Passive Income Eclipse
Passive Income Eclipse
What is financial independence? It seems we all agree on a few different definitions. One is having enough wealth saved up that one could live the rest of their lives without making another cent. There is some juxtaposition of the 4% rule or a calculation of 25X spending. Another oft used definition is that financial independence is when passive income streams accrue to a high enough number to pay for monthly needs. There may not be a fortune in the bank, but some admixture of business income, dividends, and real estate fill the gaps. In my humble opinion, there is one other definition that I believe gets short shrift. I call it the passive income eclipse.
The What?
The passive income eclipse is the point when “passive” income streams overcome active ones, and thus trigger the opportunity to leave a traditional job. You’ll noticed that I put the term passive in quotes. The reason is simple. Almost all forms of income generation require some work. Even broad based stock market indexing requires some thought and manual labor to secure these assets.
We have many examples of this in our community. Real estate mavens like my podcast co host Paul Thompson who used various income streams to free themselves from the daily grind. Side hustlers whose side gig became so successful that they were able to hand in their resignation. Bloggers who now make over six figures from their site alone.
The list goes on.
Is This Really Financial Independence?
Is the passive income eclipse truly financial independence? I guess you could argue that it isn’t. But I would politely disagree. After all, what is financial freedom other than the ability to spend your time doing what you like, and follow your passions instead of an income stream.
Real estate, blogging, side hustles. These are usually passion projects that most of our community would be doing even if they didn’t need the money.
And maybe that is a better definition of financial independence. Spending everyday doing exactly what you would be doing if you never had to make another dollar again.
My Journey
Over the years the passive income eclipse took hold. I took on enough hospice work that I could pay my monthly expenses from the stipend. Yet, I was able to feel like I was involved in meaningful work that I would do even if I didn’t need the money. It truly felt like it was passive. A side gig.
A side gig that overtook my main gig enough so that I could close my practice.
Hospice work, for me, started as a meaningful side hustle to my very stressful and time consuming practice. I considered it passive income because most of my activities were based on answering phone calls when I was otherwise busy with other things. Throw in a few low stress meetings here and there. But mostly it was pleasurable.
Final thoughts
There are many definitions of financial independence. I propose a new one that is less based on wealth and more on the activities that fill our days. The passive income eclipse is when “passive” revenue streams overtake active ones and allow you to fill your time in a way that is money independent.
To me, this is the definition of financial freedom.
Side gig, main gig, side hustle, main hustle, real estate. What happens to any of these if you don’t show up? I don’t mean you create an alternative management scheme I mean don’t show up. You start a blog and suddenly your life becomes about creating content for the friggin blog. but but but I love creating content!!! I’d create content even if I didn’t have a blog. Nonsense. You buy some real estate. If not rented it gets sold for tax liens. Just don’t show up for a year or two and see the state of your real estate. But but but I’d take on the hassle of keeping the place rented repaired and profitable even if I didn’t own it just because I love that hassle! Nonsense. Side hustles are the equivalent of side hassles. You trade your time and risk capital in expectation of making a profit same as with any job. Sounds like Nirvana to you, sounds like a peace destroying alarm clock to me.
Fair enough. I agree their is risk and work involved.
“Almost all forms of income generation require some work.”
Agree. I think that active and passive income are matters of degree. It’s not always possible to clearly fit a given activity into one of these two boxes. Also, a given activity may be ‘passive’ for someone highly skilled in that craft but very much ‘active’ for someone with lesser skill and experience. E.g. Hospice work to a less skilled practitioner, or simply one with a different temperament, could very much feel passive.
The second more fundamental issue with PIE (passive income eclipse) as defined is that by solely focusing on income the measure could give a false positive of a successful financial approach that is doomed to failure. Take the example of a person whose active income does not cover their monthly expenses entirely (there might be student loans, some finance on a credit card to ‘get by’ (minimum payments made each month) that kind of thing). Such a person now experiences a PIE and their passive income now exceeds their active income, but alone does not cover expenses. I’d argue such a person is not financially independent, which becomes apparent if their active income is voluntarily or involuntarily removed. With the passive income, which exceeded their previous active income, unable to cover monthly expenses such a person will slowly sink further and further down financially.
That’s why Is say that without a link to expenses, PIE is a potentially problematic way to identify FI. PIE needs to be defined by reference to monthly expenses in order to be a measure that will work in all circumstances (which then transforms it into the second definition of FI mentioned at the start of the post). Although, to emphasise, this oddity of active income not meeting monthly expenses was the only one where I thought PIE was in general danger of producing a false positive indication of FI.
HH
Good point.
For me the definitions of financial Independence and finacial freedom she out like this.
Finacial Independence is what everyone says it is. 4%, 25x, never needing to work for money again. Plenty of people do paid activities but it is all gravy.
Financial freedom is having the financial runway to choose what you want to do with your time. It’s having FU money and then some. You still may need to make money because you haven’t reached financial Independence yet. But you get to choose how to spend your time getting there. You get to decide how much and what kind of paid work you want to do because you have the FI lifestyle and live far below your means. What you call PIE sounds similar to this.
Yes. your second definition sounds like what I am getting at.