338. Real Passive Income: What's Legit and What's Not

Passive income is one of the most talked-about wealth-building strategies today, but it’s also one of the most misunderstood. From rental properties to online side hustles, many income streams labeled “passive” actually require far more time, effort, and involvement than people expect.

In this episode of the A Wiser Retirement® Podcast,  we take a closer look at the reality behind passive income, breaking down the myths, the misconceptions, and what it actually takes to build income that works for you.

Related Podcast Episodes: 

Ep 240. The Benefits of Diversified Income Streams

Ep 239. How can I reduce my current taxable income?

Related Financial Education Videos:

Investing for Income vs Growth in Retirement: Finding the Balance

Does Social Security Count as Income?

Learn More:
- About Wiser Wealth Management
- Schedule a Complimentary Consultation: Discover how we can help you achieve financial freedom.
- Access Our Free Guides: Gain valuable insights on building a financial legacy, the importance of a financial advisor for business owners, post-divorce financial planning, and more!

Stay Connected:
- Social Media: Facebook | Instagram | LinkedIn | Twitter
- A Wiser Retirement® YouTube Channel

This podcast was produced by Wiser Wealth Management. Thanks for listening!

Transcript

Passive Income Hype Check

SPEAKER_04 0:00

Rental properties, dividends, and side hustles, everyone calls them passive income. But how passive are they really? Let's separate fact from fiction in this episode. Stay tuned.

SPEAKER_02 0:11

Welcome to a wiser retirement podcast, where we cut through the noise and bring you real, honest conversations about investing, retirement, and building lasting wealth. No sales pitches, no gimmicks. Just insights to help you stop guessing and start planning your financial future.

CFP Life And Advisor Banter

SPEAKER_04 0:30

Welcome to a wiser retirement podcast. I'm senior financial advisor Shauna Therriel, and today I'm joined by financial advisor Michaela Dowdy to discuss real passive income. What's legit and what's not? If you enjoy listening to our podcast, don't forget to leave us a review. Let's get started. Good morning. Good morning.

SPEAKER_03 0:50

Hi, Shauna.

SPEAKER_04 0:51

How are you doing?

SPEAKER_03 0:52

I'm so good. How are you?

SPEAKER_04 0:54

Miss Omo CFP. Yes. Certified financial planner.

SPEAKER_03 0:58

Yes, we're so close. The exam has been passed. I mean, just waiting for the official certificate to come to me via my email. How does that feel just to like be done with that? Oh my gosh, it's so nice. I have a life again. Like, I feel like I don't have to go home and like do homework, which is such an odd feeling when you're like working already. Um, but it is so nice to uh now actually kind of start picking up a little bit of my hobbies back again. Right. Like, let me cook, let me go and do all these other things, like and stop doing the bare.

SPEAKER_04 1:31

You have to work out, right? Yeah, yes. You get to work out. Yes. No, I'm so proud of you. It was so awesome. It has to be a good feeling getting that off of you. That is that is a I don't know that people know that aren't in our industry. It is a really hard test. That is a really, really hard exam. It is rigorous. It's like you have to have a certain amount of hours, and then you have to have like courses prior to it to be able to even sit and then sitting for the exam. I mean, it is a monster to take. So it is.

SPEAKER_03 1:58

It is. And I'm glad that it is behind me now and it is done.

SPEAKER_04 2:02

We're glad too. And then you have to like have all your experience submitted before you can use your letters and all of that. So exactly. So we just wait. So hopefully by this time it'll be done and you'll have your letters, right? Hopefully. So exciting. But the test is done. So that's the hardest.

What Passive Income Really Means

SPEAKER_03 2:18

That's the big thing. That's the big thing. That's so awesome.

SPEAKER_04 2:21

Well, today we're talking about passive income. What is real passive income? Um, I feel like we get this question a lot, you know. It's like people come in, it's like, how can I have a bunch of passive income and you know, so so that I can let my money work for me and all of this. Yes.

SPEAKER_03 2:37

Especially, I feel like in the digital age, there's so many different streams now that you see, whether it be, okay, well, I could create an Amazon storefront.

SPEAKER_05 2:46

Yeah.

SPEAKER_03 2:46

Or I could, you know, do, I don't know, something on like Etsy or, you know, something like even like Canva I've seen lately where people will make little templates on Canva and sell those. So it's just there's starting to be a very different, you know, view and it's a lot more accessible to get this other income source than it used to be.

SPEAKER_05 3:06

Yeah.

SPEAKER_03 3:06

But I feel like you still traditionally we're hearing about, you know, rental income for the most part, right? Rental properties. How can I buy another house? Or should I keep my first house that I bought and just turn it into a rental? Yeah. You know? And everyone refers to that as passive income, which is, yeah.

SPEAKER_04 3:25

We're gonna demystify that a little bit, maybe, because it's like, it's like, how passive is it really? No, exactly. Exactly. So what so the definition, okay? So let's talk about what is actual passive income. Like, what is the actual definition? So the IRS definition, um, IRS framing, it's like rental activities or businesses where you don't material participate. Exactly. So you're not doing anything.

SPEAKER_03 3:48

Yes, like you have not managed the property whatsoever. Right.

SPEAKER_04 3:52

Manage the property, don't have to run the business, don't have to, you know. So it's like when you think about the tra, you know, when people ask us about what exactly what you're referring to, it's like, well, that's not really. Usually you have to have some play in it. Exactly. So it's almost like semi. And so the other, the other definitions, um, you know, it's basically income not directly tied to ongoing labor. So really, it's like there's active participation, then semi-passive, and then truly passive, where you're not, you know, we'll kind of go through a couple of those, but um I mean, really, I think the theme is it's like if whether it's passive or not, I mean, you I think people want passive because then it's like your money's working for you, you're not really having to do anything personally. And so it's over here working for you while you can do other things. So I really think, you know, the theme, I think it's great to have multiple sources of income.

SPEAKER_03 4:46

Definitely.

SPEAKER_04 4:47

You know, diversify your income if you can't. Absolutely, you know, because you never know if something happens to your job or you know, uh then and if you end up retiring, then you know, you have other income to help offset that and all of that as well. So um let's just get into you know, let's go through those we were talking about. What what people think are passive. Yeah, you know. So what what what do you normally hear? I mean, I think you started naming them what yes, you know, but let's talk about each one you kind of mentioned.

SPEAKER_03 5:16

Well, I feel like rental properties is the most often one that we hear about, is just saying, I want to be a part of something passive, passive income. I want my money to be generating wealth for me. And it ends up being, okay, I'm gonna have a rental property because I've already purchased this home. I'm going to build up my own empire basically of rental properties. And what ends up happening is that's not actually passive at all. Um, unfortunately, your rental property is going to require a lot of work out of you. Yes. Um, even listing it on, you know, okay, we're gonna do, you know, an Airbnb or we're gonna do that, requires so much work. Who's gonna clean that property? When the AC goes out, who's gonna fix it? You know, when uh, you know, a door gets broken, someone's gotta go over there and you know fix that as well. Uh, you know, who's gonna mow the lawn? All of those different things of just maintenance on the property. Also, who's gonna take and who's booking for it? Of course, if you kind of outsource to Airbnb, BRBO, those can kind of take care of a little bit on the short-term rental side. Yeah, if you're looking for more of a long-term rental, that's something you're typically going to have to have someone, a part of your team that's doing that alongside you if it's not yourself.

SPEAKER_05 6:24

Yeah.

SPEAKER_03 6:25

And so it ends up being more of an active approach, whether you want it to be or not.

SPEAKER_05 6:30

Yeah.

SPEAKER_03 6:31

It's not truly passive because of the fact that you are having to materially participate at so many different points, typically, especially if you're doing regular turnovers with like a short-term rental. Absolutely.

SPEAKER_04 6:43

No, yeah, I definitely um, and and something else too. It's like, you know, I do like having rental properties, but you're not really diversified there. So if you have a lot of money locked up in like one or two properties, and then something happens where there's a disaster or something, some kind of income interruption where you can't rent it out or something, you know, and then and then homes do age, you know, so it's gonna have to be maintained and redone. So I mean, it can be a good source of income. Um, but I I don't like having it like a huge part of your portfolio, part of your portfolio, yes, but that's where it's challenging because the cost of homes is just so high. You know what I mean?

SPEAKER_03 7:23

Definitely.

SPEAKER_04 7:23

Um, but that's kind of like a side note. But um another one, you mentioned online businesses and side hustles.

SPEAKER_03 7:31

Yes.

SPEAKER_04 7:32

You know, but if you're doing a side hustle and you're selling stuff or you're doing an Etsy or doing that's not really passive, you're actually doing it.

SPEAKER_03 7:39

You're having to do it. Even with like Amazon storefronts, you're having to put everything in the storefront to then get the commissions from people by putting it on your social media. Yeah. There's not really a such thing in that capacity as a passive income stream, unless it's something, you know, that you're somehow just giving money to an individual to then pay you back, but like you're not doing anything while they're materially like building up this income strategy. Uh, but overall, the side hustles that are out there, there are plenty of them out there now that you can definitely, you know, market off of online. Yeah. But it's something that to say that that's passive income is not really true. Yeah. It's more of a semi-passive, I'd say. So maybe it's okay, you created this online course and it took you a couple weeks to create that course, but people now, you know, five years later can still purchase that course online. Yeah. Okay, sure. Maybe for the last year or two years, you really haven't put much work into it. But you did at the beginning.

SPEAKER_05 8:35

Yeah.

SPEAKER_03 8:36

And so even if it required that upfront work, it's still considered, you know, technically active income. Yeah. Uh especially when it comes to like the IRS, because you did materially participate in that. Exactly. And so that's exactly, you know, just a differentiator. And I feel like that's kind of the bigger differentiator here that we're even getting at is kind of there, there's no with passive income, you or the passive income everyone refers to. There's still labor involved with it typically.

SPEAKER_04 9:03

It's not something you set and forget in the capacity that our modern day, you know, well, I mean, there's still like marketing of that, and there's still, you know, updating things like that. Or, you know, I just I can't think of any business unless you're doing something where you're, you know, somebody's working underneath you and they're just using a license of yours or something like that. Then I mean, I guess that could be passive to a point, but you know, how do you still find those people? You still market to them and you have to have those relationships and you know, so I don't I don't know that that would be completely hands-off either.

Side Hustles And Online Income Truths

SPEAKER_03 9:36

No, definitely.

SPEAKER_04 9:37

Another one is you know, trading and options. Um, I mean, that if you're if you're you can have investments, you know, the investments in the market, investments. I mean, that that is passive income that's working for you when you're not watching it per se. But if you're actively trading and going in and out of investments and monitoring those investments, I would think that I mean you can't just set it and forget it. Exactly.

SPEAKER_03 10:02

Yeah, if you set and forget your options, you might be in a world for obviously exactly depending on what you've done.

SPEAKER_04 10:10

Exactly. So um so so interesting stat. So even among higher income households, the majority of income still comes from wages, so not passive sources. So, you know, we say the higher income earners, they have all this passive income, but you know, the majority of their income, 60 plus percent of it, is still coming from, you know, non-passive sources. Exactly. So they may have multiple sources of income, but yes.

SPEAKER_03 10:38

So and I feel like that's what you see with your higher earners is maybe they don't only have, you know, maybe one occupation or there's only one occupation for the household or something like that. It's more so, okay, there might be two or three different income sources that they're, you know, maybe even getting K1s from or whatever it may be. And that's really what's kind of helping them establish wealth is they do have that diversification, but that doesn't mean that it's passive per se. They're not having to put effort into that.

Trading Is Not Set And Forget

Legit Passive Income From Investments

SPEAKER_04 11:05

I mean, that could be from like private investments and you know exactly. Um maybe some real property dividend paying. So, you know, then then your your earnings and all of that. So you could have multiple sources to your point, you know, where you or maybe you did start a side business on top of that. Um, but none of that is other than maybe some of the dividends can be a little bit passive. Yeah. So what is actually, you know, we've talked about what's not passive basically, or or or what people think is passive, because it's like, you know, they want to come in, it's like, how do I create more income that's passive? Um, but what actually counts as legitimate passive income?

SPEAKER_03 11:44

Yeah. So uh one of the bigger ones that you really see, especially, you know, once you're even getting to like retirement, I feel like this is where a lot of clients start bringing this up is dividend paying stocks and ETFs. Um, so really wanting to have that dividend coming to them because all you're doing is investing in that, you know, ETF or that specific stock. And then they're paying a dividend to you.

SPEAKER_00 12:06

Yeah.

SPEAKER_03 12:07

Um, you know, it whether that be quarterly or however often, and then they're choosing to, you know, pay that out to their investors. And then at that point, you're getting that income stream effectively. Yeah. But then you didn't really, you're not managing the business you invested in. Right. You're not managing the ETF that you invested in. Someone else is doing that, a fund manager, a CEO, whomever it may be, is then in charge of that. So it's not something that you're materially, you know, participating in. And so that's where we really, you know, see that as a big passive income generator and a big, you know, topic, I feel like that a lot of a lot of our retirees like to bring up because they want that secure income stream during retirement. Yeah. And so it just gives them a little bit more security.

SPEAKER_04 12:50

Well, and everyone's like, how how can I just, you know, I've I've heard people say it's like, how can I not spend from principal and I can just, you know, live off the income. And it's like, well, if you're truly talking about the cash flow piece, you have to have a lot of money invested, depending on what you spend, depending on what you spend, to be able to just live off what is generated by cash flow. Yes. But I mean, I always look at a combination of, you know, cash flow and growth, portfolio growth. It's like, you know, many times if you're invested appropriately and your withdrawal rate was is within the 4% rule, if you will, you know, then what happens is you end up, you know, retiring, having an account at a certain value or assets at a certain value, and they continue to grow over time. So, you know, but are you spending from principal? I mean, maybe some of it, because if you're talking about true principal, in, you know, I I look at appreciation in dividends too, just living off cash flow is is tough, unless, you know, depending on how much assets you have. Um there's also other investments as well, um, bonds and fixed income that that also pays that cash flow and that you know, interest rate as well. Um, real estate investment trust, that's one way to be in a passive investment um and get income, um, have a little more diversification. So this is one that is truly passive business ownership with operators.

SPEAKER_03 14:15

Yes.

SPEAKER_04 14:16

So that's kind of like what you were describing. So it's like, you know, maybe you buy into a business or you start a business, but then you hire somebody to manage it and they're doing the hiring and the whatever, and they're running the business, and you're truly only getting the net income from it, and you're not having to touch it. Yeah. So people do it all the time, or they invest in a business and they don't have anything, you know, um, where they get income from that. I mean, that is truly, I mean, I guess you could step in and take over if you own the business. Um, but you know, I mean, you could buy into a laundromat or purchase a laundromat or start a, you know, a tea shop and hire somebody to manage it. I say that because my my middle daughter is uh do starting her own little tea business. So, you know, you or will be at one point, but you know, you could have uh a fact where you buy a business and then hire people to do it and then you're not really doing it.

SPEAKER_03 15:11

Yeah.

SPEAKER_04 15:12

So I mean, that would be a true passive income.

SPEAKER_03 15:15

Now I have a question, and you might not I don't know the answer to this, but it just came up to me as I we were talking through this. If you were a business owner, yeah, and you sell your business, but you keep a you know 10% stake in the company for income, but you're no longer managing.

SPEAKER_04 15:29

Yeah.

SPEAKER_03 15:30

Like you're a business owner, you've sold your business, you're not gonna be. You sold 90% of it. Yeah, you sold 90% of it. You just keep enough that you 10% ownership so you can still receive income from the business, but you're no longer managing anything. You've completely stepped away. Is that active or passive income?

SPEAKER_04 15:48

I would say that's passive.

SPEAKER_03 15:49

I would think it's passive too.

SPEAKER_04 15:50

Yeah, because you're not you're stepped, you stepped away from it, you're not really actively participating.

SPEAKER_03 15:55

Yeah, but I was just curious because at one point you were actively participating.

SPEAKER_04 15:58

So I would think that would switch.

SPEAKER_03 16:00

Yeah.

SPEAKER_04 16:01

And it matters for, you know, reporting purposes of active or passive and all of that too. And but most people think of it as, you know, how can I make money without having to, I don't want to say think about it, but actively participate in what's happening. Yeah. You know, annuities is something that is passive income, but I don't recommend annuities generally. So like, you know, um, but that is considered a passive income as well because it's the type investments. Um so interesting stat here too, um, about investment income, Michaela. Do you want to talk about that?

SPEAKER_03 16:35

No, so investment income. So whether that's your interest, your dividends, capital gains, even which is that growth that you talked about. Exactly. And so that totaled about 1.6 trillion in the US, which is show really just shows how significant asset-based income really is, um, especially at this scale.

SPEAKER_05 16:54

Yeah.

SPEAKER_03 16:54

So just being able to participate in the market um and really investing in these stocks, ETFs, bonds, fixed income, or even REITs, you know, really can give you that passive income that you're, I feel like a lot of our clients are looking for. It's just maybe this is the true passive way to do that.

SPEAKER_04 17:12

Well, interesting. Like when you're looking at this list of what is true passive income, I it's it's really ownership of assets. It's not running a business and managing a house and and doing the rental property. It's truly, you know, I mean, I suppose if you had a rental property and you had a management company that handled everything and you didn't touch it, you could be that. But it's really just about ownership of assets. And, you know, it's not really like a strategy of, hey, how can I have passive income? It's really having enough resources and savings to be able to own assets that are passive. Definitely. Really. So it's not like you can just strategize and say, how can I get there? Yeah. I mean, you can, obviously from savings and investing, but it's really about ownership of assets.

Free Pre-Retirement Checklist Break

SPEAKER_03 17:55

Definitely. Before we jump back into the episode, do you know if you are ready to take off and launch into retirement? Get your pre-retirement checklist, a free guide from Wiser Wealth Management, from cash flow to social security. We've got your account down covered. Go to wiserinvestor.com slash guides to download your free guide today. Now let's get back to the episode.

SPEAKER_04 18:24

You know, the trade-offs that no one really talks about, um, you know, so so one is like investing capital versus your time. So I mean, I would say that our most valuable resource that we can't get back is time, probably. And so if you think about, you know, being able to take that money, but of course it took time to make that money, usually, unless you have an inheritance of some sort, you know. Um, so capital versus time, which is, you know, that's a huge trade-off there. What what else? Liquidity. Liquidity, being locked up in something. Exactly.

SPEAKER_03 19:01

And like that's even something huge of oh, what was it? It was a real estate syndicate, is that right? That we have syndication. Yes. And uh that, you know, you just don't get liquidity out of that. It's really hard to actually ever see your liquidity come back from that, from the experiences that we've had with it. Yeah. Um, and so just you know, something like that. Like, yes, maybe you're investing in it and it is relatively, you know, passive income at that point. Yeah, but you've just lost all liquidity of those funds and there's no guarantee you're going to receive those back. Granted, do most investments come with a guarantee? Of course not. No, but uh absolutely of course not. But it's something that, you know, definitely just even making sure though that you have those liquidity needs available to you. Yeah. You know, if something were to happen and you needed those funds. Uh, because, you know, also though, depending on, you know, your net worth or where you're at, then maybe that risk is worth taking.

SPEAKER_00 19:54

Yeah.

SPEAKER_03 19:55

Uh, but just making sure that you have the appropriate liquidity needs um, you know, available to you are huge, especially when it comes to these passive strategies. You don't want to be, you know, sending out all of your capital in hopes for there's an income, you know, coming back your way, you know, and definitely making sure there's always a contract on those sorts of things as well.

SPEAKER_04 20:14

Yeah, where your money's locked up, whether that be, you know, even in real property, if you're investing in something and you know, the markets could change. That could change in anything too, of course. But if you're if you're counting on that income, um, you want to make sure that you do have enough because we spend cash flow. We don't spend assets, right? So we spend cash flow. So you want to make sure that you either have the money set aside for your expenses or you have enough cash flow coming in from multiple sources to be able to cover that. And if some of that gets disturbed, that you have a plan B, you know, of of how to cover it for living expenses, either cutting back or, you know, covering it for because you don't want to, you don't want to sell when like any investment, you don't want to sell when it's down. You don't want to be a distress sale. So you don't want to be like, oh, I need access to this capital. You have this private investment, and maybe you have to sell it for, you know, pennies on the dollar, or you have to take a haircut to be able to sell something like that to get out of it if you even can, or on a real property or rental property, you know, a distress sale where it's like, well, I need the capital, I have to get out of this now. And then you're just gonna take a lower amount because you need access to the capital. So definitely thinking about all those risks as well. Um, also taxes, yeah.

SPEAKER_03 21:30

Taxes is huge, especially considering if you have true passive income, you have to be so careful because if there is a passive income loss, that's not something you can take against your active income.

SPEAKER_05 21:39

Right.

SPEAKER_03 21:40

You know, so while yes, maybe you have, you know, had an incredible year, you know, you're earning$400, some odd thousand dollars or plus, and then you have a passive income loss. Well, that's just gonna sit there if you don't have any passive income gains. Right. Uh so or income. You know, and so that's where it's just something to know. That for passive income, it's a lot more specific.

SPEAKER_05 22:03

Yeah.

SPEAKER_03 22:04

Especially on, you know, when you can even generate or not generate, but when you can even claim those losses on your tax return. Absolutely. Now, something to note though with that, that is a difference with like your real estate professionals is if, you know, you or your spouse happen to be a real estate professional and then you start having rental properties, then you can typically, you know, claim that then as an active income loss.

SPEAKER_05 22:27

Yeah.

SPEAKER_03 22:28

You know, regardless. But of course, then that's changing it to active income because now you're using that professional status associated with it. So there's an adjustment there that maybe your management doesn't change. But as we've already discussed, you know, real estate really most of the time is not, you know, passive in and of itself.

SPEAKER_04 22:46

Absolutely. Um, you have to look at the risk versus the yield. So, you know, are you locking up a lot of your capital here? You know, is is the time and the effort or is the amount of capital you're putting in there, what percentage of it is your portfolio, whether it's real property or, you know, a private investment or a REIT, et cetera. And then what is the potential return on that?

SPEAKER_00 23:12

Yeah.

SPEAKER_04 23:12

Um, is it worth it? You know, I mean, if you could earn the same thing in a publicly traded stock, I probably would do that. Exactly. No reason to take on unneeded risk. I know. Or like more work or something, or something. And like general rule of thumb, if you don't understand the investment, don't invest in it. Yeah. Like if you don't understand what's happening, I wouldn't invest in it. You know, um, sometimes, you know, people do trust their advisors and should if you have a good advisor, if they say, you know, there's there's an opportunity or, you know, what have you to look at something. And, you know, if you're not trained in that field, you may not understand even how a stock functions. You know, you don't want to be completely out of any investment. But um if it's really complicated and there's pages and pages of words that explain the, you know, I I don't know. I'm just very leery about you know the small prints. So no.

SPEAKER_03 24:07

And you want to know what you're getting yourself into, definitely. Right. Especially when you're taking a risk like that with a lot of your capital.

SPEAKER_04 24:13

Absolutely. So you'll have to look at that. Um so the top 10% of households own about 89% of the US stocks. So top 10% of households own eighty-nine percent of US stocks. Which is so interesting.

SPEAKER_03 24:29

This just seems like that seems like a mind-boggling fact to me.

SPEAKER_04 24:32

Yeah. Yeah. If you think about 10% of people own 89%.

SPEAKER_03 24:37

Like only the top 10% of households.

SPEAKER_04 24:40

Yeah.

SPEAKER_03 24:41

Which I'm assuming the top means the top income earning, the top 10% of income. Probably.

SPEAKER_04 24:46

I would assume so. Households. So that means that most because if we're saying, you know, US stocks is one of the passive income, that means most passive income is really concentrated among the wealthy. Yeah. But I promise you, I have watched over our my career of 29 years. I know you you've been doing this, you know, a long time too. I've watched people go from just starting out savings to building that wealth. And it's there's there's no trick to it. It's being disciplined, it's not living beyond your means, you know, it's saving as you should and investing you know appropriately over time and just having that discipline of, you know, not taking on a lot of debt. And you can grow wealth and get to that top 10% of household. Exactly. And it's really important to do that. Just not because you want to be the top 10% of households, but because you want more choices, you know, as time passes, you know, it g it just gives you more choices and, you know, I don't want to say freedom, but more choices to be able to make and make your own decisions and be retirable and comfortable.

SPEAKER_03 25:49

Yeah. And I feel like that's the big thing is it's, and we even kind of have this on here of it's there's not really a shortcut to this.

SPEAKER_05 25:55

Yeah.

SPEAKER_03 25:56

You know, and that's the thing that I feel like you're constantly seeing online is here's a shortcut to wealth, basically. And unfortunately, that's not how it operates. It's kind of like your body, you know? There's no short shortcut to being healthy. There's no shortcut to being healthy. Unfortunately, you cannot have chocolate cake every day and drink soda all day long and think you're gonna have a really healthy lifestyle.

SPEAKER_04 26:18

Just like you can't like overspend and get a bunch of debt and buy stuff you don't need and think that you're gonna grow wealth.

SPEAKER_03 26:24

Exactly. It's the same thing. It's just unfortunately, there just has to be those like momentary sacrifices. And maybe they're not even, we're not saying big sacrifices, but it's just those little like, okay, I'm not gonna go through that, we're not gonna go out to eat at this restaurant, you know, today, or we're not going to you know, do this certain spending and buy that thing today. You know, it's just certain, you know, opportunities that you just kind of say, you know, that's not in our bigger picture.

SPEAKER_05 26:50

Yeah.

SPEAKER_03 26:50

And that's not going towards the goal that we have for wealth. And like, and I think that's what sometimes gets so, especially in our society of everything's instant.

SPEAKER_00 26:59

Yeah.

SPEAKER_03 26:59

I mean, now you can get any question practically answered instantaneously by whatever AI you choose, you know? And so and if you don't like that AI's answer, go to another one and maybe it'll give you a different one.

unknown 27:12

You know?

SPEAKER_03 27:13

And so, you know, it's just something that it's so instantaneous. You know, I mean, even our our like TV now is, you know, we can watch whatever we want on demand. You know, like it's just there's nothing it's very rare you have to like wait for that much anymore. And so I think because of that, it makes people try and get in on these passive income streams that it's like you won't have to think about it. You'll just become rich overnight. And it's like too good to be true. It's too good to be true. And so it it's just one of those that I hate to see, you know, clients, you know, just fall into that kind of trap of thinking that that's what's gonna happen, especially our younger clients. Yeah. Because, you know, it they're just trying their best and trying to figure out how to navigate it, especially if their family wasn't having conversations with them about it. Yeah. And so it's just really easy to get you know, take all of the large plethora of information that we have out there and try and run with the wrong one because it's the most prevalent one out there. Absolutely.

Building Wealth Without Shortcuts

SPEAKER_04 28:14

So absolutely. So then yeah, so obviously there is no quick, quick way to do it, but how do you build passive income the right way then?

unknown 28:24

Yeah.

SPEAKER_03 28:25

And I mean, really, this is kind of what we were just saying is you have to know your goals. And I think that's the big thing is if you can actually know where I am wanting to go. Yeah. And you know, I think that's a big thing is understanding that you're planning for a long term for most, you know, people. You're you're planning for the long term. And maybe of course you have short-term goals. Yeah. There's also got to be long-term goals out there too that you're working towards. And then I mean, we have a book, What Hero on a Mission.

SPEAKER_05 28:50

Yeah.

SPEAKER_03 28:51

It's one of my favorite books that we read right when I started working here. I was required to read it. Um, and it was so pivotal for me, honestly, to understand, okay, well, what are my long-term goals that I have? And it's okay, 10 years out, I want to be at this point in my career. I want to have this for my family. I want to, you know, be at this personal goal, whatever it may be. And it's like, okay, well, now pairing that back, where do I need to be in five years to be at that goal? Right. Then it's okay, well, then from that five-year mark, where do I need to be in three years? Okay, from that three-year mark, where do I need to be in one year? And then you can find your baby step.

SPEAKER_04 29:24

And that's the way the habits are created. Exactly. Because that's what it is, it's the habit creation to get you there. You know, it's like, you know, losing one pound at a time or gaining one pound of muscle at a time, or you know, saving$10 at a time. So it's like creating that muscle of you just get better and better over time. And then you have that momentum behind you, you know.

SPEAKER_03 29:45

Exactly.

SPEAKER_04 29:46

Um, so that that's where the habits, so you have to start with you have to, you know, start with the end in mind, right? And it's like work your way backwards. I love that, Michaela. And then, you know, start building those habits towards that. Yeah. That's so cool.

SPEAKER_03 29:58

And then once you start kind of building that habit, then it becomes something where you're like you start to really feel that difference of, oh, I, I, you know, this needs to go to this savings account so I can build towards this, you know, housing goal that I might have. And it's like, okay, well, if I want to buy that house and this is going in automatically, well, say you overspent the month before and you're like, crap, I've really got to pay off my credit card. Yeah. Well, then, okay, realistically, I don't need to be paying 29% interest or whatever on the credit card. So then, okay, then what I need to do is I just need to pair back savings. Well, now you're gonna feel that. Yeah. You're gonna say, I just shortchanged my goal. I could have had another$500 in that account, but instead I'm paying off a credit card because I didn't limit my spending.

SPEAKER_05 30:41

Yeah.

SPEAKER_03 30:41

You know, and so it's really just having then that dialogue with yourself.

SPEAKER_05 30:45

Yeah.

SPEAKER_03 30:45

And then you can really start to feel kind of those pain points. And it's the same thing of like, you know, we were just talking about waking up early. It's, you know, those first couple weeks of trying to wake up earlier are awful. Yeah. You know, typically it's just trying to get your mind in that new routine, yeah. Especially if you're naturally like a night owl or something to that effect, but you're trying to be more of a morning person, it can take a lot to get your body adjusted. But once it gets adjusted, yeah, you're you can't imagine going back to it. Absolutely. You know? And so that's where it's just really building that consistency. Yeah. And I think having that consistency with investing, consistency with savings. And that's really what builds your wealth and builds it generationally, because then like your family, your kids, yeah, they're all seeing what you're doing.

SPEAKER_05 31:28

Yeah.

SPEAKER_03 31:28

And then that's where it becomes a generational habit, not just a, you know, personal individual habit. It's you're also, you know, teaching the generation below you or even the ones, you know, above you, you know, kind of what to drive towards.

SPEAKER_04 31:42

And I mean, truly, kids do what we do, they don't do what we say. So if you exhibit that, you know, that doesn't mean they'll always follow your lead, but if you lead yourself well, they'll generally, you know, that's where we learn a lot of our habits for like, you know, health and wealth, all of that. We learn that when we're younger. So if you're exhibiting those habits in front of your children, they do what you do, they don't do what you say. Yeah. So they follow what you do. And and also focusing on, you said, you know, obviously consistent investing, um, diversification, you know, being diversified, and then tax efficiency to try to make the most of what you have. And something I always say to clients, and I've seen this over and over again, I swear to you, the first million is the hardest to make.

SPEAKER_03 32:23

Yeah.

SPEAKER_04 32:24

I know that sounds crazy. It's like a million sounds like, you know, so much money, but it truly is the first million. It feels like it takes forever to get there. But once you get to the first million, it just you have that momentum. And then, you know, the the market helps or the diversification or, you know, how you play your if you're if you're constantly going in and out of the market or selling stuff when they're down or you know, making these moves emotionally, that's not being consistent. That's not, you know, it's you really truly have to stay the course and you know, play the strategic long game. Um, so roughly interesting stat. Um, roughly two-thirds of Americans still rely primarily on earned income. So, you know, that just reinforces that passive income is built over time. It's not immediate.

SPEAKER_03 33:13

Definitely.

SPEAKER_04 33:14

Mm-hmm. And we had we did another episode how um there's a large percentage of Americans that are living off Social Security as well. So they didn't have that savings or they didn't, you know, they weren't consistently saving. So where it's a lot of their income.

SPEAKER_03 33:29

So and so I really think here it's just, you know, we talk about too just building up that strong active income. So, you know, wherever you're getting your primary earnings and then you're able to invest that consistently. And, you know, really investing that into the market, saving towards whatever goals you may have for the future, and then, you know, letting then there be an ability to whether you create passive income by investing in specific, you know, strategies that we were talking about, those dividend-paying stocks, or if it's something that you, you know, putting capital towards a business that you're not managing. Yeah. And so then those are really those areas where you can, but you first have to kind of take care of your primary, you know, concerns first. And then it can become that passive income can become an addition, not something you just take from the beginning.

Realistic Expectations And Wrap Up

SPEAKER_04 34:15

Right. Right. Absolutely. So, you know, just what passive income actually looks like um, you know, medium passive income is only like actual passive income is only$4,200 per year for households that actually have it.

SPEAKER_03 34:32

Yeah.

SPEAKER_04 34:33

So it's really it's really small.

SPEAKER_03 34:36

Yes. And it's because it's so limited what's actually considered passive. Yeah. I feel like if maybe we were to take like the modern definition of passive income, I hate to even call it modern definition, but more of the what people are claiming when they're saying passive income, then I think it would probably be higher if you're thinking like rental property income. But we're looking at true passive income, yeah.

SPEAKER_04 34:57

It's that's what the average is basically, you know. Um, you know, so it's it's really having an expectation of what you're trying to do. I mean, really, I think most people are just mean they want multiple sources of income, which is good, like I said, because it's kind of diversifying your income.

SPEAKER_03 35:12

Of course.

SPEAKER_04 35:13

So, you know, bottom line, it really starts small and scales with time, discipline, and capital, really.

SPEAKER_03 35:20

Yeah.

SPEAKER_04 35:21

So, um, so so just really kind of in closing, passive income is real. It is me, it's it's rare at meaningful levels early on, but it can over time. Um, you know, most passive strategies are partially active. They're not truly, truly passive. Um, you know, and the most reliable path is like we talked about, that long-term investing and ownership of assets is really the passive income approach.

SPEAKER_03 35:49

Definitely. And it's just a majority of what you talk about in the modern day passive um thought process is more so just that, you know, semi-passive strategy is really what we're actually seeing. Yeah. So you are still having to manage some aspect of it. Uh, you know, it's not just that you're going to completely be able to wash your hands clean of everything and say, yep, nope, this is just gonna grow for me and I'm gonna get a deposit into my bank account.

SPEAKER_04 36:12

Yeah.

unknown 36:13

Absolutely.

SPEAKER_04 36:14

So, really, if you're trying to build passive income, don't start with a product, start with a plan, figure out, you know, start with the end in mind, what you're trying to do, what you're trying to build, and then and then create the habits that get you there. Yeah. Um, you know, because the people that actually live off passive income, they didn't find a shortcut. They like they built it from the ground up, you know, and backed into it. Sometimes you fall into it, but we can't just go through life just hoping something happens to us. We have to, you know, be intentional about things. Um, and know and you and you can change things over time and adjust your your goals and your plan, but you know, going in there and taking charge of your own life and not just letting life happen to you like that. Yeah, you know.

SPEAKER_03 36:54

100%.

SPEAKER_04 36:55

Yeah. Well, thanks for listening to today's episode. If you're interested in learning more about wiser wealth management or want to schedule a consultation to meet with one of our fiduciary financial advisors, like Michaela, um, new CFP, you can do so by going to wiserinvestor.com or you can click the link in the episode notes. We'll see you next week.

SPEAKER_01 37:17

Thanks for listening to a wiser retirement podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about security, digital assets, or any other investment, or basically. Why is it incorporated as a registered investor advisor with the SEC? The host and or guest may personally own securities, digital assets, or other investment vehicles mentioned on this podcast. Neither the host nor guest of the show are compensated for their participation, and no referral fees are paid to or received by any host or guest or clients, listeners, or similar issues. Investments involve risk, unless otherwise stated, are not guaranteed. Feature a first consult with a qualified financial advisor, tax professional, insurance professional, andor legal professional before implementing any strategy discussed here. Past performance is not indicative of future performance.