In a world where financial stability is often elusive, especially in difficult time like Covid era and potentially 2023 recession, passive income has emerged as the ultimate dream for many. This is especially true for pay-cheque-to-pay-cheque people or those who struggle with poverty, as the idea of a consistent, low-effort revenue stream seems like a ticket to financial freedom. In this blog post, we'll explore the concept of passive income, why its potential benefits look attractive, and the real challenges one might face in pursuing this ideal.
Picture: USD and FIRE. Source: Unsplash
What is Passive Income?
Passive income refers to money earned with little to no effort on the part of the recipient. This might include income from investments, drop-shipping, rental properties or among other sources. The allure of passive income lies in the fact that it can provide a steady flow of money without the need for constant active participation or labor. Thus, the hope is that it will one day grow large enough to at least the recipient's cost of living. In addition, not everyone enjoy the current job. By having a safe net to fall back on, passive income can encourage people to chase for their dream.
Why Passive Income Widespreads in the Covid Era?
The Covid-19 pandemic has had a devastating impact on the global economy, leaving millions of people unemployed or facing reduced incomes. For those living in poverty, this has exacerbated their already precarious situation, making it harder to afford basic necessities and cope with unexpected expenses. In such a scenario, passive income can offer a lifeline for the poor, as it can supplement their regular income and help them meet their needs and goals. Passive income can also reduce their dependence on external factors such as employers, markets, or governments, and give them more control over their finances and lives. As the world has witnessed since 2022, the mass layoff from tech sector and recently banking sector adds more fuel to people desire of growing personal passive income.
Picture: Covid layoff. Source: Unsplash
The most obvious benefit of passive income is financial stability. For those living in poverty, passive income can offer a sense of financial stability that might otherwise be unattainable. Even for middle class, facing the uncertainty from the economy and AI impact on employment, it helps to sustain their life style to a certain extend. A consistent revenue stream could help cover basic living expenses and alleviate some of the daily stressors associated with financial insecurity. For example, a person who earns passive income from a rental property might not have to worry about paying rent or utilities every month, or about losing their home if they lose their job. In fact, there are numerous videos on Tiktok and Youtube giving guides on buying a duplex house to have the rent covering monthly mortgage. This could reduce their anxiety and allow them to focus on other aspects of their lives or even chasing their dream.
In fact, time freedom is one of the benefit of passive income. By generating income without the need for ongoing effort, passive income can potentially free up time that might be spent on more fulfilling pursuits, such as spending time with family, pursuing hobbies, or focusing on personal growth. For instance, a person who earns passive income from an online business might not have to work long hours or commute to a workplace every day, and instead have more flexibility and control over their schedule. This could enhance their happiness and satisfaction with their life.
Therefore, passive income can potentially improved quality of life. With the added financial stability provided by passive income, those in poverty might find it easier to invest in their health, education, or other aspects of their lives that could lead to long-term improvements in their overall well-being. For example, a person who earns passive income from an investment portfolio might be able to afford better health care, nutrition, or education for themselves or their children. This could improve their physical and mental health, as well as their opportunities and prospects for the future.
All of this benefits match the FIRE idea: Freedom Independence Retire Early. This is a lifestyle movement that advocates saving and investing enough money to achieve financial independence and retire early from the workforce. By earning passive income that exceeds their expenses, those in poverty could potentially reach this goal and enjoy a life of freedom and leisure. For example, a person who earns passive income from a book they wrote might be able to quit their day job and travel the world, or pursue their passions and interests without worrying about money. After all, dream is the essence of life. It is the reason we have plane flying in the sky and the reason of living for many.
Does Passive Income Work?
Picture: The Thinking Man. Source: Unsplash
While passive income sounds appealing, it is not easy to achieve. It often requires an initial investment of time, money, or skills, which may not be readily available for the poor. For instance, rental properties require at least 10% of down payment for mortgage, which is around 100k CAD in Toronto. It also involves some risk and uncertainty, as there is no guarantee that the income source will be sustainable or profitable in the long run. This is especially true for drop-shipping case, where copycat sellers and intense price war happen on a daily basis. Moreover, passive income may not be truly passive, as it may require some maintenance, monitoring, or management to keep it running smoothly. Therefore, one should be careful and realistic when pursuing passive income opportunities and do proper research and planning before committing to any venture. Let's dive deeper into the details.
One of the most significant barriers to generating passive income is the initial investment required. Whether it's purchasing property, investing in stocks, or creating intellectual property, the initial costs can be prohibitive for those struggling financially. For example, besides of buying a rental property that I mentioned above, investing in stocks for dividend inflow is very popular for passive income. However, assuming the cost of living is 2,000 CAD in Toronto (including rent), with a high 3% monthly yield from ETFs, REITs and stocks, it requires at least 500,000 CAD. You can explore more with this calculator. Creating intellectual property, likes music, might require specialized skills, equipment, and legal protection. These upfront costs and incredible competitiveness in some of these industries can obstruct passive income to grow large enough for FIRE.
Another challenge faced by those purchasing this dream is a lack of access to information and resources needed to successfully establish passive income streams. Without proper guidance, it can be difficult to identify the best opportunities and navigate the complexities of investing or creating a profitable venture. For instance, it is difficult for first-time homebuyers to evaluate the true price range of a house, which could lead to over bidding. It is even more complicated for stocks, as people need to understand financial terms and inspecting various companies, ETFs or REITs to buy and hold for a long time. Moreover, some passive income sources might require licenses, permits, or regulations..
Passive income ventures can also be risky, with no guarantee of success. For individuals with limited financial resources, this risk may be too great, as the potential for loss could further exacerbate their financial struggles. For example, a rental property might suffer from vacancy, damage, depreciation or even regulation change. One instance of this is the recent popular idea of banning AirBnB in various cities in both EU and Canada. A stock portfolio might fluctuate with market volatility or lose value due to unforeseen events like Russian war in Ukraine in early 2022. An intellectual property might face competition, plagiarism, or obsolescence. These uncertainties can make passive income a gamble that many people in poverty cannot afford to take.
Verdict
In conclusion, it is important to recognize that passive income does not necessarily mean easy income. It still requires hard work, dedication, and persistence to create and maintain it. While passive income can provide financial stability, time freedom, it require tremendous amount of skills so not just any Joe can do or have the desire to stay persistent. Therefore, passive income is not a magic bullet that can solve poverty or a golden ticket to wealth, but rather a potential tool that can help improve one's financial situation and well-being if used wisely and responsibly.
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