Passive income is the _Daenerys Targaryen_ of personal finance. It scorches the earth of our work-centric society giving birth to freedom, pleasure and financial independence. It anchors so many calculations, such as the never-ending quest find your tipping point, or [your “Number.”]() ![Blog post image](/images/blog/giphy.gif) The allure of The Number is that it spits off passive income. Once you’ve amassed the right amount of assets, plug in a low-risk rate of return (2.25% via a [High Yield Savings accounts]()) and you’re off to the races. Game on, it’s time to start living. ## But it’s a flawed calculation Spoiler alert: __low-risk assets have EXTREMELY low returns.__ So you need to accumulate a f*ckload of money to live off of the passive income. The obsession with passive income also hides the fact that you have many more strategies at your disposal. They may not be totally passive, nor do they fully protect your principal, but using a portfolio approach to passive income can be a useful lever to [finding fulfillment AND financial independence](). And if you’re looking for easy ways to receive a monthly check in the mail,__you can stop reading now. That just doesn’t exist.__ ## Try a portfolio approach Using a single rate of return is also overly-simplistic. Instead, let’s analyze three Passive Income levers: a risk-free savings account, a simple digital product, and S&P 500 dividends. We’ll apply a simple framework to evaluate each source of income: * Degree of difficulty (_How hard is this source of Passive Income?_) * Degree of passivity (_Is it truly passive?_) * Upside potential * Risk of loss * Tax efficiency Let’s say your goal was __to generate $20,000 of passive income each year__. How would these three opportunities stack up against one another? ## Option 1: The FDIC-insured bank account This is the silver bullet of Passive Income. You’ve got the remote risk of a US default with no [duration risk](). But if we run it through our framework, it’s by no means foolproof. ### Degree of passivity Truly passive, other than the fact you’d have to split the money amongst banks to stay below the $250k FDIC limit. ### Degree of difficulty To generate 20k of Passive Income a year (at a 2.25% yield), you’d need an account balance of $888k. To earn $888k (as a single person living in LA) you’d have to earn $1,750,000. ### __Upside potential__ None, it’s a savings account. ### Risk of loss In nominal terms, none. But if you adjust for inflation (i.e. real terms) you’ll lose purchasing power over time. And since these are daily rates you are subject to federal reserve policy. In other words, when the economy tanks, your interest rate will go down. ### __Tax efficiency__ Low. Interest is taxed as current income, so your passive income could be taxed as high as 37% (not to mention state tax) ## Option 2: A digital product I know what you’re thinking: “Wait, he’s now comparing apples and oranges – Digital Products are not passive!” But hear me out, I’m adding something that’s clearly not passive to __illustrate the relative difficulty__ between these two alternatives. And I’ll use a very tangible product, that we’re all familiar with: [RadReads](). RadReads generates $20,000 in annual income __exclusively from our generous Patrons;__ a number that’s been consistent over the past two years. ![Blog post image](/images/blog/patreon-passive-income-300x277.png)Patreon is a membership driven for of quasi-passive income ### Degree of passivity It’s not. The newsletter/blog take me on average 6 hours (per my [Time Audit]()) to create each week. But, I started it while I was working 70 hours/week (and had a newborn), so it absolutely can exist as a side project. ## Degree of difficulty Mixed. I’ve working on the blog/newsletter for four years and it’s really only got traction in the last two. But there’s an embedded advantage that isn’t captured in a strict passive income calculation: __it never feels like work.__ So ask yourself, if you can generate income from something that doesn’t feel like work – _is it passive?_ ### __Upside potential__ High. In fact, the adjacent consulting/coaching/speaking opportunities are annualizing to become a six-figure business. To be fair, this upside would not be captured as a side project (and has become, _my job_). ### __Risk of loss__ Mixed. There’s little principal at risk, the opportunity cost (or __forgone income__) is the biggest risk ### Tax efficiency Decent. Running your own business has good write-off ability (talk to your accountant!). ## So, what’s more difficult? Generating $1.75 mm of income or creating your own version of RadReads? __The jury is still out,__ but both of them have _the profile_ of $20k of Passive-(ish) Income per. I’ll let you be the ultimate judge, but spoiler alert: __They’re both hard.__ ## A bazillion flavors of digital products There’s an entire section of the Internet dedicated to the world of digital products. (It’s also is rife with false promises, so _caveat emptor_). Don’t get it twisted: __digital products are very, very hard.__ But the playing field is level – the opportunity is open to anyone with an Internet connection and a desire to [teach everything you know](). Here are a few examples: * Ebooks * Online Courses * Webinar recordings * Live event recordings * Virtual summits * Membership sites * Expert interviews * Workbooks and templates Here’s an absolutely mundane example from the RadReads community. For a one-time payment of $50, Nat Eliason [sells lifetime access to the notes]() of all the books he’s read (through a product he calls _Brain_). If you send him 50 bucks, he’ll literally share a gigantic Evernote notebook with you. __Passive? Not really.__ But was he going to read the books anyway? Absolutely. Eliason sells roughly 12 of these “subscriptions” each month, for a total of $7,200 a year. Through the lens of our framework, you’d need $320k of High Yield Savings (corresponding to roughly $600k of income) to generate that same amount of passive income. ![Blog post image](/images/blog/nat-eliason-passive-income-1.png)Tap into Nat’s ‘Brain’ for $50. ## A third option: The S&P 500 The [current dividend yield]() of the S&P 500 is 1.88%. Stocks typically comprise some element of a passive income portfolio, but their volatility (and risk of loss) are well-documented. ### Degree of passivity Truly passive via an ETF or mutual fund. ### Degree of difficulty To generate 20k of dividends a year (at a 1.88% yield), you’d need an account balance of $1.1 million, and as a single person living in LA you’d have to earn $2.2 million. ### __Upside potential__ Good. If you use historical rates of return, you’d probably generate an additional 4-6% over the long-term. ### Risk of loss High (and depends on your time horizon). As a benchmark, the S&P 500 lost half of its value during the 2008 Financial Crisis. ### __Tax efficiency__ Good. Both dividends and capital gains have preferred tax treatment. ## Be the DJ in your own life In [There’s No Such Thing as The Number]() I encouraged you to break out of linear thinking in your pursuit of autonomy on your own life. You have so many levers at your fingertips, use them as you __try to tie all the pieces together.__ > _Think of yourself as a DJ with all sorts of knobs to adjust the energy and intensity while blending tracks into one beautiful experience. The knobs are your work, your investments, your spending and how you allocate your time. There’s no end to your career. Nor is there a start to retirement – just tiny tweaks along the way that respond to the energy of the crowd._ You’ll find some of these knobs in the various flavors of passive income, so tap into your built-in advantages. If you’re young, take on the principal risk of equities while still collecting the dividends. And every single one of you can tap into your creativity to build even the tiniest digital product – as we’ve seen, they pack quite a punch. And remember the loophole: if it doesn’t feel like work, it might as well __qualify as passive income.__ If you’ve ever experienced a wild DJ set, you know all about __the drop__ , the moment > _…in a dance track when tension is released and the beat kicks in…, releasing the enormous energy accrued during a song’s progression…after the momentum build, the pitch rising, the tension mounting, bigger, louder, until suddenly — the drop._ The progression, momentum, and the drop are your tools to make the energy explode. __You’re the DJ.__ _This post was inspired by conversations with[@nateliason]() and [@jasonevanish]()_