Why Passive Income Will Make You Value You Yourself More

Growing up my parents instilled in me the virtue of hard work. Wake up early, give your best, grind it out and your labor will bear fruit. I have followed this path for most of my life until one day I realized it was taking me in the wrong direction.

The old model

The problem was that I was equating effort with value when they are two totally different things. Unfortunately, this is how most of us think about money. If you tell someone you need more money, they will usually reply, “get a part-time job.” Traditionally that was a good answer. A price for an hour of work was agreed upon and to make more money you worked more hours and your employee got more service.

This equation, however, lacks two key elements:

1. There was no open forum in which employee and employer agreed upon what fair compensation was for the hour of work
2. It doesn’t take into consideration the amount of value you contribute during that hour

If you read most economists, whether they lean left or right, you will see that the hourly wage discussion has failed most workers. Even raising the rate to $15 per hour, creates more problems than it solves. The greater problem with this model is that it puts a cap on your value, which is to say you could crush it during your shift while I dog it, yet we both make the same amount of money. You could argue that overtime your work ethic would be noticed, appreciated and you would be promoted. But that is relying on a lot of other people acting for your benefit, which puts you in a passive role in your own career development.

There is a much more productive approach. First this begins with you acknowledging that you bring value. I am a storyteller. For years I told local stories for community newspapers for $23,000 per year (not much more than that $15 minimum wage discussion). Then I realized that companies didn’t know how to tell their stories. That CEOs didn’t know how to package their life events into compelling narratives. Suddenly I was doing the same sort of thing I did with the local paper but I had found an audience that valued what I did differently.* That is a good start.

Once people realize they have value to add, they often develop a services business. This is a step in the right direction because at this point at least you are assigning a monetary number to the value you’re providing. That is an empowering feeling. It still, however, marries effort and value. You still need to add effort to add more pay out. The laws of physics means there is a limit on your earnings – there are only so many hours in the day. You could add more billable hours by adding more people but that simply increases complexity and responsibility. One of the goals of this site is to create personal freedom. So then how do you separate value from effort?

You create passive income.

The new model

Passive income, according to our friends at Wikipedia, is “income received on a regular basis, with little effort required to maintain it.” Growing up that sentence would have offended me. Income and little effort in the same sentence would have struck me as cheating. But the key words in that sentence are actually “to maintain it.”

That is where the value of passive income can be found. America was built on innovators. We have always been a nation of wild ideas. Brainstorming, scheming, white boarding and coming up with a plan are intoxicating. There are, however, only so many ideas. And even for the ones that succeed the magic eventually wears off and it becomes the grind of maintaining.

Passive income isn’t saying that you don’t have to work hard. In fact, to create a solid stream of passive income you probably have to work harder. What passive income is saying though is use up all of that energy, creativity and passion in the beginning and develop something killer. Then create a process that allows you to sell that work on a regular basis without you having to actively replicate the work. This will open up your time to either do something new – which could lead to even more passive income – or spend time on other, more personally fulfilling pursuits.

After journalism I entered the tech world and joined a company that operated a Software as a Service (SaaS) model. Basically, we built really great products. People bought them to help their websites perform better. Once they bought the product the companies tended to keep using them year over year and paid us a monthly or yearly subscription. We were then able to count on that recurring revenue while our sales team went out and sold to new companies. This is how we were able to scale at an exponential rate.

You can do the same with passive income.

So once you discover the skillset you have that is valuable, don’t think about how you can sell it on a 1:1 model but think about how you can create a passive income source (check out this blog on how to do just that!). So instead of creating that services business, create an online seminar that people can pay to participate in. This is the holy grail. It allows you to set your monetary price for the value you are providing but it also eliminates our own negative perceptions. Most of us under appreciate our skills. We think only so many people would be interested. The passive model can prove us wrong.

Of course, there is still a lot of work to do – and that’s OK because deep down we all like working, we just want to be compensated fairly – but once the heavy lifting is done the rewards can ripple for months and months afterwards, which gives you more time to come up with that next great idea! Who would have thought that getting passive would be the best way to proactively control your own career?!
*In this post, I am referencing value in the context of income. One could easily argue that there was much more value (freedom of the press, moral obligation, education, etc) in the work I was doing as a community journalist. There is another discussion entirely on what you value as an individual and the trade offs to greater financial value vs community impact.