Revealed: The Passive Income Scam

Passive income is often portrayed as the ultimate goal in personal finance. The idea of earning money without actively working for it is highly appealing. 

You'll come across countless videos and advertisements emphasizing the importance of millionaires having multiple streams of income, implying that you should do the same. 

However, there's a fundamental issue with the concept of passive income—it is a scam. 

Nevertheless, the vast majority of so-called passive income strategies advertised online, particularly on platforms like YouTube, are either misrepresented or entirely fabricated to prey on those in desperate financial situations. 

I’m not saying that some of these strategies don't hold value. 

But the strategies that sound too good to be true, promising effortless earnings, often lead to you losing your hard-earned cash. 

Aside from winning the lottery or receiving a fortunate inheritance, true passive income doesn't really exist. 

When people talk about passive income, they are typically referring to one of two things: 

investment income or entrepreneurial income. 

While there's nothing inherently wrong with these approaches and they do change how your efforts are rewarded, they don't eliminate the requirement for effort. 

There's a simple explanation as to why any claim of high rewards without any effort is usually a gimmick. 

Let's begin by explaining these two income streams.

Investment Income

First would be investment income, it involves owning assets such as stocks, bonds, or rental properties that generate a yield or return. 

As a channel focused on investments, I have no issue with individuals earning money from their investments, and I genuinely hope and wish you do too. 

However, as a passive income strategy, there's a significant caveat: 

you need to have money available initially to purchase these income-producing assets. 

The average millionaire has 7 streams of income. 

Let's face it, we've all heard this a million times. And, while I believe this is well-intentioned advice, it sends us in the wrong direction. 

What is not frequently mentioned is that four of these strategies (dividends, rental income, interest, and capital gains) require an initial investment of money, and a considerable amount at that, if you want to earn a meaningful income. 

For instance, if you were able to consistently achieve a seven percent return on your investment and aimed to replace an annual active salary of $67,000 (which is roughly the median household income in the US), you would need to accumulate $960,000 in net savings. 

This initial accumulation of funds poses a significant challenge when pursuing passive income.

There are certain strategies I've come across that claim to provide passive income without requiring upfront capital or effort. 

For instance, there are investment bots that promise to grow your money faster than the market using specialized software, or courses that guarantee to teach you how to build a real estate empire with just a five percent down payment on multiple properties, even at a young age like 20. 

However, these products fail to accurately represent the risk-reward trade-off involved in implementing them. 

For example, the notion that someone should invest all their savings into a rental property as a down payment is flawed and constitutes bad financial advice. 

While real estate, on average, is a solid investment category and a legitimate path to wealth building through rental income and property appreciation, it also carries substantial unexpected costs and risks. 

Real-life scenarios like a broken water heater or a roof in need of repair, exemplify these risks. 

Additionally, there's the risk of increasing payments, which becomes evident as interest rates rise—an issue many individuals are currently grappling with now. 

Clearly, if you lack a cash buffer to handle these additional expenses or a few months of unpaid rent from tenants, it could be enough to jeopardize an inadequately managed real estate operation.

As for trading bots, let me make it clear that they are ineffective. 

It doesn't matter if a YouTuber claims to have made 20% returns last month using such bots; that's nothing but survivorship bias. 

This is why I find it problematic when people overly emphasize the passive aspect of investment income. 

While it can be a powerful tool to gain more freedom in your schedule once you have accumulated sufficient capital, it requires saving a significant amount from actively earned income—something that most individuals may never achieve. 

Entrepreneur Income

Now, let's consider other forms of passive income.

If we look at the concept of the seven streams of income that millionaires often talk about. Excluding earned income, there are two remaining avenues: royalties and business profits, commonly referred to as entrepreneurial income.

The notion of an entrepreneur's income being passive may seem quite amusing. 

According to a survey by the New York Enterprise Report, small business owners work twice as hard as their employees, with 25% of them working at least 60 hours per week. 

So, leaving your nine-to-five job to start a business venture and expecting it to free up your schedule is unlikely to work out as planned. 

Nevertheless, there are online ventures advertised that claim to allow you to establish a self-sustaining business requiring zero effort—a setup you can leave on its own to generate income. 

These include dropshipping stores, selling digital products, content creation, and convoluted pyramid schemes that promise financial freedom if you can convince three other individuals to invest in the program you just spent a few thousand dollars on. 

As somebody who earns money from YouTube, I can acknowledge that some of these strategies have merit. 

Selling digital products, for instance, involves creating something valuable that can be sold online, generating income over time. 

There is some truth and validity to this approach as it doesn't require the same level of maintenance as a traditional business. 

However, it's important to note that reaching a point where you have a valuable product often requires a significant amount of effort and various other factors. 

There's a straightforward explanation as to why the promise of high returns with minimal effort associated with these strategies doesn't hold up.

Let’s take dropshipping for example. 

The basic concept of dropshipping is that you create an online store that sells products manufactured and shipped by a third party. 

This allows you to earn a profit by marking up the prices without having to deal with the logistics of inventory and shipping. 

Setting up a basic dropshipping store can be done in just a few hours and typically costs under $500, including the expense for a web domain or online storefront. 

It may even cost less if you choose to sell your products on established platforms like Amazon. 

Once you set it up, you won't need to physically manage a cash register or stock shelves to make a sale, as most of the process is automated. 

Sounds great, right? 

But what's the catch with this seemingly low-effort and low-cost strategy? 

Well, ironically, the ease of setting up means there will be thousands of other individuals doing the same thing, possibly even offering the exact same products. 

This leads to an overwhelming supply of similar items, while the actual demand for these products may be limited to just a handful of potential customers.

Why Do Some People Appear Successful?

However, you may wonder why there are still some individuals who appear to be successful using these strategies. 

Why do we hear cases about [insert name here] making $10,000 a week after signing up for a certain course on YouTube? 

Well, it's important to address that most of these success stories showcased in advertisements are highly biased and should not be taken as reliable evidence. 

Those who focus on individual success stories rather than presenting the overall success rate of the strategy often conveniently ignore the numerous students who fail to achieve any significant results using the same approach. 

It's likely that for every successful case, there are thousands of others who struggle or even lose money. 

Nevertheless, it is true that some people do make money from these entrepreneurial ventures, and there are typically three main reasons for their occasional success. 

#1: Timing

The first reason is timing. Like in most ventures, being an early mover can provide an advantage. 

The initial wave of drop shippers, for instance, could have made substantial profits with their low-effort online stores when the market was less saturated. 

However, as more and more people jump on the bandwagon, the returns diminish rapidly due to oversupply. 

This oversaturation eliminates the opportunity for the majority of newcomers. 

It's essentially basic arbitrage in action. 

Even those who manage to make money from such ventures may not see sustainable cash flows. 

A successful dropshipping store, for example, might generate income for a few months or even a year, but it will eventually lose momentum if left to its own devices. 

Therefore, by the time you come across an ad for a course created by somebody who spent a few months putting it together and managed to find three other success stories to support their claims, the opportunity has most likely already passed.

#2: Luck

The second factor that contributes to success with these online strategies, as you can probably guess, is luck. 

As a YouTuber myself, I would love to claim that there's a guaranteed formula for achieving success, but I don't believe such a formula exists. 

Consider this: 

there are over 720,000 hours of content uploaded to YouTube every single day, and nearly 90% of that content will never surpass 1,000 views, at which point you might only make a few dollars. 

Luck plays a significant role in every entrepreneurial endeavor, and the same applies to online courses, ebooks, blogs, and any digital product where you're competing in a crowded sea of content creators, striving to stay afloat and gain recognition. 

This leads us to the third factor: 

#3: Effort 

Nearly 90% of e-commerce stores fail within the first four months, even including companies with unique product offerings. 

However, the ones that do succeed are likely the ones where people invest more time and effort into customizing their products, collaborating with suppliers to secure new releases ahead of competitors, and actively marketing their goods. 

In other words, they actively work to earn their success. 

While it's true that a successful product may generate some recurring revenue, that revenue is often subject to slow down over time.

Generating sustained revenue on platforms like YouTube requires consistent content creation. 

It is not a passive endeavor. 

Personally, YouTube has become a second job for me, and one that I enjoy, but it involves extensive work such as researching, scriptwriting, animating, and editing. 

There's nothing passive about that. 

Why Is Passive Income Constantly Promoted?

So, why do we keep seeing others promote these supposed passive income strategies?

Well, the answer is simple: 

one of the most successful and lucrative passive income strategies is actually selling passive income strategies. 

That's why one of the most popular finance videos on YouTube is titled:

"9 Passive Income Ideas: How I Make $27,000 a Week." 

The allure of making money effortlessly is incredibly appealing. 

The reason you're bombarded with ads about how dropshipping is making people wealthy isn't because dropshipping itself is a reliable income source, but because the person behind the ad profits from selling that idea. 

They make money from the sign-up fees for their courses or academies, even though the reality is that you'll likely earn less on an hourly basis using those strategies compared to working for Uber as a driver, for example.

So, go or no go?

So far, my perspective may have seemed negative, but trust me, that's not my intention. 

I don't want to discourage you from pursuing a passive income strategy if that's something you're genuinely interested in. 

If you believe there's a demand for an online course or ebook on a subject you're knowledgeable about, I say go for it! 

Along the way, you might even make some money while pursuing your passion. 

However, it's crucial to approach it with realistic expectations. Passive income simply means front-loading your work, not eliminating it entirely. 

In the majority of strategies, ongoing effort is required to sustain the income you're generating. 

Your success will depend on how much effort, time, and resources you invest. It's really, really important to understand that you get out what you put in. 

I don't want to criticize those who use the term "passive income" or freely share ideas on how to earn extra money on the side. 

There's value in exploring entrepreneurship and building supplemental income streams. If you want to try out one of these strategies, I fully support you. 

Just be mindful of the time and capital you need to invest and assess whether it's worth it. 

Additionally, be cautious about buying a $2,000 course, especially from someone who is merely trying to fund their own passive income strategy. 

If their strategy was really successful in generating effortless income, they wouldn't need to sell you a YouTube ad.

Alright everyone, thank you for reading this article. I hope you found it informative and beneficial. 

And if you did, please show your love by sharing it to family and friends.

If you've tried any of the passive income strategies or you have a different perspective, feel free to share your thoughts.

- Ivan