The Relative Passivity Scale

The Relative Passivity Scale

I think the goal of most of the people in this community is to reach W2 independence. We want to escape the indentured servitude of the 9 to 5 and live a more purposeful life. There are a number of ways to do this. The simple one is to accumulate enough. Although the definitions may vary, enough is the amount where you never have to be employed again. The other route is to build up separate perpetual money making machines that create wealth for you. These are so called passive income streams. But it is debatable about how accurate this moniker truly is. I suspect that, like so many things in life, there is a continuum. A sort of relative passivity scale.

The dream of lounging away in the tropics while the bank accounts grow is slightly dishonest. Depending on how you have organized your life, there is a probability that you will find yourself more or less engaged in the pursuit of making money.

Let’s take a look at a few rungs on the ladder.

The Market

Although many would call the money accrued from stocks and bonds passive income, anyone who has spent time thinking about such things knows that investors come in different flavors.

The active stock investor who eschews index funds could only be characterized as active. Hours are spent researching companies, reading about trends, and executing trades.

This could be a full time job, and thus scores pretty low on the relative passivity scale.

S&P 500 and total market fund investors have a much more accurate claim to the passive income title, and a higher standing on the relative passivity scale. But even at minimum, there is a certain amount of work necessary. Asset allocations have to be organized and monitored from time to time. Rebalancing should be considered.

Even if one pays for an advisor, there is still time and energy devoted to meetings and strategic planning.

Real Estate

Real estate is a step down the relative passivity scale. Unlike paper assets, owning property may take much more oomph. Properties have to be scouted and bid upon. Funding needs to be secured. After one owns a property, renovations may be necessary. Then back into the market as a flip or rental.

I own and manage four properties and have called it passive income in the past. The truth, however, is that a certain number of hours are devoted every month. Sure, there is a lot of front loading the sacrifice. Once my properties were renovated and rented, the mental and physical energy went down greatly. But it is not completely gone.

Business/blog

Although some have tried to call a blog or a small business passive income, I think this is a stretch. Now we are moving to the bottom of the relative passivity scale. These type of activities are much more active.

Although money can often come in at random intervals uncorrelated to moment to moment physical labor, the labor still does occur. Behind the scenes, hours or even years of work is required to turn meager profits.

These ventures sometimes fall under the passive income rubric because after years of building a foundation, many owners are able to extract themselves from a grand majority of the decision making process by hiring intelligently.

But it would be unjust to say they are passive.

Final Thoughts

No income stream is truly passive. There is always a certain amount of work involved in setting up systems. Instead, there is a relative passivity scale. Index fund investing falls pretty high and requires minimal input. Real estate investing can be somewhat in the middle. There is no question that blogging and business ownership rank pretty low.

The higher an activity falls on the scale, the easier the pathway to riches.