The Great Passive Income Hoax
The Truth About Passive Income… Exposed!
Key Ideas
- Why there's no such thing as passive income.
- Discover how passive income is actually leveraged income and what that means for your business.
- Reveals how to leverage income the correct way so you succeed with your plans.
Business passive income is a lie.
It's one of those myths that has been perpetuated for so long by so many experts we no longer question its validity… even though we should.
After all, who wouldn't want an endless stream of cash flowing into their bank account without lifting a finger? That's the passive income promise, and it has wide appeal.
Network marketing companies are built on this dream, seminar promoters have gotten rich selling it, and neophytes love the concept.
In short, selling the passive income dream is big business. The only problem is… it's all a lie.
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Let's Put This Nonsense To Bed And Set The Record Straight…
Unless the “passive income” comes from a truly passive investment source like a publicly traded stock, bond, or annuity, then there's no such thing as passive income.
It doesn't exist except through passive investing.
Take my ebooks as an example…
In the get-rich-quick world of internet marketing, they would be considered passive income.
I write it once, post it as available for download, and watch the cash roll in as people buy the book electronically and download it automatically.
I never lift a finger, and the cash just flows into my bank account.
Right?
Well, not exactly…
First, I have to spend months researching and writing the book. That's only after I have a valid product idea based on my extensive knowledge of my target market's needs, learned from years of directly working with them.
Then I have to spend even more time learning all the technology necessary to create the book and implement the automated sales system.
I have to invest in the cover, software, and monthly overhead to run the system.
I also have to spend more time learning how to market the book, which involves implementing all the marketing tasks so people who need the solution contained within the book can find it.
Then I have to answer customer inquiries when someone can't download the book, and answer questions from paying customers after they buy the book.
Oh, and don't forget, I still have to account for my sales by maintaining proper records, filing the company tax return, getting a government business license, satisfying trademark requirements, recording the ISBN number, battling copyright violators, and about 30 other things I failed to list here.
Hmmmm, that doesn't exactly sound like passive income to me. It sounds like a lot of work!
The truth is I had to put in a ton of work up front before I ever made my first dime on an ebook, and I still have to run the business once the product is selling.
The “experts” will argue with my example by claiming I could outsource the ebook research and writing to a virtual assistant in India or the Philippines.
I could also outsource all the other work related to the ebook business and recline on a hammock sipping umbrella drinks while the cash rolls in.
I've tried it and here's the problem: you either write it yourself or pay the price because you have to extensively edit a VA's writing.
You either do the work or you pay the price in training, research, and management of the VA. It's all work in the end. There's no getting around it.
One way or another, you pay the price.
Again, there's no such thing as passive income unless it comes from a passive investment like dividend stocks, bonds, or annuities. Business passive income is a lie.
The Difference Between Passive and Leveraged Income
Ebooks, membership sites, royalty income, and all the other models bantered about in the get-rich-quick / lifestyle-entrepreneur world are leveraged income models. They aren't passive income.
Leveraged income models are characterized by taking risk and paying a large price up-front in terms of time and/or money with the hope of reaping disproportionately large rewards down the road.
It's amortized income because you get paid down the road on an up-front investment. It's not passive income.
Going back to my ebook example, I spent an extraordinary amount of time up-front researching and writing.
I then spent more time marketing the ebooks to attract targeted buyers through the internet… before I ever made a dime.
Buyers get the benefit of $50,000 worth of my time and highly edited, specific knowledge efficiently delivered for just a few dollars.
(I've always said books are the greatest deal in financial education. Now you know why.)
The only reason it makes business sense for me to do this is because my up-front efforts will produce an income stream for decades into the future with minimal ongoing effort.
In addition, they provide an affordable entry-level product that builds relationship and trust with potential clients for my more expensive products and services.
However, it's not passive income.
I'm leveraging my time and knowledge through information technology to deliver a long-term income stream that amortizes the massive price paid up-front before the first dollar is ever earned. It's hard work.
That's how leveraged income works. It can be a good business model because it's scalable and offers many benefits, but it also involves various risks, an up-front investment of time and money, and plenty of good ol' fashioned work.
The Final Nail In The Coffin
Passive income implies something for nothing. Just sit back and watch the money roll in while you do nothing. After all, it's “passive”… isn't it?
Sorry, no such beast exists in the business world, so get over it and don't waste the mental space on such nonsense.
This isn't just a rant. It's important to get crystal clear on this issue because if you build your business model on a false premise, you'll get disappointing results.
I help people design their wealth plans every week as part of my wealth coaching practice, and there's a right and wrong way to apply leveraged income.
The wrong way is the passive income hoax (which also happens to be the most common way).
The right way is to design your plan with the up-front costs, time lag, and ongoing effort required relative to the income generated built into it.
You have to plan for the lack of cash flow while you pay the up-front costs. You have to get this stuff right or you won't succeed.
Yes, you can work smarter instead of harder.
Yes, you can create more income with less effort through various forms of leverage.
But there's no such thing as passive income in business.
It's a lie.
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.Todd,
This is a great article. I like that you called business passive income a “lie”. You’re right on the money with that comment.
. The get rich guru’s are constantly selling passive income snake oil. Thanks for clearing up this myth (lie).
@Larry – Thanks Larry. Good to hear from you again.
HA! I learned this long ago in network marketing..if you don’t run it like a business then you won’t make money. And like you, Todd, all my fabulous downloadable products need to be constantly marketed or nobody will know they exist.
I think the BIG fat lie we used to hear all the time about rental properties is the one that really cracks me up. Passive? Hmph!
I love that you are such a straight shooter!
Jeanna
@ Jeanna – Yes, I’ve chased all these myths including the passive rental property income myth. It is part business/part investment as well.
You are 100% correct when you point out they must be run like a business or they won’t make money.
It is all work. It is all a grand adventure.
Thanks for your input.
wow..you really hit the nail on the head. it’s sort of like the myth of you get 2, and they get 2, and soon you’ll have 5000 people in your downline…
the real problem is outside of this myth is how the top marketers in the internet marketing arena make all the money. you want to blow the lid off the industry…there’s your article. you may offend some, but the truth may set the industry free.
@Jeff – Thanks for your input.
My goals are a little more modest than “blowing the lid off the industry.”
I just want to help people achieve their financial goals and one way to do that is to avoid some of the more obvious potholes.
When I write these articles it’s usually because I’ve fallen in the pothole and had to learn the hard way.
Hopefully this article helps a few people in my community avoid a similar mistake.
Reading this article affirms alot of what I thought about business. There really isn’t a way to become wealthy passively unless you are really lucky or are very patient and thrifty. Lets get real though, even if it you could get rich doing very little what would it do for you? Make you lazy? Dumb? Destroy your ambition? Maybe this is a little too philosophical for finance but people define thier lives through pain not pleasure. I don’t remember near as much about my high school graduation day as I remember the 12 years I slaved to get a diploma. Infact if you go through everything important in your life it invariably involves difficulty, lots of time and of course pain. Trying to build something to be proud of without pain is kind of like trying to get around the nature of life. I think the sooner you make peace with it you’ll embrace life instead of trying to escape it. I’m no better than anyone else. I haven’t accepted it yet myself but thats because I really don’t know how. I suspect what most people need(myself included) is a little philosophical guidance and personal finance. The rest will come with time.
@ Dustin – Your comment made me think of this quote…
“Perhaps the most valuable result of all education is the ability to make yourself do the the thing you have to do, when it ought to be done, whether you like it or not; it is the first lesson that ought to be learned; and however early a man’s training begins, it is probably the last lesson that he learns thoroughly.” Thomas Huxley 1825-1895
Hi Todd,
Another winner!. I have recently had similar thoughts regarding my own business. We as business owners can at times marginalize our own results and think that what we may have is a passive income like business. Like you pointed out your business may take on passive income characteristics but the time, effort and capital to get it there was anything but passive. In my case my wife and I worked two to three jobs each for about five years with no debts or children in order to start our base of capital in real estate. Then with each new purchase we were completely tapped out only to work like dogs to get each property in the condition we expect to match our standards for vacation renters. It has become a business or a job but one we created and it is nice to know that we don’t have to rely on someone or something else to provide for us and our family. I can say that I am living my dreams now but the process to get here has not always been dreamy!
Thanks again,
Steve
@ Steve – Thanks for sharing. It is the honest reality that not enough people discuss.
Years ago I thought I was all screwed up because all the gurus talked up passive income and made it sound so easy. I wondered what was wrong with me – why didn’t it come easily to me? Since then I’ve traveled similar journeys multiple times including with this business right now. I know how the game works based on experience so I don’t have to wonder anymore.
The truth is it’s hard work. It can be a lot of fun. I’m not saying anything negative. I love building leveraged income models, but I also want to be clear about the up-front price that gets paid so that others aren’t deceived or think something is wrong with them. The process is easily misunderstood because all you see is the gravy train on the backend.
Thanks for reinforcing the truth by sharing your own experience.
I think people who say there is no such thing as passive income never experienced passive income.
Yes, passive income system take work to set up, but once it’s done right, it can be passive. Nobody is suggesting you *never* have to do any work in the beginning.
Affiliate marketing can be a form of true passive income when done correctly. I have one particular website that generate income for me month after month without skipping a beat. I could be kidnapped on a deserted island and my website would keep generating income for years and years. If I neglect if too long, yes, it will go to the wayside, but spending only a few hours a year on updates is passive enough for me!
You’re simply redefining the term “passive”. It changes nothing as stated in the article.
When I think about passive income I think of many other things that don’t all include, or are transitioning into internet marketing. For example, Wal-Mart is truly passive is it not? Sam Walton started that business one time, and now it is passive income for himself, and his family. Now, Wal-Mart wants to go online like an Amazon, another completely passive income created by Jeff Bezos. When you say leveraged income for the purposes of writing, and selling your book, that is something different all together. People write books when they want to get hired as a consultant, or expert in a field. I’m sure retail isn’t the only examples of passive income created by entrepreneurs who created an income that pays them while they sleep. I was in a group with someone who created a supplement, started marketing it, and now makes six or seven figures per month. No book necessary. My point is that passive income isn’t only for retail, software, or MLM. Anyone can put together a simple system that will pay them over, and over again while they do something else.
Veronica, I don’t disagree with your basic conclusion, that anyone can create passive income. However, I do disagree with much of what you shared in your comment. The devil is in the details. For example, nobody is going to just give you money so the idea of “putting together a simple system that will pay you over and over again while you do something else” is a bit misleading. While the methodology might be simple in principle, it can be quite a bit of up-front work to create. You must figure out a way to give more value than you take so that people willingly give you money for that value, and you must structure it in a business system that doesn’t require you time. Yes, that’s simple in principle, but it may not be all that simple to create. Additionally, you have to be very careful with the word “passive”. Most “passive income streams” are characterized by one, or both, of the following characteristics – delayed gratification for work that was never compensated up front, or return on invested equity that was earned elsewhere over time. Those aren’t just meaningless distinctions, but in fact inform the actual strategy you’ll use to create them. My experience is that passive income isn’t really passive, but is just delayed gratification or manageable, compartmentalized work. For example, my books are an extraordinary amount of work up-front to create, and this site that drives many of the sales requires ongoing work that can be managed as I choose giving me freedom, but not passivity. The point is to get away from the word “passive” and clarify how the process works in practice so people can attain the real goal – freedom in lifestyle by not having a job own all your time just so can put food on the table. I hope those nuanced clarifications are helpful.
Hello Todd, I have been researching different ways to take my life in a different financial direction for a few years now. I started a business where I sold stuff I made, that didn’t really take off, then started a business where I resold things I found in bulk that where worth reselling, that stayed slow, and then came across passive incomes, and eventually found this article. The common denominator in all of this seems to be marketing, I have such an impossible time trying to market anything that I think it is my biggest issue and I cannot seem to figure out what to do to fix it. My next idea is to start writing a book I have wanted to write for a while, I do not know if I will make it strictly an E-book or not but I wanted to ask you how you market your books and such or do you have resources to find maybe a business mentor. I badly want to work for myself and eventually spend free time inventing but I need to gain solo financial stability first but I feel so lost. Is there any chance you can help me?
I know this sounds self-serving, but my Expectancy Wealth Planning course https://www.financialmentor.com/educational-products/seven-steps-to-seven-figures/wealth-plan explains how you put all the pieces together. It shows you how to integrate all three asset classes into a comprehensive plan matching the specific characteristics of each asset class to your unique skills, resources, and interests. In addition, it shows you how to manage risk. The course tuition is much cheaper than continuing to make all those mistakes. It should accelerate your learning curve and more than pay for itself many times over. I hope that helps!