The Siren’s Call of Passive Income

by Mr. Cheap

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I’ve previously posted about if passive income really exists.  Whether or not it does, as viewed from the personal finance community at large, there is a rabid interest in it.  I can understand the appeal, some work is done setting things up and result in the creation of a “financial perpetual motion machine” that throws off money every month.  Build enough of these machines and you can retire to sitting on a rocking chair, sipping lemonade and musing about how it’s good to own investments.  Sign me up!

All sorts of MLM or investment schemes get people pumped on the idea of becoming independently wealthy.  Sadly, often part of this is also providing them with flimsy ethical justification to take advantage of people (sometimes including friends or family).

Rich Dad, Poor Dad“, “The 4-Hour Work Week” and “A Million Bucks By 30” each got people quite excited about their ideas, but also raised some ethical concerns.  Is rushing headlong towards passive investing a reasonable excuse for bad behaviour?

Years ago a buddy of mine got really excited about “The 4-Hour Work Week” and was talking about some of the ideas.  He’s an INTENSELY ethical guy (most of our conversations have been about spiritual and family duties) and I was a little taken aback when he talked about streamlining his job responsibilities to 5 hours a week and doing business development, at the workplace, for himself the rest of the time.  When I asked him if he didn’t feel it was an implicit obligation to do his work efficiently and then use the time for his employer, he got a sly smile on his face and said “if I can get the work done in less time, then don’t I deserve to use the saved time for my own projects?”.

Fast forward a couple of years, and I asked him how his 4-Hour Work Week projects were going and he said he’d abandoned them.  He’d found, in the end, that the approach was driving him to make life choices that he wasn’t comfortable with.  He related some anecdotes about a partner he’d been working with, who he felt was also a very moral, ethical person, who had become obsessed with passive income to the point that it was damaging his life.

I’m certainly not claiming that people after passive income are the only ones who get money hungry or behave unethically, but there seems to be a surprisingly high correlation (in my experience).  Gurus offer some lame justification like “once you’re rich you can start a charitable foundation!” and otherwise sensible people start behaving badly.

When Roosevelt introduced universal retirement pensions as part of the New Deal in the US in the 1930′s, retirement was a pretty radical concept.  My father talks about how his grandparents felt like they’d won the lottery when they got their first pension check (in the 60′s here in Canada).  It seems pretty typical from a modern perspective, but the idea of being given a stipend and turned lose to relax for the rest of your life is a very modern idea.  In the past, family members would each contribute to the degree they were able (including the elderly), and family or savings was what would take care of you if you became too ill to do anything useful (otherwise you’d work).  Early retirement pushes this up even sooner, with young people dreaming of the life of Riley.

At the time of the New Deal, the retirement age was around the life expectancy, so only about half of Americans could reasonably expect to collect a pension (and most who did would die soon afterwards).  With ever climbing life expectancies, we now have retirements that can be expected to last decades (along with the large expenses to the system to provide this luxury).

I’m a pretty open minded guy, and if someone isn’t hurting other people, I take a live and let live attitude.  If sitting around in your undershirt drinking beer all day appeals to someone in their 30′s as what they want to do with the rest of their life, “go for it!” is my gut reaction.  But, will doing so make them as happy as they expect?  There have been research studies that show the typical retirement has negative health impact.  Maybe, as appealing as it sounds, becoming useless isn’t good for us? (to be completely honest, there have been other research studies that didn’t support that retirement was correlated with health issues, but they don’t support my post as well as this paper does ;-) ).

A number of people seeking passive income and early retirement would protest at this point that they don’t want to sit around in an undershirt (hopefully they’ll still drink too much beer).  They’ll say they plan to:  volunteer, go back to school, run a non-profit, write a book, etc, etc, etc.  I’m sympathetic to this:  3 years ago I even wrote a post detailing wanting to do some of these very things, for an early retirement!  While discussing this with a friend, she made the astute observation that I didn’t need to retire to go back to school (and here I am today, half way through a PhD program).

Perhaps, rather than trying to get passive income before starting to live our lives, we should instead consider how we could earn enough to survive, while doing what we want to do.

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{ 6 comments… read them below or add one }

1 Rachelle

You could start a blog and make passive income! For instance I started my blog and have been writing articles almost daily. It takes me about 3-4 hours to write a post. I’ve been doing this since June and just made my first 3$ :)

People talk about real estate as passive income. They’re nuts too.

Step 1 find a property with positive cash flow involves driving and looking at a hundred places to find one that pays. That doesn’t sound passive to me!

There is no such thing as a free lunch, no one is giving money away!

Passive income in the stock market involves you going out and working to make a whack of money… first. For every $1000 you’ll make 5$ per year!

I just got John T Reed’s book on how to write a book and he claims you can have a passive income by writing how to books. Except it takes him about 9 month of full time work to write a book!

Thanks Mr Cheap! ;)

Most passive income seem to involve work and a lot of which is not passive!

2 Mike

I love the last line – nothing wrong with a little balance!

As Rachelle says, doing a lot of upfront work takes the “passive” out of “passive income”. Even small amounts of on-going maintenance will reduce the “passiveness”.

I don’t even think things like dividends stocks are passive. Think of the amount of effort involved to earn the money to buy them in the first place.

3 Balance Junkie

Of course I have to agree with Mike – balance is the key! ;) I recently finished reading The 4 Hour Workweek. While I found it a bit inspiring, I couldn’t really see many of the strategies working in the real world. I also had some issues with the ethics of the approach, especially with regard to the story of how he won some wrestling championship by manipulating the rules and nearly risking his life. There’s doing whatever it takes to succeed and then there’s just being unethical and stupid. I think he crossed the line on both counts.

Thanks for the interesting article Mr. Cheap!

4 Potato

Wow Rachelle, you’re doing better than I am — I’ve been blogging for years now (with ads for the last year) and still haven’t hit $3 yet!

5 Rachelle

I guess I’m an overachiever!

The really funny thing is that you need to make 25$ to get a check. I’m counting on getting my first check around 2013.

By then I may be able to buy a loaf of bead or the entire stock market considering how things have been lately. :)

6 beyondanomie

Passive income only fairly refers to income generating from existing assets without ongoing input, not how much work you had to put into acquiring the assets concerning in the first place!

I think there’s a certain “inflection point” in the net worth curve, provided you’re not a spendthrift in the “won the lottery and lost it all” mold!

If you’re reasonably frugal, once you get beyond a certain net worth, or liquid assets, (and the exact tipping point varies by country/location), passive income becomes very realistic and starts to positively feedback upon itself. This “critical wealth mass” for retirement-level amounts of passive income is quite high in the richer areas of developed countries though.

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