Passive Income Requires Active Income First

Passive Income Requires Active Income First

Passive income is probably one of the biggest reasons why so many people are starting niche sites or writing a blog these days.  Just in the personal finance sphere alone, it seems like there are hundreds of new blogs popping up every year.  Some have good information, some have bad, but they all have one thing in common.  A lot of new bloggers see the opportunity that exists to write about something they love and get paid for it.  Once you’ve established yourself, you can hire other people to do the work for you and sit back and reap the benefits: this is passive income at its finest.

There are personal finance blogs out there that started just like this one(but 5-10 years ago) that are now selling for millions of dollars.  Although these blogs are definitely the exception and not the norm, it highlights the potential that exists in the online marketplace.  If someone is willing to pay 3 million dollars for a personal finance blog, they must be pretty confident in that blog’s ability to produce consistent income.  

Everyone Wants Passive Income

One of my favorite sites is actually called Smart Passive Income and the author, Pat Flynn always reminds his readers that passive income won’t come easy.  He’s right.

My definition of passive income is an income stream that will pay you a weekly, monthly or even yearly sum with little to no work.  More traditional definitions of passive income are things like CD’s and bonds since all you have to do is invest X amount of dollars and you’re guaranteed to get certain payouts.  Obviously that type of investment sounds pretty appealing since who doesn’t want to make money for sitting around on their couch?  But no matter what type of passive income you end up with, there’s always going to be an active portion first.

Active Income First

I have a couple passive income streams but the thing I’ve realized time and time again is that they all required active income first.  People love to bring up real estate when they talk about passive income but real estate requires a huge amount of active income.  Not only do you need to save up for a down payment for, but you also need to have consistent W2 income in order to prove that you’re a trustworthy borrower.

It’s smart to try and build your passive income streams when you’re young but your primary focus should really be on your active income.  Think about diversifying your streams of active income and figuring out ways to make as much as possible.  That way you can invest in more passive sources of income like real estate, business, CD’s and dividend stocks as you get older.

Active Investment of Time

There aren’t many business models out there that could literally pay you thousands of dollars for doing absolutely nothing.  Online websites and blogs can do just that though.  Once you’ve established yourself and everything on your site is up and running, you don’t even need to sell things to make a profit.  You could write 20 amazing posts on How to Be a Magician with affiliate links and Adsense banners all over the place.  Every time someone clicks on one of those links, you’ll see a small payment in your advertising account, it doesn’t get much easier than that.

And that’s why I think so many people are starting blogs and niche sites in the first place.  Making money for doing nothing is something that appeals to everyone.  One of the first things you’ll realize though is that starting an online business is A LOT of work.  It gets easier the more sites you do, but everything from picking the name to hosting and figuring out what you’re going to write about will take a lot of time.

So while online passive income sources don’t require a lot of active income, they do require a lot of active investment of your time.  Since time is money, even passive online income sources are going to require a lot of active income/time depending on how you look at it.

Why is Passive Income Important?

The reason why I’m working so hard on my passive income streams is because I don’t like depending on my day job income to survive.  Right now, my day job income is close to 75% of my total income.  If I were to lose that income, I’d be in big trouble.  I have an emergency fund and lots of savings but it would definitely put a hamper on my retirement contributions and discretionary spending.

I’m not in any rush to invest but I’m definitely looking at all my options when it comes to passive income.  I want a nice diversified portfolio of passive income producing assets so that if I wanted to leave my day job I could.  I like writing and working online but I’m not sure if it’s my passion yet.  While I search, I’m going to continue boosting my active income and sending the proceeds straight to my passive income investments.

Eventually it would be nice if my passive income equaled my active income but that day is probably very far away.  More realistically, I’d like my passive income streams to equal about half of my day job income.  That way I’d be free to pursue nearly any passion I want and probably still be able to just about come up with the difference.

A lot of people work the same boring job day in and day out because they need the money.  Well I’ll admit it, I need the money too.  But no one says you have to get it all from the same place.

Readers, what do you think about passive vs. active income?  Do you think passive income is a good goal or should you try and maximize your active income to succeed in life?

-MR. 4HWD

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I'm Mr. 4HWD, I started this site because I think everyone should be able to work at a job they enjoy and still have time to do all the fun stuff. I don't want to retire early, I want to work four hours a day on the things I love for the rest of my life.

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Comments

  1. says

    That is exactly my goal – to have my passive income streams equal about half of my “day job” income. Right now, if I were to lose my job, I could easily live in half my income, so that seems about right. However, that is several years off, and I am not patient :-(
    Retired by 40 recently posted…My 7 Worst Financial MistakesMy Profile

    • says

      Haha same here, I want it now. But it’s not the worst thing in the world to have to suck it up for a few years. It will only make you appreciate your goal even more once you achieve it.

      The reason I picked half is because I’d probably be able to just about get by on half my income too(since I save the other half) so any job that I took on top of my passive income streams would just be icing on the cake.

  2. says

    Excellent blog. Of course you have to Max out your active income; that is what pays the rent/mortgage and puts food on the table. But remember, by definition, you do not control how much your active income will be or even if you can count on its security – the employer does. That is why everyone seeks alternate income, be it passive or different and additional active income.

    The only way to obtain passive income is through sweat equity. It won’t come easy. Starting a business or investing in real estate are two of the more common methods. Everyone thinking about this should read “Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money – That the Poor and the Middle Class Do Not!” by Robert Kiyosaki and Sharon Lechter.

    Right now my passive income is half of my active income because of being in 2 of my own businesses and real estate. It wasn’t easy, and I sacrificed to do it, but now me and my family are all better off for it.

    Thank you for sharing.

    • says

      Hey Ira, you’re right you can’t control your employer income but you can control everything else. I think people get way too dependent on their day job income and don’t look for other opportunities until it’s too late. I’ll add Rich Dad, Poor Dad to my reading list, thanks.

      Personally, I’m doing both, with one small biz and one rental property. So far, so good. I’d love to hear more about your story since it sounds like you’re doing exactly what I want to do.

      • says

        Mr.4HWD, it does sound like we are on the same path. I would love to share with you, but it is too much to write hjere and I don’t want others to misconstrue our conversation as me being “spammy”.

        If you click the link by my name it will take you to the website of one of my businesses. Click on the contact button at the top right of the page, send me a note through the website with your phone number and name, and I will call you and we can chat.

        Continued success. You are on the right track.

  3. says

    I have to agree with you: starting a blog or website is a lot of work. I was first introduced to the idea of creating them and just sitting and watching the money roll in. Oftentimes, which no one told me, was that it would take months and sometimes years before that money would roll in. And you’re right, they take a huge investment of time upfront. If you’re working a job and writing a blog in the evenings, it can be very disappointing having to wait for the income but, in many cases a number of websites can be build, lead to passive income and updated infrequently.

    For me, writing online has not enabled me to leave my job. I’m glad it doesn’t because it’s too unpredictable. What it has given me is: extra spending money, money to pay off student loans, something to be proud of, better writing skills, and a small addition to my retirement. I like it.
    Scott @ Youthful Investor recently posted…Starting Your Own Micronation for Fun and ProfitMy Profile

    • says

      Yea I think there is only a very small percentage who will ever be ultra-successful. For the rest of us, it can definitely be a nice boost to our primary income but to do it full time is a lot of work and makes it more of a job than anything. I like writing/blogging right now because I only do it for a few hours a day. My ultimate goal is to combine my online work with other sources of income like real estate to let me work from home and work my own(limited) schedule.

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