Passive Income: The Truth

What does it mean to achieve financial freedom?

Does it mean having a big house with a half dozen exotic cars parked in the driveway? Not necessarily.

Financial freedom is when your passive income exceeds your expenses.

In other words, financial freedom is when you no longer have to work to meet your needs. So, that neighbor with the big house and the fancy cars might not necessarily be financially independent if he’s never home because he spends 70 hours at the office “making deals.”

On the other hand, your other neighbor down the street who lives in a more modest home and drives two serviceable cars but who is never home for another reason may be the one that’s achieved financial freedom.

If your other neighbor is never home because he’s always on vacation or visiting his kids or grandkids, it might just be because he generates enough passive income to afford him the luxury of not having to work.

Every day, you’re bombarded with emails, social media ads, and YouTube ads about living the high life through “passive income.” They’ll show you the foolproof way for generating this passive income. All you have to do is to pay for their course.

My first thought is, “So you’re going to teach me how to sell other people information about how to teach other people how to make passive income from selling information just like how you’re showing me? That’s your business?” It must be working for these guys who are selling this pipe dream because their ads don’t stop. The problem is, it doesn’t work for most of the people buying this stuff.

That stuff on the internet selling you the dream is not passive income. There’s true “passive income” and then there’s what I call “false passive income”.

True passive income takes work and it takes time. It takes years, not weeks, to achieve. False passive income – what some call scalable income – is not true passive income. Scalable income is a gamble. You pay for course after course after course in hopes of making enough income to retire.

Monetized YouTube channels, affiliate marketing, selling digital products, courses, and books online are all examples of scalable income. Some people make a living from these activities, but don’t be fooled when this type of income is referred to as passive income. You could potentially make a lot of money from scalable income sources but there’s no guarantee.

True passive income is different and it’s not easy to generate. You will not get rich quick, but if you follow certain guidelines, you’ll give yourself the best shot at achieving financial freedom.

True passive income sources have underlying physical value. Passive investments in income-producing businesses, rental real estate, oil & gas interests, and agriculture are all examples of passive income sources.

One of the differences between passive income opportunities and scalable income opportunities is the person pitching the opportunity. With passive income opportunities, the promoter has skin in the game and they don’t make money if you don’t make money. If those internet gurus told you that they don’t get paid unless you get paid, they’d go out of business.

So let’s talk in realistic terms about passive income. Achieving financial freedom is when your passive income exceeds your expenses. How long will it take for your passive income to exceed your expenses?

Let’s consider the following passive income scenario:


Under the scenario above, to achieve financial freedom, the person above would have to have a capital balance of $700,000 to achieve a passive income of $70,000 ($700,000 x 10%) to meet their expenses.

In this case, it would take 24 years for passive income to meet current expenses of $70,000.

Accelerating the Timeline

So you don’t want to wait 24 years to achieve financial freedom. So here’s how to accelerate the timeline.

If you increase your income and increase your annual contributions as a % of your income, that is one way to accelerate your timeline. The other is to reduce your expenses. Cut out debt. If you reduce your expenses, you won’t need as much time to build your principal up to the amount needed to generate the amount of passive income to meet your expenses.

Now consider the following scenario (numbers in bold are numbers adjusted from the numbers above):

By decreasing expenses and increasing your annual contribution and your income, you can shorten your financial independence age from 54 to 46. Increase your income by working for promotions, find a side hustle, whatever you can do to increase that capital pool will work to your advantage towards accelerating the timeline for achieving financial independence.

Achieving financial independence through passive income is entirely realistic. What’s not realistic is that it will happen next year.

It’s not easy, but if you’re willing to sacrifice some luxuries to put into the passive income wealth machine, the sooner you’ll be able to achieve your goals.