What is Passive Income? That’s not what influencers say…
Luca Alboretti was seduced by the idea of making money while he slept.
He was looking to supplement his income as a realtor in 2018 when he set up an online store selling golf products, an idea he had after watching a YouTube video on how to earn $150,000 per year in “passive” income by selling salt and pepper. online stirrers.
“I thought I’d wake up with a few hundred orders, fulfill them, and collect my profits,” said Alboretti, 28, who lives in northern New Jersey.
He spent about $5,000 to research and test golf products, develop a private label product, and pay for website management fees. He spent about 10 hours setting up his online store, writing descriptions for each item, communicating with vendors, and marketing his site.
Yet a year later, Alboretti had only made $300 in sales. He closed the store and began using the Instagram page he created to share humorous real estate content he created instead. “I worked hard to get my few hundred followers and I didn’t want them to be wasted,” he said.
While many people claim to earn passive income, especially on social media, only 20% of US households earn such income.
This morphed into ActualAgents, a cross-platform social media brand known for its clever Instagram memes and free educational resources for real estate professionals and lead generation services for brokers in the United States and Great Britain. -Brittany.
Currently, agents have become Alboretti’s full-time job. “Courses, videos and social media content don’t create themselves,” he said. “None of this is passive.”
What is Passive Income?Search “passive income” on YouTube, TikTok or Reddit and you’ll find loads of videos of people claiming they make thousands of dollars every month this way – whether they’re selling courses, e-books or other products. online ; offer properties on short-term rental platforms such as Airbnb and VRBO; or even buy and maintain vending machines in high traffic buildings. The appeal: Theoretically, it’s easier than a traditional nine-to-five “job”.
“We live in a culture obsessed with passive income,” said John Boyd, founder of MDRN Wealth, a financial planning firm in Scottsdale, Arizona.
This preoccupation with making money effortlessly, he said, is fueled by investors in their late 20s to early 40s, who are understandably frustrated that they are not in the same financial position as their middle-class parents at their age and are looking for easy ways. catch.
But investing several thousand dollars to buy a vending machine that only earns a few hundred a month, or overstretching yourself by taking out a 10-year home loan to buy a rental property isn’t the best way to build long-term wealth. term or saving for retirement, Boyd said.
While many people claim to earn passive income, especially on social media, only 20% of U.S. households earn such income — either through dividends, interest or rental properties, according to Census Bureau data. . And the median amount these households get from these sources is $4,200 a year, according to the bureau’s figures.
“People want to earn extra money to save for retirement and do fun things now, and that takes more time and energy than people have.”
So what is passive income? The IRS defines it as a business or commercial activity in which you do not materially participate, meaning that you are not continuously and significantly involved in its operations. However, the IRS considers rental real estate activities a source of passive income as long as the owner is not a real estate professional.
Still, there is a lot of confusion about what qualifies. What people often refer to as “passive income” is income that isn’t dependent on a single paycheck or a single employer, said Kevin J. Brady, vice president of Wealthspire Advisors in New York. In some cases, without understanding the difference, people talk about leveraged income – spending time and effort up front to earn recurring profits by selling, for example, an online course or an e-book – or extra income from secondary hustle (which is more work).
Supplementary income is not passiveGina Vanegas and her husband, Andres Velasquez, have experience developing multiple income streams, including those that generate leveraged income.
About 20% of their total income comes from two rental properties they own in Atlanta. The couple each owned a home there before moving to California in 2015. Because they originally planned to return to Atlanta, they leased the properties to long-term tenants.
“It helped fund my student life for several years,” said Vanegas, 37, a psychologist.
The couple recently purchased another property, in Mexico, which they hope to rent through Airbnb this year after completing renovations, buying furniture and finding a local manager. Vanegas estimates that it has invested several thousand dollars to prepare the property for rental.
“I hear a lot of people say that buying these properties and you don’t have to do anything,” she said. “People don’t realize how much work it takes.”
Compound Interest Creates Passive IncomeFinancial planner Stacy J. Miller said she believes the pandemic has further fueled workers’ desire to create passive income. Many Americans had more free time, and they began to wonder if a traditional job would bring them enough money.
“People want to earn extra money to save for retirement and do fun things now, and that takes more time and energy than people have,” she said.
Miller’s two sons became interested in investing in January 2021 during the meme stock market frenzy.
“Compound interest is absolutely one of the keys to passive income success.”
At the time, his sons were still taking virtual classes at Georgia Tech and all campus activities had been canceled. Headlines about amateur investors making money buying and selling GameStop stock on the Robinhood trading app caught their eye.
Whenever GameStop’s stock rose, Miller’s sons would call him to discuss how novice traders were making a lot of money.
“It was a great learning experience,” said Miller, vice president of Bright Investments in Tampa, Florida. She explained that the value of GameStop stock could easily drop, and if an investor sold the stock at its peak, they would have to pay significant taxes.
“You could easily owe more than the money you earned on Robinhood when you factor in all the transaction fees,” she said.
Miller’s eldest son Jamie, 21, said the experience had “brought to my attention the idea of investing and doing things with your money rather than just putting it in a savings account that won’t earn much interest”.
This lesson stayed with him and during the summer of 2021 he decided to invest 20% of his internship salary. After talking with his mother, Jamie Miller made those investments in a Roth IRA, which he opened when he was 19.
Last year, he contributed the maximum amount of $6,000, earned on another internship. If he continues to maximize his IRA contribution, he could have $4 million in his account by age 65, assuming a good 10% annualized return on his investment, Miller said. Even if he doesn’t contribute another dollar to his account, he could have $650,000 by age 65.
“Compound interest is absolutely one of the keys to passive income success,” says Stacy Miller.
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