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Welcome to the 42nd edition of the Tech Financial Planning.

It seems like everyone I talk with wants passive income.

But what is it?

In this newsletter we’ll break down what passive income and more importantly what passive income isn’t, and why that matters.

TL;DR

If you’re having to do a lot of work, it’s not passive.
Passive income is regular cash flow that doesn’t take work
Active income can become passive income

The Myth Of Passive Income

A typical comment I hear:

“I want to start investing in real estate so I can build up passive income so I can retire early or become work optional.”

This is often in tandem with a desire to not feel so tied to their corporate job

Often, the thought is that they will start buying and renting out single family homes and managing it themselves.

The problem - that’s not passive!

That doesn’t make it a bad decision or a bad investment, but managing a real estate portfolio yourself isn’t passive.

It’s active.

You have to deal with dreaded 3 Ts of real estate - tenants, trashes, and toilets.

Quick Note: You have to remember the return on hassle

So what is passive income?

First, we need to define what passive income is

I like this definition from Nerd Wallet - “Passive income is unearned income generated from investments, properties or side hustles…Passive income is a regular cash flow that requires little or no daily effort to maintain.” (emphasis added).

In my opinion, it’s this last bit that’s the most important.

That requires little or no daily effort to maintain.

If it takes a lot of effort and work, it’s not really passive.

It becomes a job.

3 examples of passive income

Distributions, dividends, and interest from your portfolio.

This might deserve a post on its own.

But depending on your goals, your allocation, and your portfolio, your portfolio can generate a nice income for you.

What it’s not - day trading or actively managing your portfolio.

That’s work.

Real estate

You have rental properties (either as a primary investor or limited partner) and you get recurring income without doing much work.

Either you have invested in crowdfunded real estate, are a limited partner in a real estate investment, bought REITs, or have a dialed in personal portfolio and hired people to manage all the day to day operations.

I like to call it mailbox money because the only work you do is get a check in the mail and deposit it, but really with wires and ACH you do even less work.

What it’s not - active management of real estate.

If you’re handling renovations, landlord duties, property management, etc, that’s not passive income.

It might be recurring income.

But it’s a job.

Create a course

Do the work up front to create a course, then kick back and watch the sales come in.

Justin Welsh has been a master of this.

What it’s not - actively promoting and marketing

I struggle to say this is truly passive income if you’re constantly having to hop on social media and promote it.

It’s passive if you build it and forget it.

That doesn’t make it a bad decision or a poor way of making money.

But it does make it work

Putting It All Together

I have a client who owns a very successful business.

It took him 20+ years of hard work and long hours to build it up and get it to where it is.

Now he has people in place to run the day to day operations and he is free to travel as much as he wants.

His business was active, but now it’s passive.

The reason I’m writing this is to better align your time and money with your goals and values.

If you have a full time job and a young family and want passive income then it probably doesn’t make sense to actively pursue real estate or actively manage your investment portfolio.

Active isn’t bad, but let’s not confuse it with passive.

Passive means sitting back and watching the money roll in.

Doing little to no work.

WHENEVER YOU’RE READY, THERE ARE 3 WAYS I CAN HELP YOU

1. Connect with me on LinkedIn, where I post every weekday (unless I’m on vacation). https://www.linkedin.com/in/marshalljoe/.. Or follow me on Twitter

2. Subscribe to the “Tech Financial Planning” newsletter to get equity comp and financial planning strategies in your inbox. It’s free: TFP Newsletter

3. Want one on one help? Schedule your Get To Know meeting