Puffin - The Critical Guide To Passive Income: A Thorough Exploration

Titan Read 2015

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Passive income is the powerful idea that you can set up ways to earn yourself money that will keep earning you money even after you stop working on them - this is what makes it passive income. Sometime the term SWISS - Sales While I Sleep Soundly - income is used to emphasize this alluring aspect of passive income.

In this book we take a critical look at the many different ways of generating passive income that exist. The world is already littered with overly optimistic and, unfortunately, often wildly unrealistic how-to guides for how to generate passive income. Our goal in this book is therefore to provide a somber and critical guide to passive income.

The starting point for us is what is possible for a single, ordinary person. We recommend forms of passive income that are possible for a single, ordinary person to have success with and recommend against forms of passive income that are not viable for a single, ordinary person. For instance we recommend trying retail arbitrage and recommend against trying arbitrage betting. This is not because money cannot be made doing arbitrage betting - we even go as far as listing resources to use when trying arbitrage betting - but because a single, ordinary person will more than likely be wasting his or her time and money doing arbitrage betting without ever generating any kind of real, lasting income.

This is therefore not a naively optimistic book that promises its readers the world in 15 easy steps. The reality is that easy money is hard to get by. We do, however, promise our readers that after reading this book they will be able to go out into the world and set up up some form of passive income for themselves. With enough hard work and - sometimes - luck some people will be able to make a very comfortable living for themselves using only passive income. Other people will have to settle for a side income from passive income.

In this book we use the first-person, plural personal pronoun (we) because the information about the different forms of passive income we look at and describe was gathered by many different people who spent at lot of time testing and learning how things works in practice. James G. Puffin is merely the one who has written everything down and I (James G. Puffin) thank everyone for their time, hard work, and patience.

This book is about passive income. What it is and how to earn it. Quite simple really. Well no. Not entirely simple. For starters no definite definition exists of the term passive income. This is obviously a problem if you want to write a book on the subject. In this chapter we therefore start by setting out to find a definition of the term passive income. After we have defined the term we compile a list of five different kinds of passive income that we believe cover all forms of passive income. We also briefly introduce each of these five categories. We end this chapter with a presentation of the structure of the rest of this book.

For some passive income is the idea of a secondary income stream that might one day enable them to quit their day job and retire to a beach somewhere. For others the term denotes shady business practices and conmen hawking get-rich-right-this-minute schemes to hopeful dupes. Neither of these loose understanding are very useful since we are interested in an objective definition of the term passive income and not a subjective opinion.

We therefore turn to some of the proposed definition of the term passive income floating about. Quite a few exist and we are going to take a look at three of them.

For tax proposes passive income is earnings derived from rental property, limited partnership or other trade or business activities in which you do not materially participate. This is a good definition in so far as it is pretty clear-cut and objective. But the definition is also severely limited and it does not cover what most people think of when they hear the term passive income. Income from activities on the Internet if for instance not covered. This definition is therefore not useful as a tool to us.

Pat Flynn famed creator of the blog Smart Passive Income defines passive income as building online businesses that take advantage of systems of automation that allow transactions, cash flow, and growth to happen without requiring a real-time presence. This is a much broader definition of passive income and hints at one of the desirable aspects of passive income, namely automation and cash flow. Flynns definition is, nevertheless, also limited. It focuses narrowly on online businesses, which leaves out offline forms of passive income. Income from rental property is in Flynns definition not passive income since it is not an online business. We must therefore also discard Flynns definition.

Finally the Wikipedia article on passive income defines the term passive income as income received on a regular basis, with little effort required to maintain it (source: en.wikipedia.org/wiki/Passive_income). This definition is very broad. Both online businesses and offline businesses are cover. But the definition is not very clear-cut. How much is a little effort? Can a very laid-back job be passive income? For the term passive income to retain any meaning that answer has to be no. But under Wikipedias definition it is not clear that the answer to that question is, in fact, no. Wikipedias definition also requires regularity from passive income. The purpose of this part of the definition is unclear. A lump sum is still income. Wikipedias definition is in this way both to broad and at the same time oddly constricting.

Not satisfied with the existing definitions we set out to coin our own. We are interested in a definition that is clear-cut like both the tax definition and Flynns definition but that unlike those definitions captures the full universe of types of incomes that are logically similar, e.g. both online and offline activities. To this end we propose the following definition:

Passive income is income decoupled from the number of hours worked to generate it.

Passive income hereby becomes the opposite of salaried work where there is a very direct (though not always perfect) coupling between the amount of time worked and the income earned. This fits nicely with how passive income is sometimes equated with unearned income - for better or for worse. It also subsumes both the tax definition and Flynns definitions.

So there we have our answer. Passive income is income decoupled from the number of hours worked to generate it. Note how passive income in this definition is not inherently better - or worse - than salaried work. That income is decoupled from the number of hours worked simply means that there is no relationship. You can get lucky and earn a huge income on very little work or you can be unlucky and not earn a dime after having put in a huge amount of work.