Passive Income

The Inconvenient Truth

For the uninitiated, passive income is “income received on a regular basis, with little effort required to maintain it.” 1

Some examples: 2

  • You write a bestselling book and put it up on Amazon. It sells a few dozen copies per day, making you money consistently without any additional work.
  • You create a website that sells t-shirts. The website generates $200 per day in revenue, and expenses are only $50 per day, including the cost of hiring some dude in the Philippines to update the site regularly so you barely have to do anything.
  • You create a piece of software that solves a painful problem. Two-hundred people pay you $20/month for the use of this software, and there’s very little maintenance required so you can go surfing every day and still collect $4k per month.

Sounds dreamy, right?

But wait…

I’m not here to give you seven steps to passive income or anything like that.

Because honestly, I’ve been self-employed and working online for 8+ years now, and I still haven’t cracked it myself.

What I have done these past several years is waste a ton of time chasing the passive income dream.

And so I want to offer you some simple advice:

Passive Income

That’s right.

Forget about passive income.

I’m not saying it’s a myth, and I’m not saying it’s impossible.

What I am saying is this:

  • Focusing on passive income when you’re just starting out trying to make a living online can be very distracting, and very costly.

In my experience (and the experience of many other web workers I’ve talked to about this), you’re far better off focusing on “active” income when you’re just getting started.

That means becoming a freelancer and trading your time for money.

“Most of us don’t need to focus on passive income, we need to focus on improving our active income.” – Ramit Sethi

Why Are You Better Off Doing This?

First and foremost, you’re simply much more likely to earn a reliable income as a freelancer. You know that if you put in five hours working on a freelance project, you’ll be compensated appropriately for those hours.

With passive income there’s a lot less certainty.

You could spend days, weeks or even months building some amazing product or automated system that you believe will generate passive income (as I’ve tried to do several times in the past), only to end up very disappointed (as I’ve ended up several times in the past).

To better illustrate this, let’s revisit those passive income examples listed up top.

The Bestselling Book

How long will that take you to write?

3-4 months, if you’re lucky?

Even if you do put in the consistent, hard graft required to produce a book you’re proud of, what guarantee do you have that it will become a bestseller?

And say you do hit one out of the park and the stars align and your book does become a bestseller, who’s to say you won’t end up like this dude, whose book was the number six bestselling title in America for a while – no small feat! – yet he ended up making only $12,000 for his efforts, pre-tax.

A nice bit of money, but hardly a fortune.

The T-Shirt Website

Some questions for you here:

How much time, money, and effort do you think would be required to build such a website?

And let’s say you went to the trouble of building it. How then would your t-shirt website stand out from the six quadzillion other t-shirt websites online?

And let’s say your hypothetical website did manage to become exceptionally popular and start generating a good chunk of sales. How much time, money, and effort do you think would be required to keep it that way?

Do you really think a few virtual assistants from the Philippines would be all it would take to keep everything running smooth while you’re off playing golf and sipping margaritas?

The Software Business

Several problems here, too.

First and foremost, it’s not that easy to find a painful problem that software can easily solve. Much of the low-hanging fruit has already been picked.

Second, just because a problem is painful doesn’t mean lots of people will happily pay you for a solution.

Third, building quality software isn’t exactly a cake walk. Doing all the coding yourself requires significant time and effort. Hiring someone to do it for you requires a sizeable monetary investment.

And fourth, there’s the whole marketing challenge again. Just because you build it, doesn’t mean they’ll come. Figuring out how to reach and win over prospective customers is a massive challenge in itself.

See What I’m Getting At?

In short: the road to passive income is mighty tough, and mighty uncertain.

That’s not to say that you should never take a risk and invest a bunch of time and energy into a project with little or no guarantee of reward, but it’s foolish to pin ALL your hopes on something like that.

  • It’s much smarter to build up a reliable freelancing business first, and have that to fall back on if your later attempts at generating passive income fall short.

Another reason I recommend focusing on active income first is because the experience of working directly with real clients on real projects is invaluable.

You learn a lot about your chosen industry and begin to see which problems are most painful and prevalent. You also learn how to market your services, make pitches, close deals and manage projects.

Grow your freelancing business steadily and you can begin to outsource some of the work and transform into an agency.

Once you get to that point, you’ll be better able to identify solid opportunities for generating passive income, and you’ll be better equipped to capitalize on those opportunities.

All that said, it’s good to always have your eyes open for passive income opportunities, even if you’re just starting out.

  • Just please please PLEASE be skeptical and do your due diligence before investing a ton of time and energy into the chase.

A Lot Of People Online Will Tell You That Passive Income Is Easy To Achieve…

…but out of the literally hundreds of web workers I’ve personally met or corresponded with over the years, I’d say less than 1% of them are truly making a good living from passive income.

Maybe you’re exceptional and you can generate passive income right out of the gate, but your best bet is to assume that you’re going to have to knuckle down and grind it out as a freelancer in the early days.

And hey, that’s not so bad!

You may go through some struggles, but in the long run freelancing beats the hell out of traditional, nine-to-five, working-for-someone-else employment.

As a freelancer, the opportunities to grow and learn and earn are endless, and you’ll have the flexibility to live wherever you want and set your own hours.

Gone will be the days of pretending to be busy until 5pm just in case the boss walks by, or having to ask permission to take the afternoon off, or having to get dressed up and trek several miles each day for the privilege of having someone else tell you what to do.

“How in the hell could a man enjoy being awakened at 8:30 a.m. by an alarm clock, leap out of bed, dress, force-feed, shit, piss, brush teeth and hair, and fight traffic to get to a place where essentially you made lots of money for somebody else and were asked to be grateful for the opportunity to do so?” – Charles Bukowski

In whatever niche you choose to serve as a freelancer, with even a mediocre amount of hustle, you should be able to work your way up to a rate of $25 an hour within six months or so.

Work four hours a day, Monday-to-Friday at that rate, and you’re grossing more than $2,000 a month. That will buy you a nice lifestyle in many a tropical country, and give you plenty of free time to actually enjoy it.

Are You Ready To Get Real?

Let’s stop chasing unicorns and start building a real, value-adding business. No, it’s not glamorous, and it’s not easy, but it’s the most reliable way to get real-world results.

If you’re ready to get started, check out our Start Earning Online video series, a free crash course that shows you what it really takes to build an online business.

(No opt-in required.)

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About The Author

20 Comments

  1. Hi Niall, What you say makes sense. I earn a good passive income from my membership site, but it has taken me four years to build it up and still has further to go. So it can be done, but as you say, takes a lot of time and effort to achieve.

  2. Hey Niall,

    I don’t totally agree, but I don’t disagree either. Depending on your field, some forms of passive income can be more beneficial, particularly in the design fields. When you have passive income assets, like photos, 3d models, web templates etc. They will allow you to gain more than just the money from sales of these items, but they are also an excellent stepping stone towards freelance work and customization work for the buyers of these items. Just mentioning this is a good way to get passive income working to create you active income as well.

  3. Niall, Well stated and honest. Everything is stepping stones in life. Some larger than others. It’s good that you are being pragmatic with the buyers of your book so that they don’t think after reading it they can flip a switch and instantly be making a living just out the gate. I look forward to reading your book when it comes out.
    Best, Dan

  4. Niall you’re a champ. Cutting out the BS is the best possible way to be. It’s really frustrating watching a video where the person takes 10 minutes to explain something that could be told in 2 mins. If they just didn’t get side tracked! I hate people that beat around the bush. I’ll be buying your guide absolutely. Cheers mate:)

  5. But Niall, you did have passive income at a point, but you gave it up, remember? You never shared what it was exactly, but it was bringing you in a decent amount of money for very little effort. Something to do with travel blogs (I guess selling links or similar).

    1. Yup, I did have it at one point, but gave it up for a few reasons. Such as:

      – I didn’t like how the money was “earned”. That is, I didn’t feel the business was providing any real value in the world.
      – I wasn’t learning any good business lessons from it.
      – The easy money was making me lazy, and I didn’t expect it to last forever.

  6. I guess what we’re saying is that “passive” income isn’t really passive at all. It’s just a redistribution of your effort, i.e. you do all the work up front and get paid afterwards. And getting paid at all assumes that you are one of the few that get ANY traction / income.

  7. Thanks for this Niall.

    It’s great to see an honest account on earning passive income compared to a lot of the other BS out there. After leaving my job I’ve been recently running some ‘experiments’ on building systems to generate some passive income before moving onto my freelance work, but maybe I am in fact doing it the wrong way round after watching your video!

  8. Wow, this video and all your blog sound so honest, empathic and close to the real life. Thanks a lot.
    I agree with your thoughts on freelancing. Never tried it myself but it sounds logical.

    Could you share 1 or 2 examples what skills you could learn in 6 months to do online jobs for 30 $ an hour? If that is really true, it’s amazing why so many people study in all these colleges and universities for years.

    Actually, I am one of these students, electric and informational engineering.
    My dream would be not being in an office for the rest of my life every day , but your model, 3 hours a day in front of my laptop, 1800 $ a month and travelling the world.
    To be honest, I know a lot of theory about so many technical and mathematical things, but for the moment I have no clear idea what I really could offer a client that is worth any money. What is my problem? What additional skills should I learn ? How is it possible to start?

    best wishes, Cheers

    Andy

    1. Hi Andy, sorry for the late reply.

      “Could you share 1 or 2 examples what skills you could learn in 6 months to do online jobs for 30 $ an hour?”

      The easiest is probably freelance writing. You’d have to hustle, but assuming you’ve got your shit together and are fairly business minded already, $30/hour within six months is doable.

      I think it can be done with something like Google Adwords consulting as well, or even web design. To do it within six months though I think you need to pick something you already have an aptitude for. Some people won’t make $30/hour writing if they devote six years to it, let alone six months.

      “How is it possible to start?”

      I’m building out a course right now to show people how to go from earning nothing online to earning $1000/month within three months. Stay tuned to my email list and I’ll let you know when it launches: http://3m1k.com/

  9. Hey Niall,
    I just recently stumbled upon this page and I remember your recent thoughts that “If I not comment then nothing bad will happen”.
    But you thoughts provoke additional questions and I would be very glad if you expand them with additional answers.

    Do you mostly mean that people mostly fail in their attempts and illusions – or that initially-planned-to-be passive income actually turns out to be active and thus the very phrase “passive income” is
    really just marketing? (for example: while Pat Flynn called his activity “Smart Passive Income” most ways that he presents on his site (except affiliate marketing) are actually not passive (email marketing, blogging, podcasts, online courses))

    As I remember of 2013, you focused on building software not only because you saw a perspective but also because of good references of the program you undertook. After your attempts in this field did not result in a strong business do you mean the references that drove you to the program were false? And speaking more broadly – that all that references you can see at all these websites about building your course, movement, you name it are false? Or do you mean that all these educational programs miss some crucial components because they don’t know what ACTUALLY do people who succeed with passive income do differently in comparison with those who take action but fail?

    I also am surprised to see a quote of Ramit Sethi here. I can only guess what he was delivering that days but now his recurring marketing message is “I figured out how to build THE SYSTEM that brings me money on weekends etc. when I do not actually work and with my experience I will teach you how to create your version of that”.

    If the same thoughts were written by some random dude, I would not react this way and most probably would just pass away. But as I followed you while your software activity took place (and even had an interview with you about it before you come to Peru if you remember) I just could not be indifferent to it.

    Don’t get cold in our winter Moscow 🙂

    1. Hey Pavel,

      Sorry I missed this comment earlier.

      To clarify:

      – Yes, I do think anyone teaching how to generate passive income makes it sound easier than it is. Passive income takes a long time to get rolling unless you’re exceptionally talented or exceptionally lucky.

      – I don’t think such marketing equates to lying, however. I have no regrets about the courses I signed up for (like The Foundation) or the books I read (like The 4-Hour Workweek) that make passive income sound easier than it is. I learned a lot from them and think they are about as good as information products get. If they had emphasized up front how much work was involved, I probably never would have gotten started. They emphasized the potential instead, and I think that’s fair game. It’s kind of like dating. You highlight your best traits and downplay your worst. Then it’s up to the other person across the table to decide if you’re worth getting to know better.

      – That’s not the same message I hear from Ramit Sethi. I think he does a better job than most at communicating how much hard work is involved and he seems to work quite hard himself.

      1. Thanks for commenting, Niall,

        OK, I got the analogy that all that sellers are like dating partners. But to me that kind of comparison seems rather unequal: normal dating is a rather equal activity from both sides while here you have one side paying money and other side delivering paid product that sounds more like prostitution than dating. And if a “seller of love” hides a substantial part (knowing which from the beginning one would not engage) is like e.g. paying for sex with a person who most time would sit dressed up (and finally get engaged for one to be technically satisfied) rather than normal dating.

        And again, the interest of sellers is understood, but what about references? Those guys don’t have real interest in cheating or any bonus for presenting things easier than they are. Then why do they reinforce initial status quo with their references? It again were references that made you so driven about that course rather than the course itself, didn’t they?

        1. Every analogy breaks down at some point, so please don’t take it too literally.

          My main point was that every seller will highlight the benefits of their product and downplay the shortcomings. If the product has a fatal flaw, they shouldn’t be selling it in the first place. That’s unethical. Or if the product is right for some people and not others, the seller should be making that clear up front. Ramit Sethi, for example, does a great job of communicating who a given product is NOT for. I do the same with my course. I have told many people not to sign up for it because I didn’t think they were in a position to succeed.

          Re: references/testimonials, I believe those were legit for The Foundation, and believe they are legit for most courses/products. But again, the seller will show the product in the best light. Say 100 people who join the course and 10 succeed, the seller is going to mostly tell you about those 10.

          And actually, I’d say a 10% success rate is far above the average for online courses. Most people who sign up for courses don’t do anything with the materials, or at least don’t do enough. I didn’t do enough with the materials from The Foundation. So I can’t blame them for my lack of success.

          The main thing I judge a course on is this: am I more likely to succeed having signed up for this course than if I had not?

          More likely doesn’t mean guaranteed. I still have to put in the work and perhaps get lucky a bit to have the success I hope for. But with good course materials I give myself a much better chance.

          1. Niall, Thanks for a detailed conclusion. I appreciate your honesty, especially in view of your being a course author yourself.

  10. Well, you know, if you simply spend less than you earn from your active income, you can immediately start BUYING yourself a passive income stream.

    To put it starkly: I’ve set up my life in such a way that, yeah, my neighbor is perfectly within his rights to shop at the supermarket, or buy gas, or see a movie produced by Disney, or buy toys for his children, or buy seeds in order to grow his own crops, or rent an apartment or take out a mortgage… yeah, sure, he can do those things… but in each case, *I* have to get paid.

    It doesn’t get any more passive than that.

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