Passive Income For Beginners: Get a Better Job

Passive income for beginners starts with your day job. It isn’t sexy or fun, but the work that you do 9-to-5 is a much higher leverage way to earn income than is commonly assumed.

You’ve probably already seen dozens of headlines like this:

Judging by these headlines, you should rush out right now and get some of that sweet, sweet passive income. The headlines assume that passive income is quite valuable. The problem is that passive income itself is a lie. 

The definition of passive income is income that you don’t need to actively work to generate. But even managing a pile of generational wealth takes a tiny bit of time. That highly-paid wealth manager isn’t going to meet with himself, after all. And these blogs wouldn’t have any content to sell if they simply recommend ways to manage your family’s massive fortune.

This gets to something that really grinds my gears: the assumption that passive income is much better than active income. If all you care about is generating more income, don’t start a side hustle, get a better job. 

If you’ve already done that, then sure, by all means think about creating passive income for yourself. Just do so with the understanding that it’s closer to a hobby than a way to earn money.

Passive Income for Beginners Tip #1: Jobs Aren’t That Bad

Here are the top 3 reasons I think that personal finance bloggers love to trash day jobs as the root of all evil: 

Day Jobs are Boring

Most people have jobs. Most people hate their jobs because they have very little autonomy, bad managers, or both. Your parents probably had jobs. Your siblings have jobs. Jobs are just not that interesting to write about. 

Think about it. Would you click on a blog post titled “I Worked at My Job for 36 Years and Now I’m Comfortably Retired?” No. Because there’s no unintuitive hook. That’s just the story of the guy that lives around the corner. And he wears white socks with his sandals. No thank you.

Lucrative Jobs are Mostly Invisible

The most visible kind of work that we see on a regular basis is low-paid. The people making millions of dollars a year don’t help you check out at the grocery store. They’re in the back office doing esoteric things with numbers. This encourages us to associate jobs with low-paid labor.

The lack of visible, highly-paid work for pay also makes it harder for the average person to conceptualize. The people at the very top of the income distribution do things that at least vaguely feel like not-work. They invariably use words to describe their work that are hard for the majority of people to understand. They arbitrage commodity price discrepancies. They restructure corporate debt arrangements on more advantageous lending terms. They write software code to automate the cloud provisioning of virtual environments for Fortune 100 enterprises. 

This all seems a bit hard to grasp, but it’s more straightforward than it looks. Traders are just swapping made-up pieces of paper. Corporate debt consultants just find cheaper money to borrow. Software engineers just make that damn script compile. The wealthy want you to think what they do is incredibly difficult and hard-to-understand. If you think that, you’ll stop paying attention and conclude that jobs must all be more like delivering pizzas.

Most People Don’t Save

If you spent every post-tax cent available to you, as many Americans do, then a job would be a tyranny. Your boss would have all the power, you would have none. Whenever it came time to do unpleasant work at inconvenient times, you would have to say “yes.” If you say “no,” you risk missing next month’s car payment and getting sent to collections.

That’s a stressful way to live. It’s no wonder that people in that circumstance associate their feeling of helplessness with their work. But it doesn’t have to be that way. If you are able to live below your means and save things change fast. Every day that you work is one step closer to calling the shots for yourself. 

At first, you gain very small bits of freedom. Early on, you gain the ability to turn down overtime or ignore your awful boss’ terrible jokes. Eventually, you’ll have saved enough to have real freedom. You have the true definition of “fuck you money.” If you decide you’ve finally had it with your job, you can walk out tomorrow. And you can do it without fear of immediate negative repercussions.

If you save and have power over your job and your boss, a job ceases to be a tyranny. It instead becomes one way among many that you can generate wealth for yourself and your family. The only difference is whether you can consistently save.

The Passive Income Illusion

For the reasons above, it’s easy for bloggers and financial pundits to cast jobs as the enemy. If follows that passive income is the panacea of freedom. There are no bosses so that must mean you are free to do whatever you like, right? 

Spoiler alert, when you generate passive income for yourself, you still have a boss, they’re just called the customer. And remember that part about the customer always being right? That’s more true than you’d like to believe. 

Passive income can be great, but to the disciplined saver, it’s just one option among many. And as I’ll show next, it’s not a particularly compelling one.

Passive Income for Beginners Tip #2: Active Income is Pretty Good

So now we know that active income isn’t treated fairly by society and the press. Let’s move on and get down to some actual data. How much do Americans actually earn from their jobs?

Here are some hourly wages for common professions in America taken from the BLS Occupational Employment and Wage Statistics. I’ve sorted by the median (50%) hourly wage:

As a point of reference, he median American worker earns $54,132 per year. That works out to ~$26 per hour, assuming 40 hours of work per week. Fittingly, that sits just a little higher than halfway up this table.

Note that the table above taps out at $100/hr. The BLS doesn’t denominate hourly wages greater than that. So for professions like law and medicine, the wages are likely to be substantially higher than the $100 cited above.

Passive Income for Beginners Tip #3: Hourly Wages from Passive Income Are Low

Now that we have a sense of how much active income generates per hours, let’s take a look at some of the most-recommended ways to generate passive income: 

I’ve intentionally omitted straight investing activities from the passive list above. I’ll be writing a more comprehensive post soon about why I don’t believe in active investing for profit. For this post, however, I’m focusing just on passive income generated from labor.

The interesting thing about these passive income generating schemes is that the BLS actually has some data for similar professions. People who earn money through a passive source won’t report it on their taxes with a BLS occupational category. But there are enough people employed in those professions that we have data on their earnings.

Here’s a loose mapping of the activities above to their BLS occupational category:

Rows in green earn more (50% percentile) than the national average, those in red do not. 

Ouch. 67% of these popular ways to generate passive income don’t even earn the national average hourly wage. And I think this analysis is charitable. You are probably not going to earn in the 50th percentile right off the bat. Getting to the level of skill where you can command those kinds of wages takes time and dedicated practice. At first, I think you’re likely to earn closer to the 10/25th percentile.

Passive Income for Beginners Tip #3: Make More By Working Less

I think you would be better off investing your time into leveling up your active income. The leverage is higher. Here’s an example that proves the point.

Olivia is a graphic designer making $25/hr. That’s almost exactly the national median wage both overall and for her profession. She decides to start doing some graphic design freelancing in her free time after work to increase her income. She charges exactly what she’s already paid at work ($25/hr) and is able to bill ~10 hrs/week. Here’s what her earnings would look like for a 10 year period:

Olivia’s Passive Income Hustle

Not bad, she manages to earn an extra $130,000 from her side hustle. Taking her cumulative earnings, we can divide it by the 25,000 hours of work to get a total hourly wage. $625,000 / 25,000 = $25. That’s good because those were the model inputs! 

Olivia’s Boring Active Income

But let’s say that instead, Olivia uses her free time to retrain to become an online UX designer. That means she earns no money for the first 4 years in the period. In year 5, she becomes a UX designer earning the national median hourly wage for that profession: $38.

After a grueling 4 years of day job + retraining, she decides to just chill out. Rather than pursue any additional “passive” income opportunities, she takes up painting instead. 

Dividing her total earnings by her hours, we get $656,000 / 22,000 = $30/hr. That’s pretty good considering that she also worked 3,000 fewer hours which is the equivalent of 1.5 years of full time employment.

Passive Income for Beginners Takeaway: Solve for Active Income First

Don’t get me wrong: I’m not against creative ways to generate a little extra money. But I think that people should think carefully about how much income their labor generates. 

Many people start their personal finance journeys by getting out of debt first. Debt is often so toxic to your long-term financial success that it makes sense to drop everything to address it. I think active income is similarly important from an optimization perspective. If you want to save more, retire earlier, or afford nicer things, the most important thing you can do is get paid more at your day job. 

And when you have a lucrative day job, a funny thing happens. Most of those passive income schemes start to seem like a bad deal. Finding interesting stuff at Goodwill and reselling it online makes for interesting TikTok fodder, but it’s just not that lucrative. Especially if you’re making $80k/yr as a UX designer. This makes it harder to find passive income opportunities that are genuinely appealing, and that’s a good thing! It means you’ve moved up the value chain and can focus on creating more value with your time.

What’s Next?

As always, be very skeptical of anything that smells, even a little bit, like a get-rich-quick scheme. Selling crafts might be fun. Heck, I might even do it one day. But it’s unlikely to have anywhere near the same positive effect on your finances as just getting a better job. So focus on the highest leverage opportunity first. Stop reading about lifestyle hacking and hustle culture and … find a job that pays better.

If you got this far, you should also take a quick look at how you can use persistent higher inflation to your advantage.

Happy overthinking!

And in case you want passive income thirst traps … go ahead. We all know it’s fun to fantasize about it:

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