Making money while not doing anything is the ideal scenario, or so I thought until recently. For years I’ve been diligently saving and investing so I could never be told what to do for money again. 5am conference call with the East Coast? No thanks! Fly to Chicago in the middle of winter to see clients? Have fun! Come in before sunrise and leave after sunset? Yeah, you do that.
One of the most important tips I’ve shared about building sustainable passive income is treating the whole process like a game with multiple levels. Because interest rates have been coming down for the past 30+ years, generating low risk passive income is becoming that much harder every year. Earning $28,000 a year in dividends on a $1 million dollar portfolio is not exactly living it up! The investing world is counting much more on capital appreciation instead.
The problem with building passive income my way is that you start becoming completely oblivious to the income production because you aren’t utilizing the money. You have to follow the rules remember? I haven’t touched any principal or interest/dividend income since I started the passive income journey in 1999. I’ve become an over saver during retirement, which is not bringing me joy any longer.
The problem with over savers is that there’s this irrational fear that Doom is right around the corner. What if Google’s latest search algorithm changes cuts this site’s traffic in half? Less traffic means less income. What if eventual Woman Of The Year, Janet Yellen recants on her promise to keep interest rates low forever? We’re all depending on the bull run in real estate and stocks to continue. The “what ifs” never stop, so we continue to save for a rainy day that never comes.
WHY ACTIVE INCOME FEELS SO MUCH BETTER THAN PASSIVE INCOME
I’d like to give you a specific example of how active income feels better than passive income. Just the other day I scored a small ad deal for $400. After about eight back and forth e-mail negotiations over a couple days I locked it down and was thrilled. I decided to take a friend out for a steak dinner to celebrate to the tune of $140, or 35% of what I made from the deal.
During this time period I got a monthly electronic rental payment of $3,800 from a tenant like clockwork. You’d think that receiving a sum almost 10X the amount of the ad deal while doing nothing would provide a little more happiness, but I didn’t feel a single thing. Nada. Zip. Zero. Mei you. I used the $3,800 to pay my rental mortgage and HOA and still had $2,100 left over to spend on whatever. I saved it of course.
Another thing happened during the time I negotiated an ad deal. One of my long time holdings in my IRA portfolio reported decent results and the stock went up $6,000 the next day. I was excited for about an hour and then nothing afterwards. Of course the stock should trade higher because it was undervalued, I thought to myself. Who was the dummy actually selling?!
It’s strange to feel so much more joy over the $400 ad deal than the $10,000 in passive income. Let’s discuss why.
1) We want to know our actions make a difference.
After earning a certain amount of sustainable income to survive, making more doesn’t feel that good if you haven’t done anything to deserve it. I’ve spoken to a number of people who’ve married into very wealthy families or have trust funds, and there’s always this very evident insecurity about them that they need to prove themselves worthy. It’s much better to build something from the ground up and make your own fortune than inherit one.
For my stock that went up $6,000, all I did was make a decision six months ago to buy. Everything else was left up to the management and the markets. I’m a minority investor with no sway over the future of the company. On the other hand, I’m also a minority investor in Bulldog Gin, a private company headquartered in NYC which recently signed a huge distribution and partnership deal with Campari. If Bulldog Gin gets sold to a spirits giant like Diageo for mega bucks in 2020, I feel I’ve made a difference because I not only consumed lots of Bulldog Gin and tonic on my business trip to Mallorca, I also did an interview with the CEO here which helps with publicity through search traffic.
Cementing $400 in an ad deal is a small portion of my online income, but it gives me the most amount of pride because if I didn’t do anything, nothing would have happened. Creating something that didn’t exist before is one of the greatest feelings ever. Even though the Yakezie Network is not a big money maker, I’m happy to run it forever because just several years ago no such network in the personal finance blogosphere existed. The worst case is that I’ve got to spend some money and time maintaining the site from crashing, getting to know new bloggers every day, and helping others achieve their online goals. Not bad.
Knowing our actions make a difference is the number one reason why active income feels so much better than passive income. Although it takes active energy to first create passive income, you no longer feel you deserve receiving the money after a period of time.
2) We want to test our limits.
Money really doesn’t matter after a certain amount. Some researchers say making anything more than $75,000 doesn’t make you much happier. I say making anything more than $200,000 doesn’t make you much happier. I think I have way more credibility than the $75,000 a year earning researcher who has never made much more than $75,000 because I’ve made crap working at McDonald’s and large sums working on Wall St.
Instead of making more money, it’s all about the challenge as many entrepreneurs and investors will attest. This is why you see a lot of high powered jobs with healthy compensation packages look for ex-athletes and ex-military. They’ve got the combination of collaboration and drive.
I had a goal to make six figures from an occupation while I was in high school after one too many crap jobs making $4 an hour. Never again did I want to flip burgers or break my back moving boxes for a living again. Once I achieved the six figure income mark, I wanted to see if I could make six figures passively through investments. And once I achieved the six figure passive income mark I decided to see if I could earn six figures through entrepreneurship.
I didn’t want to think that the only reason why I was able to make six figures is because I got a lucky break by joining a bulge bracket firm out of college. I had to test my limits to see what I could do on my own.
3) We want to feel like we’re maximizing our potential.
Nothing is sadder than seeing someone with so much potential achieve nothing due to a lack of effort. If you’re 8 feet tall you better try out for the NBA and make your millions! If you can play Mozart conciertos by the age of 3, then hopefully your parents push you to be a world class musician without pushing you into madness. I think the majority of us wished our parents pushed us harder growing up, even though during the time we hated every minute of their discipline.
Thankfully, I’m neither tall, handsome, gifted, patient or very smart despite what my mother says. As a result, I don’t think my parents expected anything great from me except to be happy. The only thing I have inside that might be higher than average is focused intensity. Due to my very average expectations ever since senior year in college, I’m easily satisfied with what I have. But I’m always wondering whether I’ve pushed myself hard enough to maximize my potential.
DON’T GET TOO CAUGHT UP IN THE GLORY OF PASSIVE INCOME
Generating enough passive income to live a good life is wonderful. I’m still only half way to my ultimate passive income goal with probably five to ten more years to go. But take it from someone who has seen both sides of the active and passive income spectrum. You’ll get bored of your passive income streams eventually. You’ll long to start generating active income again because it feels so much more rewarding.
Wanting to see if your actions still matter is the main reason why folks who’ve retired often don’t stay retired for very long. Earning social security, pension money, and dividends is not fulfilling even if it’s a result of a lifetime of hard work. Sometimes you just want to know whether you’ve still got it.
Recommendation: Actively manage your own money with Personal Capital. They are a free online money management tool that allows you to track your net worth, help you budget, and provide investment analysis of your retirement portfolios. Personal Capital will even e-mail you a weekly net worth snapshot. I used Personal Capital mostly to make sure my assets are properly allocated based on my risk tolerance.
Photo: The lion cub was so much more fun awake. Cabo, 2013.