in exchange for growth of that money, whilst overcoming the above hurdles (I’ll cover these kinds of investments in another post).

Money in exchange for our precious time

The second category is everything else that we can do, in exchange for our time and effort spent. In this category, the trade-off is our time and effort in exchange for having a tangible product which we can sell, and continue to sell for as long as there is a market for it.

Everyone, from the youtube channelers, the youtube advert makers, the content creators, the marketing and SEO experts, everyone – is trading available time to generate content for someone else, like you or me to consume. Online merchandising (like brand creation and apparel designs), marketing advice on how to build your brand, building playlist or youtube exposure, and yes, ads on how to generate more income, are all someone’s attempt to make income in exchange for their time and efforts.

Your day job, for one, is a classic example of this. Your day job is time-based content creation, where you are essentially making content for an employer who acts as a middleman between you and consumers, providing them with your goods or services, in exchange for your salary and your time. (by the way the employer also provides a form of “content” in the shape of the storefront, or infrastructure, or office, or management expertise, and supposedly a path to a wider customer base).

It’s one giant connected circle of content made and content consumed (that thing we call “the free market”, or the economy; in fact, the first category can be seen as downstream parts or related extensions of the second category (an investment banker has just made consumable content in the form of a company’s stock or debt for people to invest in)).

This is why the term “passive income” is misleading. It implies effortless income generation, a sort of “set it and forget it” situation. That’s simply not the case.

The point

Nothing is free and there is always a trade-off. We trade effort and time in exchange for creating consumable products. It sounds pretty straightforward, so much so that it obvious, but when someone is talking about creating a “passive” income portfolio, it actually should mean spending time and effort to generate additional returns.

And the more time and effort you put in, the more returns you should see.

I’ll continue this in another post (Part 2) and we’ll look at what steps we should take in detail before building a “passive” income portfolio.

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