Last week for the Foundations of Financial Freedom, we defined what Financial Freedom is. We’ve also taken a look at other phrases you might have come across like Financial Independence and FIRE. So now that you are truly on your journey to Financial Freedom you’re likely going to fall into the baseline instinct. Baseline being that it’s not very good and instinct being “How can I get money passively?” I once went down the rabbit hole of passive income. And I still wonder about it a bit. But let’s kill your dream right now – passive income is a lie.
What is Passive Income
Passive income is about exactly what it sounds like. You get money for doing basically nothing. It’s an exchange of money for doing nothing. It’s a dream. And it’s more or less an unequal exchange, which is why it breaks down. You do not get anything for free. Ever.
You might say, “Well those cups of water at restaurants are free.”
First of all, no they’re not. The pipes that supply the water are paid for by those who live in the town or the state or another government entity. The plastic or paper you were given was not free, someone had to pay for it. The purification of the water was also paid for. And last but not least YOU had to SPEND your time to go to the restaurant to ask for free water. Time IS money (But that doesn’t mean you can spend less time for infinitely more money).
Why Passive Income is a Myth
All money comes from somewhere. Yes, it can be created out of thin air with a thought. To be made in a deal. But there’s the thing right there, you had to maneuver a deal.
Buying up houses and renting them out is the sexiest passive income strategy you often come across. And sure, lots of landlords don’t do much once they get the house set and going. But to get a house in working order? To find a renter? To make sure all of the little issues like inspections and maintenance are out of the way? The amount of money or sweat equity you would have to put into that is not very passive. And you might try to raise me a question about the granddaddy of them all – stocks.
Stocks are also not Passive
Sure. You basically buy this object and do nothing and it might grow or tank.
You might be super smart or super into it and look at all the indicators and have a good idea of what a single company does or like their dividend or whatever. Or you are indifferent and just eat up ETFs and index funds and don’t care about trying to beat the index.
And technically, once you have that money (that uh-you hopefully spent time on) then you may never have to do anything ever again and it just goes up ad infinitum. Save for another world war, major economic collapse, or a shifting of power away from the United States. Or alien invasion.
All possible. All possible in most of our lifetime?
Eh, I don’t think so.
But the point is, all of that money you took and threw at index funds are invested in companies, usually the top 500 companies, who are doing the work FOR you.
Sure, you technically don’t have to lift a finger anymore and that money may grow. But that growth don’t come free. It’s from the inevitable march of progress of humanity’s will. And that costs money and time and willpower.
Many somebodies were paid and did countless hours of work for your index fund to rise $0.03 cents before crashing again at the slightest decline. And you may never see these people working. You may never know. You might not even care because you don’t have to do anything.
But the “passive income” “you” are “generating” from owning stocks, is being built by the workers of the companies you gave your money to.
Why This is a Great Thing
It’s actually awesome that passive income is a lie.
Why?
Why would you say such a thing after a somewhat soviet rant on workers?
Well, because you have to DO something with your life until you die.
And most people don’t like dying.
And that’s where the freedom is.
You can just sit on a beach sippin’ mojitos and taking more drugs than Joe Rogan.
And while I might knock you for wasting your life on frivolous experiences, you had worked for enough money to find a way to finance your life to do that.
See, the freedom of passive income being a lie is that it will set you free of the shackles of trying to create it.
Yes, you can set up some kind of oil rig/farm/engine to spit out some chunk of change reliably for a long time. But it works because you did some work and then someone else is trading their work or dollars to give it to you.
Regardless, this allows you to focus on the intersection of what brings you the most joy with the most money you are happy with. Instead of creating a “passive income” stream, just create a life you are happy with living. Maybe you don’t mind working, you just feel trapped at your job. So you find a way to work less or work something else than work on that passion project you’ve been brewing for 6 or more years now.
Or maybe you just really want some time to catch up on movies you missed. Or you want your life to look like a scholar and you study and research and read books all day.
You have to stop focusing on escaping because life’s only escape is death.
Focus on making something good right now that lights you up enough to keep going because you are the machine.
In Conclusion
In case you made it through this whole thing and missed my point, or just scrolled to the end, it is this – passive income is a lie, so focus on building a life you enjoy. Maybe you enjoy writing books, making a YouTube channel, making niche websites, and renting out houses. And that’s fine. You just found out that what you enjoy spending your time doing is what people typically call “passive income”.
But you are a human. You must do something. Or you will be bored. So my suggestion is to disregard building a silly “passive income” engine and just focus on making a life where you do as many things you enjoy.
The only object you spend that you will never get back is time.
Spend it as jovially as you can.
Next week, let’s get back in gear and talk about stocks, then maybe next week we will discuss lifestyle design.
Godspeed,
Dennis
Cheers!