The Budgette #6: Passive income? Get ready to work hard

Like, really, really hard because passive income isn't passive. Sorry.

Places are closed, people were laid off or put on reduced hours due to the COVID-19 pandemic. It’s no wonder why people started looking at other ways to make money.

I asked if I should cover passive income or tax prep. Passive income won. I thought I had my next topic: I’d create a list of how to generate passive income, hit send and done. Who doesn’t like the idea of money rolling in with little to no effort?

The idea is hot right now based on a quick and dirty search in Google trends. You can see the jump in search from the end of May 2020.

Then something started bugging me. What is passive income? Is our idea (us, the non-financial people) different from how financial people define the term? Do we have a realistic view of passive income?

If you look at articles touting passive income ideas, you’ll see things like ‘start a blog’, ‘invest in real estate’, ‘sign up for Uber’ or ‘create a course’. Done well, these could generate income but have you noticed how much work it takes to get that sweet, sweet so-called passive income?

“I think the misconception about passive income is that people have their freedom and just sort of earn money,” says Darryl Brown, a certified financial advisor with You & Yours Financial. Passive income, according to Brown, means that “you don't have to continuously trade time to generate that money.”

Passive income is a goal, but we need to be realistic about the time and effort it takes to get there.

It’s never been easier to start a business

Brown says that the commitments, both in terms of time and money are at the lowest they've ever been for starting up a business. Costs are low to set up a website, promote your product and to start selling.

So if you have an idea, now’s the time to implement it. Just know what you’re getting into.

You’re paying in time

Once you’ve started your business, you’re going to realize something: you’re putting way more time into it than you expected. This is common, says Brown. “The part that gets underplayed is that it can take years of putting time and money into your business, which is the opposite of passive. Everyone likes saying, ‘look at me, I’ve got passive income’ but what about the many untold hours, weeks, months, years of putting into the investment to get that?”

If you’re already working on your passive income strategy, how many hours are you putting in per week? I put in about 10 hours on this newsletter and no, it doesn’t generate liveable income.

First-year home runs are unlikely

Thousands of small businesses fail in their first year. Brown says it’s unlikely you’d hit a home run in your first year. “It can take years of putting time and money in before you see income, which again, is the opposite of passive.”

Tried and true aren’t always guarantees

Maybe you’re thinking about investing in real estate. Rents are still high in the cities and maybe the market will revive after the pandemic. But one of the first rules of investing is that the previous history is not a guarantee of future performance, even with real estate. Investors who bought condos and listed them on Airbnb have started selling them because their investment is no longer a sure thing, and now they’re overleveraged. Thanks, pandemic.

Then there’s the passivity factor. If you’ve ever been a landlord, you know it’s a lot of work. Maybe you’ll hire a management company to do all the day-to-day. That’s certainly passive but even that makes Brown hesitate. “If you decide on a real estate management company, then the returns ended up being basically the same as a GIC. The story doesn't really get told out there about the time, upkeep and tax efficiency that factor into the real estate bucket.”

He speaks from experience. He used to own investment properties and one of the big reasons he sold those properties was because “it took a lot of effing time.”

It’s time to rebrand

Passive income needs to be rebranded. It’s not ‘passive’ by any means, not if you’re working at it. Maybe it should be called, as Darryl suggested, a ‘secondary asset income’ or an ‘alternate revenue stream.’

“The idea of passive income fits into this bullshit narrative from the entire financial services universe that all you need is to hire an investment dude to get you the highest returns,” says Brown. “The truth is that you’re going to be broke for the first five years. You'll be lucky if you make it the first three, it's going to be nauseating how volatile your income stream is going to be and how little it’s going to be for those first three years.”

(Ugh, flashbacks.)

Am I saying there’s no such thing as passive income? No, there is, if you have enough wealth to invest and live off dividends but for most of us, passive income takes time to get to a place where we can kick back, check out our investment app and chill. So take the time to develop that alternate revenue stream but know that it’ll take time.

This week’s readings

Are singles Canada’s forgotten poor? This one is a couple of months old but relevant. Canada’s social policies have focused on parents with kids and seniors. Yet singles or sole dwellers are the most common household type and make up half of Canadians living in deep poverty. Policy Options looks at how they’re being missed and what could be done about it. (Policy Options)

This guy knocked on doors in Toronto and asked people how they can afford their homes. It’s hilarious, sad and aggravating. (Blog TO)

In Canada, women’s participation in the labour force is down to its lowest level in thirty years due to the pandemic. IntelliHR looks at how you can help. (IntelliHR)

More and more people are shopping secondhand or the circular economy. *looks at wardrobe* (The Guardian)

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Disclaimer: I’m not a financial advisor so please consult one as needed.