The Siren’s Call of Passive Income

by Mr. Cheap

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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