Last Updated on February 10, 2019 by James McAllister

By: James McAllister

13 Comments

Take a look at any big internet marketing website, and I’ll bet you’ll see something huge about ‘earning passive income.’

People are crazy over it. Everybody’s talking about it.

“Earn money while you sleep!”

“Work 4 hours a week!”

“Build it once, earn money from it forever!”

That’s great. Passive income is actually pretty wonderful. Passive income is the reason I’ve published over 150 Kindle books and continue to put out more every week. Having money come in while no longer doing any work truly is an amazing feeling.

However, it’s extremely easy to get lost in the idea of passive income and forget what’s really important – how much money you’re getting in total for the amount of time you’ve invested in something. 

A Hypothetical Scenario

Let’s say you’re a great writer, and you want to capitalize on your skill in a way that can make you money. For the sake of this example, let’s say you have two options:

  1. You could create a Kindle book that earns you a solid $20 a month, every month for the next 100 years.
  2. You could write the book for somebody else, who would then pay you $5000.

If you do the math, it would take you 250 months, or ~21 years to earn the $5000 from the Kindle book.

Now you may be thinking that the Kindle book would be the better choice in the long-term, because you begin making more than $5000 after 21 years. After 100 years, the book would have earned $24,000, a lot more than what you would have been paid by the freelancer.

If you just spent the money when you got it, the Kindle book actually would be the better choice over the long run. The total return from the $20 a month adds up to more than what you’d earn from the freelancer.

However, there is one huge flaw in this line of thinking:

Opportunity cost.

How Are You Using That Money?

The problem with looking only at the face numbers is that it completely ignores the opportunity cost of having that lump sum right away. Again, I will demonstrate my point with an example.

Let’s say you took that $5,000 and invested it into the stock market, which then goes on to earn an average of 10% a year before accounting for inflation. After 21 years (which it would have taken to earn $5000 from the Kindle book) your $5000 would have grown into $37,001.25. This is enough to generate $100 a month in passive dividend payments alone.

After 100 years, which was how long our Kindle book would last in our example, the book would have earned a total of $24,000, and $5000 in the market would have grown into…

$68,903,061.70

Yes, that’s the power of compound interest. That’s why you need to take my financial independence course, so you can learn how to put your money to work for you and retire as soon as possible.

Don’t Forget About This!

Anyhow, another thing you’ve got to factor in when it comes to long-term passive income is inflation.

Over time, the purchasing power of that $20 a month will fall. $20 will not be able to buy as many products or services as it does today.

This means that although you are earning the same amount of money per month, every month your money becomes worth less and less, meaning the total purchasing power of your income is constantly decreasing.

In the short-term this isn’t really an issue, but when it comes to comparing passive income and your total return, many people argue that passive income adds up to a lot of money in the long-term. This is when the effects of inflation really start to show.

Here’s What I’m Getting At

Passive income isn’t a bad thing. It deserves the praise it gets from virtually everyone, and making a good amount of passive income should be a goal of everybody, whether it’s from a product like a Kindle book or from a dividend paying stock.

However, it’s important to be rational and look at the big picture before you choose to dedicate your time towards a specific income goal.

Passive income can sound wonderful, but it’s not always the best choice. Sometimes, it’s better to take the lump sum, even if it means you are trading hours for dollars.

Because in the end, the smart entrepreneur does whatever they can to earn the most amount of money possible for their time.

I’d love to hear your thoughts on this matter!

About the author 

James McAllister

James is the owner of JamesMcAllisterOnline.com. He started his first blog at the age of 11, and has since gone on to start several successful businesses. In total, these businesses have sold hundreds of thousands of units and have touched millions of lives. Here on JamesMcAllisterOnline.com, he shares his knowledge that brought him to where he is today. If you want to connect with James, follow him on your favorite social networks!

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  1. Cool post James!

    And you make some great points. Passive income is fine but as you say people must factor in opportunity cost to determine if it’s a viable strategy for them.

    One of the things I’ve been doing for many years is t market big ticket products. When considering all the options when deciding to go down this pathway I looked at passive income style business opportunities (mlm etc). I rejected all of them for two reasons:

    1. I wasn’t fussed about the way they do business (talking to friends and family etc)
    2. The lure of passive income wasn’t compelling

    My reasoning re the last point was this: If I worked hard for say 5 years I MAY have a six figure passive style income at the end of 5 years. On the other hand if I promoted big ticket products I might be able to reach the 6 figure income level in my very first year.

    My further reasoning was that if I took this big ticket/big commisson approach the income wouldn’t be passive, but by receiving the money NOW, rather than waiting 5 years, I could invest the surplus and create passive income anyway.

    So I choose the later option, and very glad i did

    People need to carefully evaluate the passive income proposition. Sometimes it makes a lot of sense but many of the so called passive income options out there are not viable.

    Heard of this saying?: ‘a bird in the hand is worth 2 in the bush’.

    Sometimes it’s better to take the money now and reach your goals faster

    Thanks again James

    Kim

      (Quote)
    Kim Willis recently posted…(Interview) Kim Willis and How He Generated $9k First Month Online as a NewbieMy Profile

    1. Hi Kim!

      I think we all love passive income but I think some people hold it in too high of a regard. It is not the be-all and end-all of making money online, especially since as we know we can create passive income anyway using the excess money we don’t need right now. Stock dividends and bond interest is about as passive as it gets.

      Marketing big ticket products sounds very interesting and it’s something I have no experience in whatsoever. I’ve never published anything about it, but I know it could be a great option for some members of my audience. If you have some time I’d love to publish an interview with you here on Help Start My Site. I know the information and experience you have in this area would be of great value to many people.

      If not, that’s OK too. I’ll be sending you a message on Skype here pretty soon.

      Thanks Kim for your valuable comment!

        (Quote)
      James McAllister recently posted…Aweber vs GetResponse: A Detailed Analysis And ReviewMy Profile

  2. Good point James!

    Note; when you wrote how you had over 100 eBooks on Amazon I ran with it 😉 Now I’ve written over 100 and have 70 more products between audio and paperbacks. I say, do what you love doing. Establish passive income and if someone comes along with a different project that combines your passion and a profit, hop on it. See more income streams than a few 😉

    Thanks for your inspiration!

    Ryan

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    Ryan Biddulph recently posted…BFP 21: Have You Ever Read a Blog Post in a Book?My Profile

    1. Hey Ryan!

      Man, I still can’t believe how quickly you are putting out new eBooks. I’ve been reading quite a few of them through Kindle Unlimited and I can’t believe how you’re able to put out so much content while still providing new value and now just regurgitating the same old stuff in a different way.

      By the way, how is the audio working for you? I haven’t put any of my books in audio form yet, but if it’s worth the time I’ll start doing it ASAP.

        (Quote)
      James McAllister recently posted…Going From Blog To Online Media Empire – The Ultimate GuideMy Profile

  3. Good points James,
    I’ve never taken the time to see this passive income of a thing like this. Its really a very good idea to have something you created to constantly make you money without you lifting a finger and thats the dream of most of us but looking at the big picture, you will see that it all depends.

    Like you mentioned, it will always be good to weigh the opportunity cost and then determine which route to go at the end.

    Thanks for sharing.

      (Quote)
    Theodore Nwangene recently posted…GuestCrew Traffic Stats and Update – September 2015My Profile

    1. Hey Theodore, sorry for the slow response. Not sure how I missed your initial comment.

      Don’t get me wrong, passive income is great and my passive income channels are some of my most satisfying revenue streams. But sometimes the time we take to develop those passive income sources could be put to better use that would make more money overall.

      Sometimes one option is better than the other, it’s just important we take the time to do our due dilligence and really figure it out for certain.

      Thanks for stopping by!

        (Quote)
      James McAllister recently posted…Taking A Break From Blogging? Don’t Feel Bad!My Profile

  4. Hi James,

    The way I sI see it, passive income places you on a frame of mind to settle down and have a workable strategy.

    For most, when you are constantly under pressure to pay bills, you just want to make as much money to be able to meet your commitment, having a strategy at a time like may be a leisure you can not afford, but when you get to a point where your liabilities are far lower than your assets, then you can focus re-assess things.

    Bottomline is, build passive income for sustainability and also go for the lump sum whenever possible for investments.

    Great post James

    Cheers

    Dan

      (Quote)
    Dan Ewah recently posted…The Intersection Of Content Marketing And SEOMy Profile

    1. Hey Dan! Sorry for the slow response, not sure how I missed your comment initially.

      You make a good point when it comes to covering expenses. Once your income is greater than your expenses, you have a lot of freedom to focus your time in different areas because you are no longer under pressure or obligated to make money. Obviously if you are strapped for cash and need to pay bills this month, you’re going to have to do what makes you money immediately, even if it’s not always the best option.

      Personally I throw every spare dollar I have into investments which create more passive income, and reinvest that income into creating any more. It’s nice to see the snowball growing every quarter!

      It’s great to hear from you Dan, hope to talk to you again soon!

        (Quote)
      James McAllister recently posted…5 Incredible Books Every Blogger Needs To ReadMy Profile

  5. Hey James,

    I also have some brief Kindle marketing experience. My very first kindle ebook did quite well. It was very short and I wrote it in 3 or 4 hours. It made me around $400 but then due to some EIN issue my KDP account got frozen(I am from Pakistan and I had to apply for EIN). I did not do any promotion for it except that of a few FB group posts and KDP select. Had my account not got frozen, it would have brought more money.

    My point here is that, passive income is really awesome and nobody would say no to it.

    Regards,
    Nabeel

      (Quote)

    1. Hi Nabeel! Sorry for the slow response, I’m not sure how I initially missed your comment but I do apologize for that.

      That is awesome that your first book was such a success. I have a lot of experience working with Kindle publishers and let me tell you, that is rare so you clearly did something right. Sorry to hear that your account was frozen, that must have been really frustrating.

      In any case I do appreciate you stopping by here and leaving a comment. I hope to hear from you again soon!

        (Quote)
      James McAllister recently posted…10 Characteristics Of Highly Successful BloggersMy Profile

  6. I get what you’re saying, but for the example of self-publishing, something you didn’t mention is that it’s really quite difficult to find a publisher! You have to spent countless hours, weeks, months, years going through that whole process. Hitting “publish” today and getting something out into the world to earn some money is a big thing.

      (Quote)
    Freedom Through Passive Income recently posted…I think I’m just going to become a farmer when I move to CanadaMy Profile

    1. Hi Jackie!

      Not quite sure what you mean – it’s easier than ever to self-publish. Amazon and their CreateSpace branch makes self-publishing dead simple.

      Of course, if you’re going the traditional route, than finding a publisher is still as difficult as it ever has been, but then you’re not really ‘self-publishing’ are you? 😉

      Good to meet you by the way!

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      James McAllister recently posted…Aweber vs GetResponse: A Detailed Analysis And ReviewMy Profile

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