The Dark Side of Passive Income: Protect Yourself from Scammers ⚠️2023 

Dark Side of Passive Income

Passive income, the holy grail of personal finance topics, the ability to earn money without doing anything. It quite literally doesn’t get any better than that, does it? And it’s something that you’ll read article & see video after video and ad after ad talking about pushing the idea that millionaires earn seven different streams of income. so should you There’s just one problem passive income doesn’t exist.

Not really, anyway There are, of course, ways of making money that deviates from your standard nine to five, where time spent working and compensation have a pretty linear relationship.

But the vast majority of the so-called passive income strategies that you see advertised online, especially here on GOOGLE & YOUTUBE, are at best misrepresented and at worst completely fabricated to prey on the financially desperate.

Now, it’s not to say that some of these strategies don’t have their merits. Well, I don’t like the term passive income. Dark Side of Passive Income

Some of these things might make you money over time, but for the ones that sound too good to be true, where you quite literally don’t have to put in any effort, you’re often more likely to lose money when you consider the fees and registration costs that you’re being charged to even try this thing.

So let’s break down why passive income isn’t all that promising, but why keep hearing about it? Passive income is usually used to reference an income stream that is somewhat self-sustaining, in that once you set it up,

it doesn’t necessarily require your active involvement. Meaning that you can have more time to yourself to hang by the poolside or play video games or do whatever you want.

But outside the lottery or a lucky inheritance, there’s not really such a thing as passive income, at least in that truest sense. Instead, when people say passive income, they’re really referring to one of two things investment income or entrepreneurial income. Dark Side of Passive Income

Now, certainly there’s nothing wrong with these approaches, and they do change how your effort is rewarded, but they don’t eliminate that effort requirement.

And there’s a very easy explanation as to why anything that promises a high reward without any effort is, in most cases, a gimmick.

But let’s start by explaining these two streams of income,

Investment Income

starting with investment income, the idea of owning assets that generate some sort of yield, whether that be stocks, bonds, or I’ll throw on rental properties here as well.

Now, obviously, as an investment-focused channel, I have no problem with people making money from their investments. I would naturally hope that you do.

But as a passive income strategy, it comes with a pretty big caveat. It requires that you have money in the first place to purchase those income-producing assets.

Investment Income

In fact, when people reference millionaires earning seven different streams of income, which stems from a 2002 report from the IRS, it’s not often mentioned that four of those strategies dividend, rental interest and capital gains income require money in the first place to achieve and a good amount of it if you really want to earn anything meaningful. Dark Side of Passive Income

If you could reliably achieve a 7% return on your money, for example, and you wanted to replace your annual active salary of $42,000 a year, which is roughly the average personal income in the US.

You would need to accumulate $600,000 in net savings. Not an easy first step for passive income. Now, there are some strategies that I’ve seen that do promise to earn you that passive income without needing that upfront capital or effort.

For example, investment bots that take whatever you have and grow it faster than the market using proprietary software or courses that promise to show you how to start building a real estate empire by putting 5% down on several different properties when you’re 19.

The problem is that these products never represent the true risk-reward trade-off that you face implementing them. Dark Side of Passive Income

The idea, for example, that someone should take everything they have and put it into a down payment on a rental property is stupid It’s bad financial advice because while real estate on average is a good investment category and is a legitimate strategy for building wealth given the rental income and the appreciation,

it also comes with large unexpected costs and risks like a broken water heater, a hole in the roof that you need to repair. That’s a real thing.

My parents had to deal with that over the summer and I helped them cut a tree out of their roof.

There’s also the risk of your payments increasing, something that many are becoming painfully aware of as interest rates rise.

So clearly, if you don’t have a cash buffer to help absorb these extra costs or a couple of months of unpaid tenant rent, then it could be enough to sink any thinly run operation.

As for trading bots, they don’t work. I don’t care what YouTuber/writer told you that they made 20% this past month.

It’s utter survivorship bias that may as well be advertising a roulette wheel because it’ll give you the same odds. Dark Side of Passive Income

So right away you can see why I struggle with people emphasizing the passive nature of investment income. Yes, if you get to a point where you have enough capital,

it can be a very powerful tool for freeing up your schedule if you end up relying on that type of income.

But it requires more savings from actively generated income than the average individual will likely ever achieve.

But what about other forms of passive income? Well, going back to the seven streams of millionaire income, which people like to focus on when you exclude the earned income, since that’s for losers, there are two remaining avenues royalties, licensing and business profits, aka entrepreneurial income.

Entrepreneurial income

Now, the idea of an entrepreneur’s income being passive should sound a little laughable. Dark Side of Passive Income

According to a New York Enterprise Report survey, the average small business owner works twice as hard as their employees, with 25% working at least 60 hours a week.

So leaving your nine to five for a business venture to free up your schedule probably isn’t going to work out.

Investment Income

Still, there are some ventures advertised online that allegedly let you set up some sort of self-sustaining business that doesn’t require any amount of effort. Something that you can set up and lead to its own devices to earn you money.

This includes your Drop shipping stores, ad placement strategies, selling digital products, content creation, and convoluted pyramid schemes that promise you financial freedom if you get three other suckers to pay for the program that you just sunk a few thousand dollars into yourself.

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Now, as someone who makes money from YouTube, obviously I’ll concede that there’s merit to some of these strategies.

Some of these strategies can make you money with digital products. For example, the idea is that once you create this thing of value and put it on the Internet, you can sell it and keep making money for it over time. And there’s some truth and validity to that strategy. Dark Side of Passive Income

It doesn’t require the same type of maintenance as a traditional business, but the idea is that to get to that point where you have this thing of value, you oftentimes still require a good amount of effort, among other things.

And there’s a very easy explanation as to why the promise of high returns with low effort with some of these strategies doesn’t hold any water.

Take drop shipping, for example. The basic idea of Drop Shipping is that you build a storefront online that sells products manufactured and shipped by a third party so that you can earn a markup without dealing with any of the logistics.

The basic setup can take just a few hours and likely costs under $500 to get set up with a web domain or online storefront.

Perhaps even less if you use a site like Amazon to sell your product, or a service such as Teespring, where you can design your own shirts and sell through their website.

After that, you won’t need to sit at a cash register or stock any shelves to make any type of sale. And it’s all pretty well automated for you. Awesome. So what’s attached to this low effort and low cost strategy? Dark Side of Passive Income

Well, just that Ironically, because of how easy it is for an individual to set up a store and drop ship something as novel as a fancy coffee mug, you can bet that there will be thousands of others doing the exact same.

Thing, possibly with The Exact Same product, providing An Insurmountable Supply Of Novelties, when There Are Probably Ten People Out There who Actually Want this thing.

But then, why are some people successful using these strategies? Why do we have any case example of Jimmy making ten grand a week thanks to him signing up for so and so’s course on YouTube?

Well, firstly, I want to address that most case examples shown in these ads are incredibly biased and shouldn’t be relied upon.

And the people who take the route of showing individual success stories rather than showing the strategy success rate at a high statistical level probably have thousands of other students who fail to break even using their approach.

Even still, some people do at times make money with these entrepreneurial ventures, and there are typically three reasons why The first is timing As with most ventures, there is some first mover advantage.

And the first drop shippers probably did make a good amount of money with their low effort storefronts at a time where online stores weren’t as prevalent.

But returns from these ventures quickly diminish over time as more and more people take advantage of it, leading to an oversupply situation that quickly eliminates the opportunity for everyone else. Dark Side of Passive Income

It’s basic arbitrage Even those that make money from this venture probably won’t see sustainable cash flows. A successful dropshipping store, for example, might make money for a few months, perhaps even a year, but will eventually see activity die down if it’s truly left to its own devices.

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