How Passive Are Passive Income?

There is no shortage of interesting debates among those who reached a certain level of financial independence who argue the passiveness of passive income itself. That the nature of the term passive income is somewhat deceiving to many. So, I decided to share my view and create a list to show how passive such income sources truly are.

 

What is Passive Income

Passive income is defined as income resulting from cash flow that requires no individuals input or minimal input to maintain the flow of the income. This form of income is usually recurring but not guaranteed to be without risks. Some forms of passive income may have a short lifespan as some may have longer.

 

Most Passive Income Requires Input to Maintain

In my experience, practically all forms of passive income in general requires some level of time input to maintain and keep optimized to make sure the instrument is performing to meet your objectives. Some may require more and some less but there is always an input.

The less time it is required for you to maintain the income, the more passive the source is.

 

Owning rental properties requires some level of input related to maintenance and management issues. Yes, you can argue that you can hire a property manager to take over the management roles. But even doing so, larger decisions that may arise on occasions will still require your approval and attention.

Investing in stocks and bonds also come with the periodic tasks of re-balancing of portfolios and revisiting investment strategies to tailor to the individuals changing financial situation and life.

 

Ranking Passive Income by Time Input

So, because most passive sources of income require some level of time input, I ranked them on the chart below to get a better perspective in the difference of passiveness in each source.

The passive score shown below is correlated to how much time you trade, in return for that income. The higher number represents more passiveness and those with lower scores indicate less.

Data shows a vast majority of Americans are on the bottom of this chart earning most of their income through wages. A large portion of Americans also earn their income operating small businesses as well.

The return/earnings vary but is a rough estimation on a broad sense. You may have noticed, the higher the passive nature of the income the lower the return in aggregate. It’s not a surprise I guess, because the addition of active contribution and high productivity equals potential higher returns.

 

Reaching Financial Independence Through Passive Income

The game is to shift capital towards higher passive ranked sources. As you do so, you will gradually create the opportunity to un-tether your time to your wage or salary.

Like most, I began with 100% of my income from wages and business earnings. The pursuit of that income often required 14 hours of my time per day.

Gradually, I shifted all income sources to real estate investments, stocks, and alternative investments that carry a higher passive score.

Today, I spend a very minimal amount of time managing my investments. It’s hard to say but roughly around one full day worth of time in a month is spent maintaining my investments.

A strong salary definitely helps your effort to invest towards more passive sources quicker, but many will expand their lifestyle as they earn more which results to no change in their cash flow to do so. I see this too often in friends and family around me.

It’s unbelievable that in the richest nation in the history of the world, 40% of U.S. adults do not have savings to pay for an emergency expense of $400 according to the federal reserve.

Having the discipline to keep your lifestyle inflation in check during the process of building wealth and passive sources of income is probably one of the most important yet difficult task many struggle with.

 

Is There a 100% Source of Passive Income?

So, to answer the question, “Is there such thing as 100% passive source of income?”. Perhaps the savings account is 100% passive? Where there is no method of input on your part to maximize returns because the bank pre-determines and periodically adjusts the rates in your behalf based on market rates.

But you can argue, since banks compete for deposits through adjusting interest rates, you the customer may want to shop for better rates. Therefore, the time required to move your funds between banks in pursuit of higher returns results in time input.

There may be one source, not included in the chart above that ranks a 10. Social security income is probably the only 100% passive income. Yet… you can argue… I’ll just stop there.

 

Conclusion

There is an element of competition in some sources of passive income. Such income may decline over time if you do not stay on top and maintain it. There are many others seeking the same and may take the wind out of your streaming sources of income over time. Especially, if it is related to income from book royalty income, ad revenue, and creative content you are monetizing.

Passive income is not infinite income nor is it definitive income. There are risks that come with them as well.

“Money does not stay with those who don’t know how to manage it.” -LBF

So, I guess it’s a matter of one’s perspective. If a source of income requires any sort of time input it’s not completely passive. Which is true. I think the important factor to focus on is the attractive nature of the income. Higher the passiveness of the income results in dividends returned in time saved. Ultimately, resulting in higher level of financial security and freedom.

Passive forms of income bring ownership of your time back in your control. That is what it’s all about.

Thank you for reading.