The Illusion Of Passive Income

Passive income - reality or mirage?

Tuck the kids into bed.

Kiss your significant other good night.

Slide under the covers, close your eyes and wait for the magic to happen.

“Make money while you sleep”

Ahh, the holy grail of financial independence. A present-day Noah’s Ark, keeping you afloat no matter how bad things get.

Hardly any conversation involving financial independence doesn’t touch the concept of passive income.

At its purest form, it is building up a stash of 25 – 30x your annual spending. Dip into it to the tune of 4% a year. Exert no effort. Live happily ever after.

You can even keep calling it passive income if you wish. I find investment income to be more appropriate, but it sure isn’t as catchy.

The downside, however, is that it takes a fair bit of time to get there. Hustle and bustle to make more money at work. Reduce your spending. More likely than not, do both.

Still have some time (and energy) left over? Try your hand at real estate. It ain’t easy, but it’s still one of the most effective ways to build wealth out there.

If you haven’t got kids and are willing to push the pedal to the metal, you can get to financial independence in a decade or so.

financial independence savings rate

For the rest of us, it’s probably going to take twenty-odd years.

Life has a habit of throwing a few curveballs our way, whether its unforeseen expenses or a period of unemployment. Inflation and variability of stock market returns can shift the goalposts even further out.

But it doesn’t have to be this way, especially in the brave new online world. No need to spend years and decades building up a real estate portfolio or starting a business.

Instead, just throw up a website. Create a course. Write an e-book.

There’s seemingly and endless number of easy ways to collect a steady stream of income for the rest of your days.

If that doesn’t sound appealing, I don’t know what does.

Digital Dollars

I happen to have two good friends who have tasted the nectar of making serious money online.

Both operate in the standardized test space, helping aspiring graduate students ace those GMATs and LSATs.

The first owns some of the top-ranking iOS apps that help people study on the go. The second comes at it from a different angle, running a very successful forum on the topic. Both generate an income that’s well into high six figures, potentially surpassing a million in years when the stars align.

Both toiled for years to launch their respective businesses. They’ve passed up on professional opportunities and repeatedly tested the patience of their (highly supportive) wives.

The efforts paid off. Escape velocity reached, digital assets scaled and producing meaningful income day in and day out.

But make no mistake – a life of peace, quiet, and relaxation it isn’t. Hand-to-hand combat is more like it.

There is no shortage of app developers trying to capture the top slot on the App Store. And a crafty little company called Facebook happens to have launched a feature called Facebook Groups, decimating all but the most successful internet forums pretty much overnight.

Instead of resting on their laurels, my friends continue an intense, albeit financially rewarding, battle of staying relevant in their niche.

Hmm, perhaps blogging is a better option? Sounds WAY easier, and you can get up and running pretty much overnight. And all those successful bloggers seem to be living the dream, aren’t they?

Unfortunately, lost in the sea of Bluehost affiliate links and $99 SEO courses lies a simple question you need to answer:

What makes you special?

Secret Sauce

When I first tried to break into investment banking straight out of university, I didn’t stand a chance.

I didn’t know a single soul in the industry. No idea how to network, what to write in my cover letters and what to expect in interviews.

It wasn’t a surprise most of the coveted jobs went to my fellow students with access to information.

Six years later, as I was gearing up for my second shot as a graduate student, the world was different. By that point in time, the internet was full of advice on landing an investment banking job.

I went from not standing a chance to securing multiple offers. Practically overnight, my structural disadvantage disappeared.

No longer the underdog. Instead, I probably edged some other poor chap with family connections and pedigree straight out of a job offer.

Information is no longer a privilege, and we should all love the internet for being the great equalizer that it is.

But you can’t have your cake and eat it too. Lowering barriers to entry works both ways.

Having scaled the investment banking wall, I don’t get to pull the drawbridge behind me. Thousands of smart, hungry, motivated folks are streaming in, nipping at my heels.

Likewise, being able to throw up a website doesn’t give you the right to succeed online.

Neither does being the first to cover a specific topic. If it was, we’d all still be reading “The Richest Man in Babylon”.

And it isn’t being the first to discover the promotional power of social media. Does anyone still remember Tila Tequila? Thought so.

In the online world, you don’t get to flood the proverbial moat after reaching success.

Staking your virtual ground doesn’t preclude anyone else from digging for digital gold in the same place.

Instead, you are now competing on a global basis. Facing off against anyone with a laptop and an internet connection.

Believing that there isn’t anyone out there who can do a better job is wishful thinking at best, delusion at worst.

Rain Over Me

Now, I am not writing all of this because I want to rain on your parade. Pursuing passive investment income is an admirable, worthwhile endeavour.

Doing so online is a very credible way to go. As a matter of fact, more people than ever are figuring it out right now.

Unfortunately, very few of the people who are trying to sell you the dream are up front about what it is really like to live that dream.

Is it a good life? No doubt. But it isn’t quite cruising on the lazy river.

Perhaps a better way of looking at passive income is to ask the following questions:

Is it really the passive part that makes it so appealing? Or are there other things at play here?

Could it be the desire for agency that comes with having multiple, uncorrelated streams of income?

Perhaps you miss the days when you had a semblance of control over your workdays. Or maybe you are tired of going on yet another holiday where the question isn’t whether you will have to work, but rather “how much?”

What about the natural need for diversification?

Industries and professions rise and fall. Age discrimination looms large (isn’t it funny it always rears its ugly head just as you’ve finally climbed up the compensation ladder?)

And as much as we hate to admit it, there will come a time when our physical and mental abilities will no longer keep up with the demands of our employers – and the potential of our younger colleagues.

Alternatively, you could view passive income through the prism of maximizing the outputs instead of simply trying to minimize the inputs.

Because what certainly hold true for things like writing that (e-)book, starting a tutoring side hustle, or even partaking in the ill-advised process of publishing your thoughts on the internet, is that you can now use technology to reach a far bigger audience than ever before.

And if you happen to be really good (or more likely, keep at it until you become really good), you get to reap the spoils. A six- or seven-figure income is well within reach.

It’s just that the process of getting, and staying, really good at something has nothing to do with the word “passive”.


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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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11 thoughts on “The Illusion Of Passive Income”

  1. This is very relevant to me as I’m just starting my online journey. I’ve stumbled upon a community on Twitter that’s all about making money online and while I love their motivational tweets, it also feels a bit too much like a pyramid scheme: new users sign up, read an ebook on how to do affiliate marketing, then affiliate for that ebook and sell it to other new users. Nothing worthwhile ever actually gets created in the process and everyone’s just looking to make a quick buck. I think I’ll stick to blogging instead, although I wouldn’t mind affiliate marketing products that I actually genuinely believe in.

    I like your chart, according to my average savings rate I can retire in 10 years (since I’m already 20% there). Must get the rate up slightly to reach my goal of 9 years.

    1. Banker On FIRE

      You’ve hit the nail on the head. One cannot build a sustainable business if you are not producing anything of value. Affiliate marketing works great as long as you are providing value to your readers along the way and the products really do benefit them.

      The chart to FI is one of the best encapsulations of the FIRE movement. Not sure where it came from originally (may have been MMM) but a great snapshot of what it takes to get to FI.

  2. During a gold rush, sell the shovels!

    Lots of people shouting about how much money they’re making online. Most (all?) of them seem to make most of their money selling you stuff to follow in their footsteps. An ebook, a coaching session, etc. If they were really making it big, I doubt they’d be giving away their secret.

    Also, most of the time people online call their income “passive”, it just sounds like a fancy name for “self employed” to me.

    1. Banker On FIRE

      If you’ve figured out a truly passive way to make money online, why give it away?

      To give them credit, some people are very upfront about how much work it really takes to succeed online. Most others oversimplify it. Much easier to get the affiliate signup that way.

  3. Totally agree with you.
    The worst are the get rich quick, or make money online bloggers who say you can make £500k with in 2 minutes of blogging, or even that blogging is passive.
    Started my blog a few days ago, and 5 hours a day writing content is anything but passive aha! Obviously won’t be forever, but even then it still won’t be passive 😉

    1. Banker On FIRE

      Congrats on launching the blog! It’s a very rewarding journey, albeit one full of twists and turns. Look forward to seeing your updates.

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  7. Yep, totally agree. I do have “passive” income streams but I had to work actively to make them happen. I make online courses, for training software devs. I made the choice to go through a company because I didn’t really feel like I could sell these on my own. It works out well, I am making my fifth course.

    You get compensated for putting in the work to build the course, often that can work out to $50-80/hour, and then you get paid on minutes viewed ongoing, which is the “passive” portion. It takes a lot of work and a lot of time. Unless you’re an industry celebrity and not a schlub like me, you need to make over a dozen, ideally 15-20 courses, to REALLY see the income stream rise, otherwise it is just nice lunch money. But if you are good at what you do, you have a knack for teaching, and you can commit to spending the time, it’s a very fun line of work. The other benefit besides income is that you start to gain some recognition, which opens more opportunities. A lot of authors I know move into consulting.

    To put it into perspective, I try to do two courses a year and each one is upwards of 80 hours of work. Nights and weekends means it can take 3 months to do one course. Since I have a full-time job, I do it because I enjoy it and I understand it will take awhile before it begins to cover a meaningful amount of my expenses.

    1. Banker On FIRE

      That sounds like a great side gig, though you are right to have the quotation marks around “passive”…

      Once you’ve built up the momentum, you will have a really nice income stream going on – but as you say, it will take a long period of hard work before that happens!

      Best of luck (and really like your blog btw!)

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