To Make True Passive Income, Experts Say You Must Avoid Doing These 6 Things
Written by
John Csiszar
Edited by
Levi Leidy
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Passive income is the holy grail when it comes to securing a financial future. As many financial experts have noted, you won’t ever get rich from simply earning a salary. True wealth-building requires investment, and passive income creates wealth without requiring active management.
As famed billionaire and CEO of Berkshire Hathaway Warren Buffett has said, “If you don’t find a way to make money while you sleep, you will work until you die.”
But while there are countless articles, blog posts and videos about how to earn passive income, there aren’t many warnings out there about what to avoid when striving for it.
Here’s a look at some of the common missteps investors make when seeking passive income.
Rely On a Single Stream of Passive Income
Passive income shouldn’t come from a single investment. Rather, think about building a passive income portfolio. Just like investing in individual stocks, building a portfolio allows you to diversify your risk. If one of your income investments doesn’t pan out for some reason, you can rely on the others to keep the income flowing.
If possible, diversify among industries as well. For example, you might consider building a portfolio over time that includes dividend-paying stocks, income-producing bonds and rental real estate. This way, a downturn in one area of the market won’t necessarily drag down your investments in others.
Expect a Gold Mine Right Away
Financial personality and founder of Minority Mindset Jaspreet Singh strongly believes in investing for cash flow through passive income. However, he stresses that it’s not a get-rich-quick scheme. In fact, for your plan to succeed over the long run, Singh says you need to build up your assets first. As Singh said in a 2023 YouTube broadcast, “You don’t get rich by investing for cash flow. You’ve got to be rich first to get a lot of the cash flow that will make you wealthy.”
In his video, Singh refers to a “decade of sacrifice” in which you’ve got to funnel all the money you can into your income-generating investments. While you may not have a lot of fun during that time, as Singh says, it’s worth it in the long run. Once you’re in the position of having enough passive income to bankroll your lifestyle, you can then effectively do whatever you want. But you’ll have to be patient to get to that point.
Equate ‘Passive’ With ‘Hands-Off’
Too many passive investors think that they don’t have to devote any time at all to their investments. The truth is, there is no such thing as a “set-it-and-forget-it” investment. While passive investments can be to some degree self-sufficient, you can’t forget to at least monitor them. With a portfolio of income-generating investments, for example, you’ll want to check in at least quarterly to ensure that they’re still solid choices. If you own rental real estate, you’ll have to at the very least maintain your property if you want it to hold its value.
Fail To Reinvest
Some investors make their first passive income investment and proceed to blow all of the income they generate on discretionary spending. The ultimate goal of any passive investment strategy is generating enough to pay for all your expenses.
As Jaspreet Singh tells his followers, the goal is to get an investment plan generating enough income to pay for your expenses. But you can’t build that long-term wealth without reinvesting what you’re earning. You’ll only see the magic of compound interest when you reinvest your money over the long run — but you’ll build up a sizable nest egg. As Singh puts it, once that happens, “Now you have assets paying for your lifestyle, instead of just you working for it. This is what it means to become wealthy.”
Chase High Yields
If you’re looking to generate passive income, you’ll want to earn the highest yields you can, right? If a 4% yield is great, isn’t 8% twice as good? That might seem like a logical answer, but sometimes things aren’t what they appear.
As Andrew Herzog, a certified financial planner at The Watchman Group, told Business Insider, “Always chasing excess yield can be a dangerous game. Yield isn’t everything.” One of the reasons is that yield is often a function of risk. The higher the risk in an investment, the higher the yield. Thus, by stretching for an 8% yield instead of a 4% yield, for example, you have a greater risk of losing your investment entirely.
Overspend To Earn Passive Income
It defeats the purpose of earning passive income if you have to overspend to earn it. As John Boyd, founder of financial planning firm MDRN Wealth, told The New York Times, investing several thousand dollars to buy a vending machine that pays out just a few hundred a month, or overextending yourself by taking out a 10-year mortgage to buy a rental property, isn’t the best way to create long-term wealth or saving for retirement.
Rather, slowly accumulate income-generating investments and use that money to reinvest into additional opportunities.
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