You know how sometimes, within a few seconds, an idea you had taken as true for decades is shattered to pieces? For example, when I was little, my dad told me the glass windows in churches were thicker at the bottom, because glass was actually a liquid. Just last week I told this to a friend. Well, two minutes ago, this false belief burst.
Some of these urban myths are more pervasive than others. Occasionally, even more people will fall for the lie than stumble into the truth. I think passive income might be one of those extreme cases.
Today, we’ll debunk this concept, and replace it with a better one.
No Income Is Passive
When Tim Ferriss wrote The 4-Hour Workweek, he had no idea what global phenomenon he’d set in motion. What had been an elusive dream for a few insiders since the dawn of the web now landed center stage and boy, was the spotlight on: passive income.
All of a sudden, you could buy a $197 course at every corner of the web to teach you the creator’s “secret trick to making money while you sleep.” But it wasn’t Tim’s fault. He said: work less on things you don’t like, so you have more time to work on things you enjoy. What people chose to hear was: work 4 hours a week, whether you like them or not, then live a dream life on the beach.
If your mouth is still watering when you read a sentence like the last one, I have really, really bad news:
No income is passive. Every $, €, ¥, shekel or gold doubloon you’ll ever earn will be the direct result of a certain amount of time you invested into work.
However, there is a difference in impact on your income between the hours you work. Let’s start with the low end of the spectrum.
A Job Below Minimum Wage
In 2016, Four Minute Books made $10,631.50.
It took 2-3 hours each day to write the summary. Throw in countless hours of promotion, organization, strategy work, design changes, tech fixes, additional content writing and email scheduling, and you easily end up north of 2,000 hours. Let’s stick with 2,000 and we can quickly calculate my hourly rate to be $5.32.
Ugh. That’s not even US minimum wage, which is $7.25! In Germany it’s closer to $9.50. I could’ve made more money picking up trash on the street. Who would ever take such a low-paying gig? Reddit sure thought I was wasting my time:
But I knew I wasn’t. The hourly pay sucked, but something else was more than on point:
My return on time.
What’s Return On Time?
In investing, there is a term called ROI. It means Return On Investment. You take what you gained from an investment and subtract its cost, the result of which (=profit) you then divide by the cost. What you get is the hopefully positive percentage of increase from your investment.
If you invest $50 and make $150, your profit is $100, which is twice the cost and therefore, you have a 200% return on investment. In essence: you doubled your money.
Shooting for a high ROI is a smart move for any individual investment, but sometimes, the return lies really far in the future and is really uncertain. When Peter Thiel invested $500,000 into Facebook in 2004, he had no idea it would make him a billionaire. But he also had to wait 8 years for this very unlikely return: Facebook IPO’d in 2012.
Maximizing your ROI in the short term comes at the expense of missing out on such rare, but much higher return opportunities. We can observe the same phenomenon with time.
Most people want the maximum financial reward for their work in the shortest period of time. They would prefer working two hours at Footlocker for $10/hr, paid at the end of the week, to writing a blog post with a return of $??/hr, possibly never.
However, the blog post has one, significant advantage: however many $ it does eventually pay out, will be spread across its entire life.
Therefore, we can define Return On Time (ROT) as the lifetime amount of money you make from an hour of work.
High-ROT vs. Low-ROT
In 2017, Four Minute Books has already made $4,200. So far, I’ve spent about 30 hours on the site, since I’m only writing one new book summary per week, which takes about two hours. That’s…$140/hr.
Holy cow! What happened? Well, writing for Four Minute Books has always been a high-ROT activity. The blog posts I’ve written in 2016 are still paying me today. Since it remains on the web indefinitely, it pays me back longer than that hour at Footlocker.
That’s the difference between high-ROT and low-ROT activities. The returns of the former extend for as long as the results remain. The latter will be paid back in full the minute you receive the payment. Let’s look at a few examples.
An hourly paid job
Delivering pizzas, working the counter and slinging cocktails across the bar are very low-ROT activities. Their lifetime reward of an hour of work will always remain the same. Accounting for inflation-adjusted raises, you’ll never really get past the initial $10, $15 or $20 per hour, and your annual income stays low.
A progressively paid job
These are getting rarer, but still do exist. A customer service call center in my hometown, for example, would pay you 5€/hr when you started, but if you went to trainings and seminars, you could bump it up to 6 and then 7, and so on. Network marketing often works the same way – the more sales you make, the higher your tier. While your ROT does increase here, it will inevitably be capped, because whoever designed the system doesn’t want to go broke.
A management job
Similar to a progressively paid job, typical post-college positions will make you more per hour over time, but the steps are a bit sharper. You can go from 60k/year to 80k/year between December 31st and January 1st. Shy of jobs with company stock options, these are also capped. As a high-level executive at a prestigious law firm, you might make $250,000/year, but if you work 60 hrs/week for it, you still end up at $87/hr – and no hour will ever pay you more than that.
Ah, the light at the end of the tunnel. Or so it seems. Sadly, not many high-ROT activities come with a job description. Only CEOs, founders, and first employees of a startup with shares in a company that might go public can hope for a very high, long-term payoff. Besides these top 1% of jobs, there really is only one thing left, and that’s starting your own.
Before you dub entrepreneurship the obvious choice, look at a comparison of all options. Yes, the rate for working at Enzo’s Pizza will never change, but it might take you over six years to even catch up to that. Sure, once you pass network marketing land you’ll breeze by managing a car dealership in a heartbeat, but will you ever get there?
Is taking a short-term loss for a high long-term ROT worth it? It depends on what you pick.
What Are Some High ROT Activities?
Everything you would file under passive income is simply an activity with a high return on time. For this kind of work, consider each hour like training a salesman. You invest 60 minutes into training him, and then send him out into the world, where he’ll hopefully make you more money. Sometimes, they do. Sometimes, they don’t.
That said, some areas you can find a high return on time in are:
- Investing in…
- Real estate
- Index funds
- If you’re a founder
- If you’re an early member
- Writing a blog
- Making a Youtube show
- Hosting a podcast
- Painting & posting on Instagram
- Releasing music on SoundCloud
- Running a Facebook group
- Amazon dropshipping
- Re-selling a product
- Making a white-label copy of a popular product
The best thing you can do, which is 100% risk-free, is to pick up a high-ROT activity on the side. After all, you can’t expect to see returns quickly anyway, so might as well start from a place of comfort. When you’re in doubt about where to focus your efforts initially, ask a simple question before you sit down to work:
How long will this hour pay me back?
Just one last thing.
The Best Projects Are…
If you love sneakers more than life, go work at Footlocker.
If you believe in Herbalife, because it’s changed your life, go sell that.
If you can’t wait to design the next Procter & Gamble catalog, go be the best freakin’ catalog designer they’ve ever seen.
In the end, the best projects are those, where you can afford to not give a damn about ROT, ROI, or any numbers at all. As long as time flies by, because of your passion for the project, your involvement with the mission, or your innate sense of meaning derived from the work, each hour will pay you back for a lifetime.
And that’s not an urban myth.