Avoiding Passive Income Scams
Recently, on episode three of the Free the Economy podcast (about 5:30 in), we discussed the promise and perils of “passive income” investments. On the show we like to emphasize that the U.S. economy is full of opportunity, including outside traditional workplaces. Entrepreneurship, investments, franchises, side hustles, online selling and reselling—there are lots of ways to make money and achieve financial independence in this, the world’s largest and most dynamic economy. But there’s a misleading undercurrent here, which is the frequent description of many of these non-salary income opportunities as “passive” income. For many of our hustling brethren, this is the holy grail of finance—the gig that pays you income every month regardless of whether you do any work or not.
Now there are some investments that really do produce passive income—interest from bonds and certificates of deposit, for example. But you need to have a much larger pool of capital to begin with to receive that regular income. Earning 3 or 4 or 5 percent interest isn’t much of a road to financial independence if you need to already have a couple of million in investable cash to begin with. So many financial and investing influencers will label other things as passive income opportunities even when they aren’t really passive at all.
People who sell online courses and offer personal coaching, people with YouTube channels and affiliate marketing blogs, and people with online publishing operations will often refer to those projects as passive income streams, but anyone who has ever produced a video or edited a blog knows that it is time-consuming, detail-oriented work, the kind that needs to be done continuously as long as the project is in existence in order to be successful. That’s not even remotely passive; it’s another job entirely. It might end up being only a part-time job, it might be possible to do it on your own schedule, and it might be more rewarding than working a traditional 9-to-5, but it’s still a job.
It’s true that you can continue earning money from, say, a popular YouTube video you posted months ago, but the number of people visiting your channel will dwindle quickly if you stop posting new content entirely. The same with an unusually popular blog post of other piece of old content. You don’t have to put in extra work every single day for those previous efforts to continue paying off, but the projects themselves need ongoing effort. The long tail earnings opportunities online are, at best, a sort of semi-passive income stream.
One financial expert who has covered this recently is Richard Coffin, who posted a video last year on his channel The Plain Bagel that he called “The Passive Income Scam.” Not all of the things he mentions in the video are actually scams in the sense of being fraudulent, but a lot of them are certainly misleading. He highlights a lot of influencers with flashy social media profiles who claim to be able to create automatic wealth machines that will churn out income with no ongoing effort. And they can teach you these secrets … for a fee. The bottom line is that many of these opportunities exaggerate the amount of money that an ordinary user is likely to make and underestimate the amount of time required to keep them going. Some simply quote revenue figures without mentioning actual profits after overhead and marketing expenses. Making $20,000 a month on a side hustle isn’t that impressive if it requires $19,500 a month in digital ad spend to pull in clicks.
As Coffin and others often point out, opportunities that sound too good to be true probably are—and paying a social media guru a lot of money after reading a string of one-sided claims of success is probably not a good idea. You can’t buy yourself a lifetime of middle-class income for a few thousand dollars with no extra work, no matter what anyone tells you.
There are plenty of great small business and side hustle opportunities out there for people who want to chart their own course, but I have some disappointing news: They all require actual work in the long term. The only real passive income is a trust fund, and most of us weren’t lucky enough to be born with one of those. Back to the grind, my friends.