Whether you’re thinking about what to do with your savings or your time, it’s often taken as a given that ‘passive income’ is the best goal to pursue.
However, searching for free income can actually be counter productive.
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Why do so many influencers talk about passive income?
The short answer is: because it’s a really attractive idea. Who wouldn’t want to receive income without needing to work for it?
Because it has such a wide ranging appeal, low-effort personal finance books, videos and podcasts will often focus on the topic. Selling the passive income dream is a very profitable line for influencers, so it is in their interests to promote it.
The phrase is now so overused that it has basically become a meme, and a red flag that someone is trying to sell you something.
For many people, ‘passive income’ has become synonymous with success, wealth, or investing. That is very much not the case!
I have savings – shouldn’t they generate an income?
If you’ve recently started building savings, or perhaps received a lump sum, your first thought may be: can this provide some income?
It makes sense to want to see some tangible benefit from your savings. But the issue with focusing on receiving ‘passive income’ from your savings is that by taking income out of your investments rather than re-investing it, you lose some of the magic of compound growth.
Taking money out now means having less money available in future. The more you take, the bigger the impact. It sounds obvious when stated that way but it’s easy to miss.
Gains from interest, dividends or growth are ultimately not really any different to other money (for those interested in digging deeper into this topic, it is called the fungibility of money). Spending £500 of savings interest is the same as spending £500 of your savings – or indeed £500 of your employment income.
Take the time to work through our flowchart and lump sum guide and make a financial plan which takes into account how much you can spend and save from your regular income, when you might need to withdraw money from savings, and when you might have enough to live off (retire).
I feel like I don’t earn enough – how can I increase my income?
If you would like to increase your income, the most efficient way to do this is generally through your main job. It is almost always better to look for career progression opportunities than ‘passive income’ opportunities. Finding a role that pays £5,000 more will likely be easier to achieve, more reliable, and take up less of your free time than trying to make £5,000 elsewhere, and investing in your long-term employability will compound over time.
If you need more income in the immediate term, the simplest solutions are things like overtime at your workplace, or getting an evening or weekend job.
If you are looking for something to do on the side that may not bring in money immediately but has more potential for growth, think about what you might be particularly good at (or enjoy) that might have a market. There is no one thing that anyone can make an easy profit in.
Do consider carefully whether the time and effort spent on a project like this will be worth the returns. Start-up costs, running costs, time costs, and opportunity costs (what else could you be doing with this time, effort and money?), all need to be weighed up.
Common passive income suggestions
Buy to let
Our Buy to Let page compares BTL to investing in stocks and shares. For many people, BTL is not very tax efficient, or particularly “passive” – it tends to take more time and effort than people guess, so if you are considering this make sure to consider the issues carefully.
Dividend portfolios
Dividends appeal to income-focused investors – spending dividends can feel less painful than selling some of your stock.
However, it’s not that simple. See https://ukpersonal.finance/index-funds/#Acc_vs_Inc.
The other challenge is that you significantly limit your investment universe by looking for dividends. For example – an investment that returned 6% growth would be better value than one that returned 2% growth and 2% dividends. Prioritising dividends is a form of active investing, and the research on its drawbacks is conclusive.
Starting a business / “side gig”
Owning a profitable business certainly has a higher possible income ceiling than working as an employee. However there is a big risk that you will instead lose money, and of course time.
There is also no one business that anyone can succeed at – or even anyone with a certain amount of money to spend on a business. Someone who can run a restaurant can’t necessarily run a marketing agency or a construction business.
If there’s something you think you could do that could become a successful, scalable business, we’re not here to tell you otherwise! But if you have money and are looking to get the best returns from it, this is unlikely to be the way to go.
Looking for ‘passive income’? Look out for scams
If you are looking for opportunities to make passive income (aka, to get money for free) you will quickly find that there’s a whole universe of content on this topic, with many niches for different audiences. Whether they emphasise that it’s easy and anyone can do it or that it’s difficult and requires grit and determination, whether they promise riches or just a small stream of income, anyone selling this dream should be looked at with suspicion.
Influencers will try to sell you on bogus ‘courses’, access to exclusive communities or coaching for a subscription, or whatever else they can think of to extract money from their audience on the promise that they will teach reliable techniques to generate passive income.
It is in these influencer’s interests to promote the idea that working for money is a mugs game, and ‘passive’ income is the only path to success. This is far from the truth.
Ironically, profiting off the general excitement about ‘passive income’ is a better way to earn money than any of the passive income strategies they claim they can teach you. (You merely have to leave your conscience at the door).
Search for ‘most profitable youtube niches’ and you will find ‘making money online’ at the top of the list, or read passive income forums and you’ll find most of the success stories are selling resources to other people interested in making passive income.