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:
- You could create a Kindle book that earns you a solid $20 a month, every month for the next 100 years.
- 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:
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…
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!