Millennial Money: Just how passive is passive income?

Jan 25, 2022, 5:00 AM | Updated: 7:17 am

The opportunity to make money while we sleep is one few of us would turn down. And passive income, at face value, suggests we can do just that.

Social media is chock-full of influencers telling us how to make passive income. And while many of those content creators do actually earn money even when they’re not on the clock, fewer of them are forthcoming about the work required to get there.

“A lot of people are surprised by how much work it takes because I think a lot of people who are earning a passive income are talking about how great it is having earned that,” says Pat Flynn, a California-based entrepreneur and creator of the “Smart Passive Income” podcast. “But they don’t necessarily tell you the whole truth. You’re seeing the tip of the iceberg.”

“Passive” income, in most cases, won’t be created passively. Whatever the pursuit — investing in stocks to receive dividends, buying rental properties, earning ad revenue on video channels — you’ll have to put in work upfront before you can start making money while doing little, or no, work. And in many cases, you’ll have to keep doing work to maintain that income, too.

PASSIVE INCOME HAS NO SET DEFINITION

When does a job or side hustle turn into passive income? That depends on how you define it.

There is no clear-cut point where income turns passive. For some, it could be when no work or upkeep is required, or for others, it could be when a minimal amount of work each week is required. And “minimal work” is also subjective.

“Passive income, for me, is really something that you have to work to set up, but after that, it takes very minimal work to maintain and to keep that income stream coming,” says Joseph Hogue, a chartered financial analyst and creator of the YouTube channel Let’s Talk Money.

Other sources of passive income include investing in bonds or peer-to-peer lending, generating ad revenue from a blog, or putting your money in a high-yield savings account. Even the money an artist makes through plays of their songs on a streaming platform can qualify as passive income.

IF YOU WANT PASSIVE INCOME, BE READY TO WORK

Contrary to what the phrase passive income suggests, you need to put in work in order to attain it.

Investing money you inherited or won in a lottery may be the only path to truly passive income, start to finish. But for most of us, creating this new revenue stream will involve investing money made from more traditional means like a job, or investing our time building a source of income from the ground up.

Without a large initial financial investment, people often underestimate the “sweat equity” or time and energy required at the beginning, says Jannese Torres-Rodriguez, a Florida-based entrepreneur and creator of the “Yo Quiero Dinero” podcast.

“That initial workload, that time it’s going to take to get to a place where it’s passive, is what freaks a lot of people out and makes them think that, ‘Oh, well, this is obviously a scam because I just want to make money quickly,'” says Torres-Rodriguez.

For both Torres-Rodriguez and Flynn, it took at least a year before they saw earnings from some of their current sources of passive income. Both said that it took consistent work during that period before they started seeing money come from their blogs, including from affiliate marketing, ad revenue and selling courses, among other sources.

The amount of work upfront can depend on the income stream and what you want to get out of it. For instance, if you’re making income from rental properties, you can hire a person or a company to take care of all the property management. That’ll take away from your earnings, but putting in your own time will make the income more active than passive.

If you’re looking to make passive income, keep in mind it’s not guaranteed down the road — even if you do put in the work. There’s no promise your investment, whether that’s time or money, will pay off. Inevitably, there is risk involved.

Seeing other peoples’ successes, or hearing about them, can trigger that fear of missing out on a good thing. But before you try to emulate them, consider the journey. It’s not unattainable, but it won’t happen overnight.

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This column was provided to The Associated Press by the personal finance website NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Colin Beresford is a writer at NerdWallet. Email: cberesford@nerdwallet.com. Twitter: @Colin_beresford.

RELATED LINKS:

NerdWallet: What is passive income, and how do I earn it? https://bit.ly/nerdwallet-what-is-passive-income-and-how-do-i-earn-it

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Millennial Money: Just how passive is passive income?