More than ten years ago, in the early days of this blog, John wrote about the concept of trading hours for dollars. If you haven’t read that post, I highly recommend you go back and read it. A lot has changed on the Internet since then, but the fundamental philosophy remains the same. Passive income is the way to go, long term.
A lot of people have the common misconception that it takes no time to earn passive income. They think this income stream just runs itself and you just wait for the cash to come rolling in. That’s not true. It’s just different, because you are no longer trading hours for dollars. Per se.
What’s Your Time Worth to You?
When you work a regular job, let’s say in retail, you can expect to earn a guaranteed amount of money (ignoring taxes and other deductions for simplicity’s sake) for the time you put in. If your job pays $15 an hour and you work a 4 hour shift, you get $60. The relationship is very straightforward and direct.
When you have a traditional salaried position, the relationship is similar, but a little more fluid. Let’s say that your annual salary is $52,000. To keep things as simple as possible, we’ll ignore vacation pay, sick days, deductions and so forth. This means, in effect, that you are earning $1,000 a week on a steady basis. However, because you’re on salary, the actual number of hours you work each week can vary. When things are slow, your boss might let you take some time off or leave the office early.
Let’s say on a slower week, you only had to work for 20 hours. If that is the case, then it means that you earned $50 an hour for that week. Not bad at all. But then your company gets pummeled with a big project that needs immediate attention. You work longer hours during the week and your boss says you have to come in on the weekend too. In that week, you worked 100 hours. Suddenly, your effectively hourly wage is only $10. Not so good anymore, but the effect is the same. You traded hours for dollars.
How Is Passive Income Different?
When you pursue a passive income stream, there is far less of a direct 1-to-1 relationship between the time you put in and the dollars you receive out the other end. Make no mistake. Earning passive income still takes time (and other resources). If you have a blog, it takes time to design the site, maintain it, write and edit blog posts, promote your content, and so on. Each of these tasks, however, don’t relate back to a specific amount of money earned, as least not directly.
Instead of trading your hours for dollars directly, you’re investing your time with the hope of better returns in the future. Let’s say that you design premium WordPress themes as our hypothetical example. Let’s say that you create this amazing theme and it takes you a total of 80 hours spread over two weeks to complete it, including all the time to create a squeeze page, a sales channel and all that other stuff that goes with it.
Before you receive your first sale, the total amount of money you’ve earned by working those 80 hours is zero. Zilch. Nada. Thus, your effectively hourly wage for that time is also $0.
Only One Direction to Go
For the sake of simplicity and convenience, let’s say you price this theme at $80. Let’s also ignore all the other costs involved — web hosting, transaction costs, income tax, etc. — so the math is as straightforward as possible. And then the first sale comes in. Your total revenue is $80 at this point, so your effective hourly wage for creating this WordPress theme is $1. Not so good, huh?
But let’s say that over the course of the next 12 months, you rake in a total of $50,000 in sales. You also put in a total of another 40 hours to promote the theme, maintain the website, and perform other related duties. Thus, for the 120 hours you’ve put in, you’ve earned $50,000. That works out to an hourly rate of $416.67. That’s much better than $1 an hour.
You invested 120 hours and got a return of $50,000. Now, let’s say that you put in no additional work at all and in year two, you manage to sell another $20,000. Your total revenue is now $70,000 for those original 120 hours invested, resulting in an effective hourly rate of $583.33. This number keeps getting better and this is the true beauty (and power) of passive income.
Risks and Rewards
However, just like investing in the stock market, your returns on passive income projects are not at all guaranteed. Let’s say that you put in the same 120 hours, but in two years, you only manage to sell $1,000 worth of your theme. That means your hourly rate works out to a mere $8.33, less than minimum wage in many places.
It’s about investing wisely and understanding the inherent volatility of the market, just like with stocks. The difference is that when you invest your time in passive income projects, your investment won’t tank to a value of zero… at least not in a direct sense (and ignoring the money and resources you may have invested in the project too). Because when you invest in a passive income project, at the very least, you gain the return of experience and insight, which you can then re-apply to another project and another project.
There are no guarantees and you need to manage your risk accordingly. But if you keep trading your hours for dollars, you’re only going to get trapped in a rat race that you’ll never escape. With passive income, the potential returns are literally limitless.