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Most 'Passive Income' is BS

Most 'Passive Income' is BS

How the wealthy build money streams.

June 10, 2024

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Welcome to another issue of Passionate Income.

Today we’ll be discussing the three primary types of income: Active, Semi-Passive and Passive.

More important, we'll discuss why most of the "passive income" strategies you see online are anything but. We'll also discuss the order in which the wealthy go about building their income streams.

Let’s dive in.

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If there's one thing people are obsessed with, it's the idea of passive income.*

*To avoid email filters, we'll use the abbreviation PI for the rest of this issue.

In particular, the idea you can get paid without having to do any work.

Now, we're not saying PI doesn't exist. It definitely does. The problem is that there are different types of PI.

Some of which are truly passive, some of which are hands-on, and some which fall somewhere in the middle.

Further, while you can build a PI business from scratch, there's nothing passive about building a company. As an old acquaintance once told me:

"You have to work the 400 hour work week before you'll ever be able to work the 4 hour work week."

*Implying you'll have to work your a$$ off before you'll ever be able to sit around and earn without doing any real work for it.

Fortunately, there's a proven roadmap for building legitimate PI.

A strategy the wealthy have used for decades to create generational wealth while retiring with 100% financial security.

And the first step to putting this plan into action involves understanding the three types of income and which phase you should focus on next.

Here they are in chronological order:

#1 - Active Income

This is easy.

Active income is what you make from your job or business.

More important, the higher your active take home is, the more you can plow into PI vehicles and investments.

While this might sound obvious, increasing your AI is by far the easiest way to build PI.

As an example, while compound interest is the 8th wonder of the world, compounding 7-8% on $1,000 isn't going to get you very far (unless you're ready to hold for 80+ years, which is how long it would take you to hit $1M).

On the flip side, $100K at 7-8% will grow to $1M after 27 years, while $250K will grow to a million after just 17 years.

Sure, there are ways to invest / build businesses that can get you more than the S&P 500's average return rate of 8%. And we'll to get to those below.

The point here is that it doesn't matter if you're buying cash-flowing businesses or investing for PI. Because unless you plan to build a PI business from the ground up, you're going to need cash to invest.

And the more capital you have to deploy into PI investments and/or businesses, the faster you can hit your PI goals.

#2 - Semi-Passive Income

Because the public has such a voracious appetite for it, social media gurus have learned they can sell most anything if they label it as a system for generating PI.

But here's the kicker:

If you fall into a coma and it stops producing cash, it's not true PI.

Instead, it's what wealth experts refer to as Semi-Passive Income.

Semi-PI is any stream that requires less effort / is more passive than a job or business, but is not 100% automatic.

Examples include real estate and AirBnbs, books (which are written once but require ongoing marketing), digital micro-businesses where 95%-99% of the work can be outsourced to a single person / small team of freelancers, etc.

In short, while the above might only require a couple hours of work per week, they are not truly passive. Mainly because they fail the coma test.

The other thing you need to understand about Semi-PI is that in most cases, your investments here will generate an exponentially larger return than they would if you were to skip straight to category #3 (true PI).

As an example, while you might have to pay a 30x monthly EBIDTA to buy an Internet business that's already cash-flowing, if you understand marketing you can likely 3x revenues in a short period of time.

Which, in turn, would allow you to recoup 100% of your investment in anywhere from 9-15 months. From there, any cash you earn from the business is 100% pure profit.

Same for real estate, where you earn a profit on both the rent you charge and any appreciation in the value of the home.

And because of that, most people should plug their AI into Semi-PI before worrying about true PI.

#3 - Passive Income

Very few financial vehicles falls into the true PI category.

Mainly because 99% of businesses require some kind of maintenance or effort.

The handful of exceptions are patent, royalty or licensing deals where companies pay to use something you created on an ongoing basis.

From inventions to music rights, these deals can be absolute goldmines. And they can pay out for years, decades and even centuries.

The only problem?

Unless you're a famous musician or develop some kind of mind blowing invention, odds are you're not going to land one of these.

Which means if you want PI, you're looking at investments.

The majority of which boil down to dividend stocks / ETFs, and bonds / treasuries / money market funds.

The majority of which pay anywhere from 4% (based on current interest rates) to low single digits. The problem?

The higher the interest rate you pursue, the more risk you have to take.

As an example, corporate junk bonds pay higher interest rates than US government bonds / treasuries because there's a much higher risk of a random company going bankrupt than there is the US government going bankrupt.*

*On a short-term time horizon at least ; )

Further, high net worth individuals (HNWIs) based their finances on an expected 4% annual earnings rate. Meaning they need $2.5M invested at 4% for every $100K in annual lifestyle costs.

Which is why retiring off "guaranteed" PI is so difficult:

The more expensive your lifestyle is, the more risk you have to take with your capital (exposing it to loss) OR the more money you have to earn (after taxes) to invest into safer PI investments.

Which is why you see exponentially more real estate / business owner millionaires than you do dividend stock millionaires.

There's a flow to these things.

The amount of post-tax capital you need to retire off truly passive income can very easily climb into the multi-millions. And unless you have an extremely high paying job, most people just aren't going to get there via saving.

However, if you can funnel your AI into Semi-PI vehicles like real estate (where you profit off appreciation) or cash-flowing businesses (which you can increase the value of and sell), it's exponentially easier to earn the multiple millions you'll need to retire off true PI.

💡 Takeaway: Despite what social media gurus push online, most business models and investments are far from being passive. Further, there's a flow to building truly PI, and it starts with taking your disposable income and plugging into semi-PI vehicles, then taking the profit from those investments and plugging it into things that will generate true PI.

🎁 Resources: