After reading well-spun yarn like ‘Rich Dad, Poor Dad’, many start talking about the importance of financial independence and passive income. There is no free lunch in the universe and there is no such thing called ‘passive’ income. A look at some well-known passive income ‘streams’ and what it takes to make them count.
Income from rental property
If you are earning rental income from ancestral property which you naturally inherited (without litigation etc.) then it is sheer luck. It is perhaps passive, but it unplanned. So does not count.
If you have purchased a property in the hope of generating income, would it count as passive?
If the property was purchased with a loan, then until it is closed out, there is nothing passive about the rental income. After the loan is closed, assuming regular tenants are available, the income is passive. So passive that the rental yield after (or before) taxes and adjusted for inflation will steadily remain close to zero.
The real cost of generating such passive income will be felt only years later, when the landlord does not want to sell the property and leave it as an estate to heirs.
Income from talent
You have a special talent (eg. writing, photography, baking) which is not (directly) involved in your day job. Perhaps you can derive an income from it, ‘on the side’? Would it count as passive?
Unless you are a J. K Rowling or an Uderzo, or Stan Lee, you cannot hope to generate continuous income from work done in the past. Perhaps you might have a large stack of unpublished material which could be gradually monetized. Those are lucky accidents. Does not count.
You need to work your talent continuously in order to derive regular income.
Income from blogging
Many people start a blog to make money. Which is like putting the cart before the horse. To make money from a blog, one needs to find a suitable niche (popularity is irrelevant. In fact rare niches are better). The blogger must have expertise in that niche(which is often ignored) , must blog frequently, be mindful of search engine optimization techniques, site speed, answer comments etcetera. Most important of all, the blogger must have the enthusiasm to churn out regular content.
Assuming all of the above is a given, there are many ways to generate income from a blog.
Google Adsense Big brother google has an ad program where readers will have to click on the ads for the blogger to generate money. This July,freefincal crossed 1.5L monthly page views(not spectacular, but decent). Suppose only 1% of those readers click on the ads (which typically point to ‘best’ stocks, mutual funds, term plan etc.) and if each click pays about 0.1- 0.25 USD, the monthly earning will be about 150-375 USD or about Rs. 10,000- 24,000.
If you are thinking, ‘that is not bad’, please recognize the effort it takes each month to make that much. If I took a break from blogging for a month, the income could drop significantly. If you think ‘that is not enough’, imagine the effort it will take to improve earnings. If you are thinking one can earn ‘passive’ income by setting up a website or a blog, think again. It may be possible for some niches and by some people. They are exceptions. but most people would struggle.
Hosting ads Once your blogs Alexa rank heads close to the 1,00,000 mark, advertisers will request you to host ads for a fee. I don’t know about the rates (I always say no), but I do know that, they will not renew their contract if the traffic reduces.
Therefore, a site constantly updated with topical content is crucial for ad revenue. While writing such content, if there is a drop in quality, there could be a drop in readership!
Affiliate links This is the new menace. Affiliate links are everywhere. If not done right, it is a sure shot way to drive away the audience. Manish Chauhan recently learned it the hard way. Very few people can manage to sound professional while earning from affiliate links, which will take quite a bit of effort for such income to be significant. If you think, all you need to do is to write a ‘review’ with an affiliate link is that needs to be done, think again. Very few people can pull that off.
Also, many do not realize that successful website owners or bloggers make a big chunk of money from offline activities. The website only serves for lead generation (more on this later).
NB. I don’t host ads because that would make me feel like a fool. I say ‘don’t buy a pension plan’ and Googles bot would serve up ‘best pension plan’ ads. How would you feel if you saw a distributor portals ad when I talk about direct plans every now and then. As for affiliate links, they just plain stink. How can I write a neutral review when I want to earn from the product? Of course, such meaningless notions are ‘out of syllabus’ for this post.
Income from financial instruments
I do not wish to discuss avenues like an income ladder (with FDs) or annuities which are used to generate passive income in retirement. That is a deliberate effort on out part to generate income from a corpus.
What about dividends from stocks, is that passive? Not really. You cannot close your eyes on the health of the underlying business. You may need to make tactical calls wrt those holdings. So don’t think it is all that passive.
Passive income cannot provide you inflation protected income in retirement.
Income from network marketing
I could not believe how many Indian bloggers list this (MLM) as a valid passive income idea. Recipe for disaster.
Passive income is a misnomer!
Let us face it, there is no such thing as passive income unless we are lucky or extremely talent so that our work will stand the test of time. Standard ways or generating income are anything but passive. Call it a supplemental income if you will, but let us please not call it passive.
You don’t need passive income!
All I need for financial independence is a large enough nest egg from which I will generate inflation-protected income
If I have to worry about maintaining a passive income source when I financial free, I am not really free!
Yes, we could all use a supplemental income. It requires effort and I willing to put in that effort to hasten my financial independence. After I am independent, such supplement income and the effort associated should be optional.
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