Passive income is often portrayed as the holy grail of earning money online; make money while you sleep, sounds good right? But before you quit your job to embark on the passive income lifestyle, I thought I’d share a few realities you may want to be aware of.
To add some context for new readers, my business currently generates revenue in a few different ways. Primarily from providing consulting services but also from digital product sales, affiliate marketing, sponsorships and ad revenue. Some of these revenue streams require more effort than others. While I get some revenue without having to do anything afterwards (e.g. affiliate income), every revenue stream requires effort to create and maintain.
Don’t want to read this post? Listen to the podcast instead:
1. Passive income isn’t what you might think
Passive Income is often used as a marketing term to describe a means of making money without having to work for it and this definition has been taken to the extreme. I often see ads or videos online of young guys sitting in an exotic car boasting about the big sales they’ve made from drop-shipping all while doing very little work. Reply All published a very good story about how most drop-shippers don’t actually make that much money and the only ones really making any money are people making courses about drop-shipping.
According to Investopedia, passive income is:
…earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved.
The key phrase here is the “not actively involved” part. So if you’re working in some way to create or maintain your income, it’s not really passive (more on this below).
So my first word of warning is to not get sucked in by the allure of passive income and all the marketing hype that surrounds it.'Passive income' has become a marketing phrase to describe earning an income without having to do any work (which is a fallacy)Click To Tweet
2. It takes a long time for your passive income to kick in
I’ve talked to aspiring or new business owners whose goal is to create a passive income stream and live the good life. Now I have nothing wrong with this as the goal but I think people need to be realistic that generating sources of passive income can take a long time to get going.
When I started my business, I focussed on creating digital products and courses for exactly this reason. I later realised it takes a while to build the audience and get the subscribers and website traffic to make a business model like this work. This is why I started consulting. By consulting I could earn money quickly so I could justify quitting my job while I continued to grow sources of passive income.
Now, years later, I’m able to earn some passive income from YouTube ads, affiliate links and product sales but none of this would have been possible without the years of groundwork I put in creating content and building an audience.
Pat Flynn, one of the godfathers of passive income, uses the following tagline in his podcast intro:
“Work hard now so you can sit back and reap the benefits later”
In my experience, this is spot on! It takes a lot of hard work to get going and if you're lucky you’ll be able to reap the benefits later. This doesn't mean doing no work at all. It simply means you’ll realise the true benefits later.Work hard now and if you're lucky, you might be able to benefit from earning a less active income later onClick To Tweet
3. Passive income requires maintenance
This is a nice segue to my next point; passive income still requires maintenance.
I spent years making videos for YouTube and it was a lot of work upfront. Now I can enjoy the benefits of this work as the videos generate ad revenue each month. But if I stopped responding to comments and making new content, this source of income would eventually dry up as the content became outdated or as new content took over.
With digital product sales, I’m able to generate revenue each week from my automated sales funnels. But I still need to provide customer service and the products require updates in order to stay relevant and useful.
Even investments aren’t truly passive as they still require maintenance. I’ve been investing some of my company profits into Bitcoin but it still takes time to educate myself and stay up to date with what’s going on in the market.
Going back to what I said at the start, some sources of income require less effort than others but none of it is truly “passive”. All income requires work to maintain.There's no such thing as 'passive income'. All income requires effort to create and maintain.Click To Tweet
4. Don't rely on it
The final point I’ll make on passive income is that I wouldn’t rely on it as your only source of income. It’s always better to diversify.
In my business, I view affiliate revenue (which is pretty passive) as a bonus on top of my main income. For example, when I work with a client, I may be able to recommend a tool as part of my consulting services. And if I can receive a commission for recommending that tool, great! It’s the cherry on top of the sundae (but you still want to eat the sundae).
Depending on how you generate your passive income, you may be closely tied to the actions of external parties that can significantly impact your business. In the past, YouTube creators have been caught off guard when the company has suddenly decided to change its ad revenue rules and recommendation algorithms.
The consulting revenue I generate is much safer. I don't think there’s much risk of Asana or Pipedrive suddenly shutting up shop and leaving me with no work. If you want to learn more about how I create a lucrative consulting business, then check out my How to become a ‘Virtual Consultant' program.
In closing, I don't want this article to come off too pessimistic. I’m now enjoying the benefits of earning less active income (see what I did there) and if you can do this in your own business, I highly recommend it. My goal is to make sure aspiring or new business owners are realistic in regards to creating and maintaining an income online. If you have any questions, please leave me a comment below!