What No One Tells You about Passive Income: Debunking Passive Income Myths

November 7, 2023
Passive income is often seen as the peak of financial freedom. But is it? Let's debunk some common passive income myths.
Britt and Laurie-Anne two women laughing and looking at their computers on a couch in a well-styled living room
Britt & Laurie Anne
Two female investors in their 30s with a collective net wealth of over $6 million+
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Passive income, seen as the pinnacle of financial independence, has gained a lot of popularity in recent years.

And there’s a reason for that – it sounds AMAZING! “Passive income.” It sounds like a never-ending stream of money flowing into your bank account while you sleep, freeing yourself from the 9-to-5 grind, and building wealth with minimal effort. A lot of people are enticed by the promise of financial stability and a comfortable lifestyle.

But I need to dispel some passive income myths.

We need to talk about the less-glamorous side of passive income – the limitations and complications that nobody talks about.

While passive income can provide undeniable benefits and opportunities, you need to approach it with a realistic and informed perspective. By understanding and addressing these downsides, you can make more informed decisions, mitigate risks, and set realistic expectations on your journey toward financial independence.

Today, I’m diving into passive income myths that no one ever talks about.

What is passive income?

Passive income refers to earnings derived from sources that require minimal active involvement or ongoing effort once set up. It is income generated through assets, investments, or business ventures that continue to generate returns or profits without requiring significant day-to-day management or active participation.

Unlike active income, which is earned through direct employment or actively running a business, passive income allows you to earn money while having more time and flexibility to pursue other activities or enjoy a greater work-life balance. Passive income streams can continue to generate revenue even when you’re not actively working, hence the term "passive."

Passive income can be earned from a wide variety of sources, such as:

  • rental properties
  • dividends from stocks
  • interest from savings accounts or bonds
  • royalties from intellectual property
  • income from affiliate marketing or online businesses

…and more.

The key is that passive income does not necessitate constant effort or time commitment once the initial setup or investment is in place.

What no one tells you about passive income…

1) It requires initial effort and upfront costs

While the term "passive" implies minimal effort, passive income does not mean "no work" or "no initial effort." Establishing a passive income stream often requires significant upfront effort, time, and capital. Whether it's investing in rental properties, building an online business, or creating intellectual property, there is typically a substantial initial investment in terms of money, resources, and learning curve.

For example, if you invest in stocks, then there’s the research to decide what you’re going to invest in and the cost of buying in. That may be a low effort and cost. But if you want to buy a rental property, that will require a pretty substantial investment of time and money.

You need to explore different properties, possibly do renovation work, and pay for the house.

Often, creating and establishing passive income streams requires upfront investment, research, planning, and ongoing monitoring to ensure the income continues to flow and grow.

2) Profitability isn’t always reliable

Passive income often involves relying on external factors beyond your control. For example, rental property income can be affected by changes in the real estate market. Dividend income from stocks can fluctuate based on company performance and decisions.

Passive income streams are not immune to risk and market fluctuations. Investments tied to passive income, such as stocks, real estate, or businesses, can experience downturns, economic uncertainties, or unexpected events that impact their profitability. Depending on the investment type, there may be risks of vacancies, property damage, or business failures.

Depending solely on external sources of income can leave individuals vulnerable to unforeseen circumstances. Staying informed and adaptable is crucial to navigate these changes effectively.

3) It can require maintenance and management

Passive income streams, such as rental properties or businesses, require ongoing management and maintenance. This can involve dealing with tenants, handling repairs and maintenance, marketing and customer service, or staying updated with industry trends. Failure to effectively manage these responsibilities can ruin the passive nature of the income stream.

This is something I’ve talked about before. When my husband and I bought their rental property, they discovered that there’s a lot more to being a landlord than cashing a check once a month. It’s all the responsibility of home ownership. If a tenant calls you at 9 pm on a Friday to let you know a pipe burst, you need to find someone to fix it.

4) It may take time and patience to become profitable

You’ve heard the phrase, “If it was easy, everyone would do it”? Building a successful passive income stream often takes time, patience, and perseverance.

It may take years to achieve significant returns or reach a level where the income stream can sustain your lifestyle. This can be challenging if you’re seeking quick results or immediate financial freedom.

When you invest, you don’t see an immediate return in your checking account. In fact, you don’t see a dime until you sell your investment.

That’s part of why we always say to invest for the long-term. When you’re investing in stocks, you should be prepared to let that money sit for at least five years.

This isn’t a get-rich-quick scheme. This is about creating financial stability that can sustain you in the long run.

The good news is that if you stick with it, you should see big pay-outs in the end. Just don’t expect it to happen overnight.

But don’t be discouraged

Please don’t misunderstand me; I’m not trying to discourage you from building passive income. Passive income is important to create financial stability and freedom and open the door to a more flexible lifestyle.

But it’s important to build passive income with your eyes wide open. Not all passive income ventures are risk-free or guaranteed to be successful. Each income stream carries its own level of risk, requires due diligence, and may involve varying degrees of ongoing management or maintenance.

Despite these challenges, passive income can still offer substantial benefits and financial freedom when approached with realistic expectations, diligent management, and a diversified portfolio, so take this as a loving warning.

If you want to learn about how to build financial security through passive income, check out our free masterclass. Britt and I walk you through the secrets of successful investors so that you can start building your own passive income stream with confidence.

Best of luck building your passive income!

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