What is passive income?
It’s NOT a get-rich-quick scheme.
It’s NOT a shady way to trick people into giving you money online.
And it’s NOT “easy” money.
According to passive income master Pat Flynn, you earn passive income when you take advantage of systems of automation that allow transactions, cash flow, and growth to happen without requiring a real-time presence.
In other words, you don’t trade time for money.
Some types of income are more passive than others.
For instance, e-books seem to be an excellent source of passive income.
But in my experience, they are more active than passive income earners.
E-books earn passive income by nature because in most instances you aren’t directly working for your sales.
Instead, you do a one-time promotional push, and then (theoretically) sales happen automatically.
However, experts say you should expect your sales to drop 10%-20% each month.
Matt and I have certainly experienced a drop in sales since publishing our e-books.
This is why “passive” income from e-books can be short-lived.
A better passive income earner is property rental, where you use a property management company to handle rental payments, marketing to obtain a tenant, rent collection, and property repair.
Apart from the research and purchase as well as minor administrative duties for the property, you receive a monthly check from your property management company like clockwork.
Of course, you may have to deal with issues like vacancy, significant expenses, and declining real estate value that can turn this passive income dream into a financial nightmare.
But if you do your homework, renting property can transform your life like it did for Brandon Turner, who makes $4,600+ per month in passive income on rental properties.
The holy grail of passive income is when your investment savings meet or exceed 25X your annual living expenses.
For the sake of clarity, I’ll refer to this state as “true financial independence” in this blog post.
When you reach true financial independence, you can withdraw 4% of your savings annually for eternity and never touch the principal.
In other words, you never have think about money again, because your investment returns will cover annual expenses for the rest of time.
The basic math behind this is that, on average, the stock market returns ~7% annually.
If you reduce that by 2% to account for inflation and another 1% to be cautious, you arrive at a 4% withdrawal rate that will never touch the principal.
Check out this post if you want to learn the nitty-gritty of why the math works.
The important thing is that stock market research supports this.
The math does work.
That said, very few people have reached financial independence according to the definition above.
I know I sure haven’t.
But I’m working towards that goal and I think you should be too.
As Warren Buffett says, “If you don’t find a way to make money in your sleep [aka. earn passive income], you will work until you die.”
Even if you’re OK with the idea of working till you die, most people won’t have the physical ability or opportunity to do that.
This is where passive income becomes critical!
If you lack the physical ability or opportunity to work and you don’t have passive income streams set up, someone else must take care of you or you die.
I’m sure no one wants to be a burden on their relatives.
So how do you avoid it?
You must earn passive income.
Here are 5 reasons why I think you should pursue passive income right now and not defer your focus on it till later (or never).
1. Passive income is the only income that gives you financial independence.
Most people don’t understand that true financial independence is necessary for retirement.
They simply work their day job and try not to think much about future finances.
How do I know this?
33% of Americans have no retirement savings whatsoever and over 50% have less than $10,000 saved for retirement. (source)
Why is this?
Research shows we have a hard time saving money because we tend to think of our future selves as strangers.
Imagine giving away a portion of every paycheck to stranger.
It would be difficult, wouldn’t it?
Some people do recognize the importance of retirement and actively save.
But they don’t try to set up passive income streams before they reach true financial independence. Instead, they work on active income for their entire lives to enjoy passive income in their last couple of decades of life.
While this is definitely better than not saving, it’s not as good a strategy as pursuing passive income right now.
Once you start earning passive income, you can act with financial independence immediately, as opposed to laboring through decades of saving and investing.
You see, many view the American dream of retiring as a path of deferred enjoyment.
You push yourself through the week, live for the weekend, and at the end of your life when you achieve true financial independence, you can finally do whatever you want.
But any path of deferred enjoyment is a fool’s errand.
Living for the weekends and for retirement is no way to live life.
Instead, you can start earning passive income now and live the “retired” life immediately, where you choose what you want to do, when you want to do it.
Just look at Pat Flynn, the founder of smartpassiveincome.com.
At his current income level of six figures a month, I imagine he has achieved true financial independence and could theoretically stop working.
But he’s earning passive income doing what he loves, so why would he stop?
He’s also been earning passive income for years, even before he achieved true financial independence.
All this time, he’s been acting with nearly all of the freedoms of the truly financially independent.
He works wherever he wants, whenever he wants.
A retirement purist could legitimately say that he doesn’t have the luxury of the truly financially independent until his investment savings = 25X annual expenses.
Although true, the goal of retirement isn’t idleness.
The reality is that retirement idleness only sounds idyllic when you don’t like your job.
Peter Adeney has discovered that 95%+ of the truly financially independent among his community end up making money in retirement, not out of necessity but for fun.
This is a great example of how people don’t want to be totally idle now or in retirement.
Instead, what we want is fulfillment from our work without concern for our basic needs.
You don’t need to wait till your savings and investments = 25X your expenses.
You can achieve the lifestyle of financial independence the day you start earning passive income.
When you start earning passive income, you can choose how to spend your time, you (hopefully) are doing fulfilling work, and you have the unparalleled freedom of the financially independent to do what you want, when you want to do it.
2. Passive income allows for extended periods of work and rest.
Because passive income separates earning from time, passive income earners can typically work whenever and wherever they want.
Michelle Schroeder-Gardner, blogger at makingsenseofcents.com certainly has this freedom.
Some months she works a hundred hours a week, and others she hardly works at all.
How is this possible?
When you produce content for the web, all of it can (and should) be scheduled.
So you could write all your blog posts on Saturday, schedule them to publish on your blog throughout the week, and schedule their social media promotion too.
Likewise, your website visitors can visit your site any time of day or night from anywhere in the world and make a purchase.
Michelle also does all her work from an RV while traveling the US with her husband.
So she is living proof that passive income can be made at any time and from anywhere in the world.
When you separate income from time, you can properly unplug from technology and spend months or longer at arms length from the daily business minutia that can bog anyone down.
And while it might seem like business suicide, these times of leisure away from the day-to-day business can be a wellspring of creative ideas and can boost the already proven effects taking short breaks have on creativity.
Lastly, this quality of passive income really comes in handy if you ever face extended health issues.
For instance, Tim Ferriss suffered from debilitating Lyme disease for nearly a year while doing almost no work.
If he weren’t earning passive income, who knows what would have happened to him.
The burden would likely have been on his family to take him in while he suffered through this time.
Though extended health issues might seem far from likely for you, you never know when something could happen.
Wouldn’t it be nice to have passive income as an insurance policy?
3. Passive income gives you options.
If you’re earning passive income and can work whenever you want, wherever you want, you suddenly have a multitude of options before you.
You could move to a different state or country like Victor Pride who lived in Asia for years while blogging at Bold and Determined.
You could exercise and be outside during the day and work on business at night like the YouTubers at Six Pack Shortcuts.
You could work like a dog on the weekends and take it easy all week like Michelle Schroeder-Gardner sometimes does.
In other words, when you’re earning passive income the world is ripe with opportunity for you to live life as you please.
4. Passive income enables you to prioritize relationships above all else.
Most importantly, the flexibility of choosing when you work will enable you to prioritize relationships above all else.
Is anything more important than the ability to prioritize relationships?
Pat Flynn started living off of passive income just before he had his first child.
He talks about how passive income enabled him to put his family first and to spend lots of time with them.
Even as his business has grown, he has maintained focus on relationships.
He can do this because web businesses scale so effectively.
Tim Ferriss was able to take his family to Europe on an extended vacation where he worked on his book, Tools of Titans.
Without passive income, he would not have had this luxury.
If relationships are the most important thing in life, then there’s every reason to start pursuing passive income today to fast-track your ability to focus on what matters most.
5. Passive income allows for more fun than active income.
Passive income definitely allows for more fun than active income.
Thanks to all the reasons above.
Independence, extended periods of rest, and the freedom to do what you want, when you want are all components of having a rich, fun life.
No more commuting to work, dealing with restrictions on how, when, or where you work, getting annoyed when busy seasons limit vacation time, or struggling with terrible bosses.
Earning passive income is how you have a fun and happy life.
I’ll finish this article with one more reason to focus on earning passive income immediately.
I was chatting with a friend recently who told me about his boss who had recently retired.
His boss had achieved true financial independence – his investment savings exceeded 25X his annual expenses.
This friend told me that, after a few months of retirement, his boss started coming into the office again.
He was open about the fact that it wasn’t his dream job.
But he said that in retirement, he had no idea what to do.
So he figured he’d rather be doing something he didn’t love than doing nothing at all.
I know of another older woman who has achieved true financial independence, but she wakes up every morning wondering why she’s alive because she feels like she adds nothing to the world. These stories are so sad because I’m confident each of these people has much to offer the world.
Unfortunately, they probably don’t realize that adding value in the 21st century idea economy is totally possible for them.
If nothing else, pursue passive income to figure out what you want to do for the rest of your life, especially when you lack the physical capacity or opportunity to earn active income.
If you don’t know where to start, begin with a blog.
If you use my link* for Bluehost web hosting, you can start blogging today for just $3.95 a month, that’s 50% off the standard price!