Tag Archives: passive income

Passive Income – Top 5 Misconceptions

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I have been working professionally for over 20 years. And I have also been reading into how to generate extra income while working full-time. Naturally one of the things that we hear quite often is how to generate income passively. With the pandemic paralyzing the world in the second year, getting that extra income has become more important than ever. As we continue to hope for that chance of getting the extra money, sometimes I wonder if “passive income” is a myth. After a few years trying, I think there are 5 misconceptions that all of us should be aware of.

Before getting into the 5 misconceptions, let’s define what is Passive Income. Passive Income is defined as money or income that you are earning without you actually spending the time and effort. Active Income on the other hand requires us to spend time, effort and sometimes money to manage the activity. For example, I have been making money “actively” as a working professional in a bank for over 20 years by physically go to an office and sit in front of a computer.

There are a number of articles and several books touting the success of earning passive income. After reading some of these “success” stories, I’ve decided to dip my toes to test the water. I have tried my hands in several “passive income” ideas over the years. Unfortunately, I can tell that it is not as easy as it is sound. Many authors of these “successful” passive income toot the horns how colorful the rainbow is on the other side – however there are several misconceptions that none of the authors point out. Without further due, let’s address the misconceptions in the order from low to high.

5. Effort Free

To begin earning passively is not as effortless as many have advertised. It requires up front investments and a lot of time. Once you have the ball rolling, if you are lucky, you can have a snow ball effect and the income will keep generating. Notice that I underlined “if you are lucky”? Not everyone can be successful once they start generating the income. There are many factors that can have an impact how the the ball rolls.

Let’s take an author as an example. To be able to generate that income, the author needs to spend a lot of time to write a book, find a publisher and get the book published. Once it is published, the publisher needs to be able to advertise the book and sell it to the mass. Getting your book noticed is difficult because there are literally thousands of books being published everyday. Sure you can publish your book using ebook, but you are facing an uphill battle against other authors who have the same idea.

Let’s look at at an angle as a YouTuber. At any given minute, there are hundreds of videos being uploaded to the YouTube platform. How do you get noticed among seas of videos? If you are lucky your video could go viral and you may continue to generate views and possibly monetize your video. However, there is no guarantee that you will continue to be successful as a YouTuber.

4. Getting Rich

Unless you are one of the few YouTubers who have millions of views, it is unlikely you are going to get rich. We all read about who makes the most money being a YouTuber every year. The list is very short and very difficult to get into. If you believe that by publishing a video on YouTube you can begin monetize, then you are wrong. Google has several conditions that every YouTuber must satisfy before he or she can start monetizing the videos.

Even if you can begin monetize, it is unlikely you will get thousands of dollars from YouTube. It is believed that conservatively you could earn up to a thousand of dollars for every million views you generate. Plus if you make over $600 in a year, you have to pay over 40% as income tax to the IRS. Being an author is not as easy as it sound. You get paid a royalty (a set percentage) for every book you sell. The publisher usually gets a bigger cut and leave a small fraction that goes into your pocket.

3. Many Ways to Earn

This is the biggest BS I’ve read. Yes, there are many ways to make extra money but they are not for everyone. As I noted in my earlier paragraphs being an author is one. But how many of us can actually write as well as Tom Clancy? Being YouTuber is stressful and takes a lot of time, but none of us can be as successful as PewDiePie or Mr. Beast.

What about rental income? Sure if you have a lot capital lying around to invest in properties and time to manage each one. Then there is also developing apps for smartphones. Let’s be honest, when was the last time you check the app store? Even if you have, there are literally hundreds of thousands of similar apps on one subject.

2. Press and Forget

The major reason Passive Income is coined because it is supposed to generate income stress free. You are supposed to hit the send button and forget about it; and magically you will start making money. Unfortunately, this is wishful thinking. Any ventures that you invested in require constant maintenance. Let’s take investing as an example – you have to constantly monitor the market to ensure your investment strategy is sound.

Ever wonder why successful YouTubers have a team of people working for them? Because it is a full-time job. Not only they have to produce the videos, they have to constantly keep the quality of the video high to keep their subscribers happy. Additionally YouTubers must ensure the videos the create do not violate YouTube guidelines or risk being banned or censured.

  1. It Is EASY

If anyone tells you that it is easy to get into any activity and start generating passive income, turn around and walk away. None of the ideas are easy. Either they require a lot of investments or that you have to be extremely lucky. My major problem is the market is too crowded. The pandemic forces a lot of people to start thinking of generating income out of their regular full time jobs. Being a YouTuber is a shoot or miss because there are way too many YouTubers. Investing in stocks is perhaps the easiest but it is not without its risk.

Here is another advice that I’ve read a lot. Take stock photos and sell them in the available platform such as ShutterStock or StockPhoto. Unfortunately it is very difficult to get into because these websites usually have high requirements. Even if you could start selling your photos on these platforms, it is very difficult to get noticed and start generating income because there are just too many photos that are available now. Additionally, there are thousands of photos already available online for free; how many are willing to pay for photos? Not many unless if you are big corporations who are in need to have certain photos for their in house publishing. The point is there are too many hurdles before you can actually start making money from the photos you take.

I’m not here to discourage anyone to attempt generating passive income. We just need to be realistic of what you can earn. Passive income requires a lot of effort and time and it is not without is stress. If you able to earn handsomely from your ventures I salute you. Until then, I recommend that you invest in passive income as a side hustle.

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Put Out the “FIRE” on Your Way Out

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Last year I read several articles how several 30 years old saved a million dollar and decided to retire for the rest of the lives. These retirees follow the FIRE – “Financial independence, retire early’ movement that has proven to be popular among burnt-out millennials wanting to quit the corporate rat race. They want financial freedom to do what they want to do without following the norm.

The FIRE concept pique my interest. My initial reactions were that it was a good idea and I’m amazed how they are able to save a million dollar in such short time. Retiring early seems fun and I wouldn’t mind doing that. However, one of the articles has a photo of the retiree in simple attire wearing sandals relaxing on a lawn chair. And therein lies the problem, the “retiree” looks like a hobo.

As I research further and start thinking the “ifs” and “buts” I realized that FIRE lifestyle is unattainable and unsustainable. There are too many things could go wrong and there are too many potential pitfalls.

Let’s start with what we have today. Since the end of World War 2, there were numerous progress made to assist Americans when they reach their retirement age. Without going into details, essentially we need to work for 40 to 50 years after graduating from school until we reach retirement age (current retirement age is 66). From that point on we can start withdrawing from Social Security, pension plan and any retirement savings we have. I agree that the current model needs revisit as the market conditions today are not what they were 20 years ago and the Social Security is running out of funds to sustain the next generation of retirees. The question is will FIRE method be better position to replace the current retirement model?

My answer is very simply, NO. There are several reasons working against this method and I will list them with my arguments. Let me know your thoughts in the comments below if you agree or disagree.

We Are Materialistic

To be able to save a million dollar by the time you reach 30 years old, you need to save at least 70% of what you earn for the first 10 years. Once you reached the “retirement” age, you are supposed to retire by slowly withdrawing the money you saved. But in order to sustain your lifestyle, you MUST live frugally. There will be no big spending and no unnecessary spending. Essentially, you are living on the edge so you can stretch your savings. The problem is we are so used to the materials around us that for anyone of us to cut all these spending for the next 50 years is impossible. Of course there is the possibility to make passive income to supplement the expense, which I will touch upon below. There will be no more cars, no vacation and maybe reduce your reliance on smart phones. Personally, I would rather work 60 hours a week and then take 2 days vacation and spend time travelling.

Don’t Get Sick

The health care cost in the US skyrocketed several decades ago and it continues to go up as of today. Various administrations and politicians attempted to control the cost for decades but without any results. The likelihood of health care cost to come down will not likely to happen. So to be able to sustain a FIRE lifestyle, you better not get sick. Seeing a doctor is an expense and living frugally won’t allow you to spend that kind of money. We are not even talking about hospitalization! Seeing a doctor can easily cost $100 and above on one visit. Staying in a hospital for one day can cost up to $10,000 a night! You may wonder that the cost can be covered by health insurance. Unfortunately, that is no longer the case. Depends on the policy, insurance may cover up to 80% of the cost but first you need to pay an annual premium at least $8,000 a year. If you work for a company that offers health insurance coverage, you know you are covered. A FIRE retiree would not have that luxury.

Don’t Have Kids

Being FIRE, you need to be very selfish. You are living off your savings and having children will not help at all. The cost of raising a kid can easily cost up to $250,000 from birth up to 18 years old. On average, it costs $234,000. And this does not include college cost and inflation rate. I have 3 children and I can tell you that raising kids is not a cheap venture. To retire at 30 you are not allowed to have kids because they eat in your retirement really quick. Maybe this is not a problem for millennials because they tend to be more selfish than previous generation due to materialistic behavior.

Living Easy or Living Aimlessly

Humans are curious animal and we thrive by learning. Not working for the rest of 30 years is like life sentence for us as human beings. The real reason our civilization continue to evolve because we continue to learn new things and continue to make our lives better. Retiring at 30 means no big spending, no working and no exploring. You basically have to live near your backyard aimlessly because you constantly keep thinking how to cut expenses and how to stretch your dollar. Since you are no longer working, you are not being challenge by daily challenges. You are no longer looking forward to what will bring in the future because you are “happy” with your currently easy living. If you are lucky enough to live until you are 80 years old, as a FIRE you need to live like this for 50 years. If you don’t think this is a life sentence, I don’t know what is. Personally I will not be retiring when I reach my retirement age. I will likely start a new venture to make extra income or I will be volunteering my time helping those in need. Working is one way to continue to keep our mind sharp and active.

The Math is All Wrong

A million dollar is not a lot, by any means. Assuming a 4% return in interest rate for 50 years, you are able to grow it to about 3 million dollar. But that is a big IF. That assumes that you won’t be spending that million dollar; that assumes the market continues to provide 4% return annually; and that assumes there won’t be an inflation. Unfortunately being a FIRE you are withdrawing the million dollar every month. Assuming you are spending only $2,000 a month your million dollar will lose $300,000 in 10 years, which will diminish the return of your original million dollar. That brings back to my first point, how many of us can live frugally only on $2,000 a month? That is like living almost at poverty. If we continue to work, we can continue to supplement our income while we continue to let our money grow.

Rely on Passive Income

There is another movement that is going strong. There are a number of successful people who are able to gain income passively. Active income is define as work and getting paid through employment. For example, I work full-time at a bank and I get paid on a bi-weekly basis. Passive income is defined as you grow your net worth without your active involvement. Example includes dividends you received from your stock or royalty you receive from your songs you published on iTunes. You may think generating income passively is easy but the truth is it does not always work. Not many of us can be a successful influencers on Instagram or YouTuber. Not many of us can gain a foothold in making music or gain an audience by selling ebooks. There are some who are extremely lucky but for the majority of us is like dropping a bomb in a barrel. Would you want to take that chance by being a FIRE hope you will have a steady stream of passive income?

Let’s be real, we are jealous beings. Sitting idly and looking at other around you driving the latest cars or living in a nice house would not sit well with our jealous selves. Or lounging in your cocoon while you hear the kids in your neighborhood having fun because you can’t afford it because you are planning on how to manage your expenses. We need to continue to keep our brain active by exercising it and continue to have objectives or goals that we can strive for. That’s what makes us human. Retiring aimlessly is just not the way to go.