Anyone who has read books on financial education knows very well that the way to reach the financial freedom we all long for is to build assets that generate passive income for the rest of our lives. That’s when we come across phrases like “I make money while I sleep, I make money while I’m on holiday” and “Don’t work for money; make money work for you.” Well, passive income as most people imagine it simply doesn’t exist, because it can rarely be sustained without active management on our part. I’m not saying this to shatter anyone’s dream, but rather to bring it closer to reality.
That picture of spending the whole year lying in a hammock on a beach, smoking a 100% Cuban cigar while a woman with large breasts puts sunscreen on us and our passive income keeps the money rolling in, is a long way from reality (read: The only secrets to getting rich).
To begin with, if we want money to work for us, we first need to have money, and that money has to be earned. Our first capital can only come from working and saving for a while. Once we have money, we can of course invest it or start a business (create assets).
Passive income doesn’t exist, but income-producing assets do
If we stop to think about which assets actually generate passive income, the purest forms are what we receive from shares, whether through capital gains or dividends, as well as fixed-income investments (fixed-term deposits or government bonds) and patenting a product. Even shares wouldn’t really be passive income, since we have to keep an eye on our investment. The more active the management, the better the risk is controlled and the fewer nasty surprises. For me, investing in the stock market has never been passive income, but rather a vehicle for growing my savings.
(Read: Quotes from the great investors that will help us understand stock market investing)
A writer earns supposedly passive income from book sales. Robert Kiyosaki has made more money selling his formula for making money (in books) than from the passive income (from real estate and shares) he has accumulated over his whole life (Rich Dad Poor Dad still sells all over the world). Even so, writing a book takes hard work, just as a website or blog can supposedly generate passive income, when the truth is that the moment we stop being active we risk seeing that income shrink or being overtaken by others. (A race isn’t won by the fastest runner, but by the one who keeps running when everyone else slows down.)
Finally, there is income from investment real estate, businesses or network marketing. Except for rental income from property, the income from our own company or from network marketing could never be passive, although it can certainly be profitable.
Many people will think that if you own a company, you can always hire someone to run it and collect that kind of income. A serious entrepreneur rarely leaves the company in other people’s hands without being actively involved. Just look at Gates, Slim, Amancio Ortega, Buffett, Zuckerberg and so on.
Make the most of your momentum
As Donald Trump said in The mindset of an entrepreneur, you need to build momentum and keep it going. In other words, once you’ve achieved success, it’s not the time to lie down in the hammock but to keep growing, because in today’s world everything moves very fast, and if you lower your guard, you can lose everything you’ve gained. As the fictional character Gordon Gekko put it, money is a very jealous mistress: if you don’t look after her properly, you could wake up one morning to find she’s gone.
See also: 8 life lessons from Warren Buffett
Today, businesses need constant innovation or adaptation to avoid becoming outdated, and much of the income we might consider passive may turn out to be only temporary. That’s why business works the same way as investing: we need to diversify our assets in case one of them stops working.
What’s more, we start from the premise that if we do what we love, we’ll enjoy the experience of constantly creating assets in the form of businesses and investments. I insist that there isn’t a single millionaire in the top 100 of the Forbes list who has stopped working, and their passion for their work is, almost certainly, what made them millionaires.
Further reading
Featured image: photo taken by flickr user *Micky*, CC BY-SA 2.0, via Wikimedia Commons.
