Is Passive Income a Hoax? Here Is The Truth

It all started with the book The Four Hour Work Week by Tim Ferriss. This book is probably responsible for one of the biggest sea changes of my time. With a title like that, it enticed a whole generation to think differently about the world we live in and how we work. But it also spawned a lot of misconceptions.

The new buzz word became passive income. It was touted as the holy grail. But is it possible to quit your job, work four hours a week and live happily ever after sipping Mai Tais on the beach? Recently Gary Vaynerchuk did a video that lays it out pretty well. If you don’t know who Gary is let me warn you before you watch this video.

*****WARNING STRONG LANGUAGE, SPECIFICALLY HE CURSES…..A LOT!************

So you have Tim Ferriss on one side and Gary Vaynerchuk on the other…or so it seems…who is right?

Like anything else, it is often the language and the marketing that is used that creates this confusion. Lets start with the basic question. What really is passive income? Some call it mailbox money…money that just shows up in the mail. You make money while you sleep. It’s marketed by many that you can put in a few hours of work and then sit on the beach all day while the money just shows up. Really?

Has the internet changed everything so that you can just create this amazing opportunity to make money while you sleep? Yes…and no.

Well, lets just back up for a second and talk about what passive income really is. Actually I have started hating the term…just because of all the low level marketing that is done around it…but I love the idea.

I prefer the term asset based income…it goes back to the idea of the cash flow quadrant. Cash flow is always generated via one of these quadrants. And cash flow is how you pay for your life. Asset accumulation is fine, but we live off of cash flow. The most famous book on this topic is The Cash Flow Quadrant by Robert Kiyosaki.

He breaks down the source of cash flow coming from one of four quadrants. In the illustration below you have the right half representing your exchange of time for cash flow. On the right hand side is using assets to generate cash flow. The initials stand for :

E = Employee

S = Self-employed

B = Business

I = Investment

The Cash Flow Quadrant

The passive income idea has been around forever…it has just been talked about differently than it is now. Businesses and investments are nothing new. What has changed is that the internet has made creating a business with a substantial impact much easier to create. Your geographic location is no longer a barrier. So, in theory, you could work from the beach…or anywhere else that you desire. You could have employees and customers from any geographic location. Your customers don’t have to physically be able to drive by your store.

The myth that is perpetuated by some marketers is that the asset side is passive. Which is interpreted as not involving any work. I don’t know when that term really started to be used but I am going to blame the IRS…just because I can…they use the term but they mean labor vs. assets because they tax these sides differently. If you are on the labor side they assess self-employment tax…on the asset side, no self-employment tax.

The confusion comes I think in getting from one side to the other. How do you stop trading time for money and get paid for owning assets? Well, you have to either buy the asset or build it. Both of these require using your labor. Saving, accumulating and buying or building. The creation of an asset requires labor. AND the maintenance of that asset requires labor. EVERYTHING atrophies over time without maintenance…it is a law of nature. So the myth that you can just sit back once you have this asset and no further work is required is just that…a myth. The amount of labor required really depends on the type of asset you have purchased or built.

So to cross from the labor side to the asset side requires labor that you specifically dedicate to that side rather than consume!!!

If you spend all the money you make from your job, you have nothing left to build an asset. If you spend all your time at your job or on other activities that aren’t asset building, then you have no time to build. Time and or money are required for asset acquisition.

The amount of time, money and your level of skill will determine how quickly you can acquire assets. The idea that a few hours dedicated to something will pour money into your bank account is crazy. Yes, the internet makes it easier to create leverage to build a business…but it still isn’t magic. It takes work…consistent work.

But marketers appeal to your emotions, to what you want to hear…not reality. You don’t want to hear the challenges…you want to buy the dream.

The question that I have for you is: is this really the life you want? A life of nothing but leisure? Nothing but leisure in your life isn’t a great place to exist. I love the Caribbean as much as anybody…my saying is that salt water cures everything…at least it does for me. A good dive in the peaceful bliss of the ocean really rejuvenates me. But soaking in the ocean all day drains the life out of you. Leisure is best when contrasted with meaningful and fulfilling work.

So my holy grail is building assets that generates cash flow that provides for basic living expenses so that I can spend my time on what fulfills me and gives my life meaning…having the freedom to craft my life in a way that is meaningful.

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