No Sense Friday: About Passive Income...

Hint: it doesn't exist

When Tim Ferriss published The 4-Hour Workweek, this was his message:

Work less on things you don’t like, so you have more time to work on things you enjoy.

When people read it, this is what they chose to hear:

Work 4 hours a week whether you like them or not, then live a dream life on the beach.

Needless to say, not many get the most out of this great book. The first time I read it, I didn’t either. All I saw was passive income. Passive income, passive income, passive income. And since the book was such a hit, that idea was now everywhere.

There’s only one problem: it doesn’t exist. Passive suggests inaction. Leisure. Doing nothing. And you will never - never - get paid for doing nothing. No income is passive.

Every $, €, ¥, shekel or gold doubloon you ever make will be the direct result of a certain amount of time you invested into work.

The only difference is when and how much each of your hours ultimately pays out. And that’s what most people get hung up on. They think about ROI - the return (in $) on their investment (in hrs) - when they don’t have enough information to do so.

In its first year, my website Four Minute Books made $10,000. I worked on it for at least 2,000 hours. That’s $5/hr. What a terrible investment.

But in its second year, it made $20,000 while I worked only 150 hours on it. That’s $133/hr. What a great investment!

In order to calculate ROI, we need to know the return over the total lifetime of an investment. But for many things in life, you have no idea how long they will last, which makes it impossible to determine the ROI in advance.

A much better concept to think about your income with is ROT - return on time. I define it as the lifetime amount of money you make from an hour of work. It’s a relative measure and often just an estimation, but it accounts for long-term effects.

Working for $10/hour at Footlocker has a low return on time - it’s $10 and will never change. No matter how long you work there, each hour is done and dealt with for $10.

Writing blog posts often has no immediate payoff, but a high return on time - the more you write, the more you can expect to make as a result of each individual post - it’s just not clear how.

As with Tim’s ideas, many people mistake the words for the message. They confuse ROI and ROT, and end up maximizing only the former, not the latter.

But there are no cheat codes in entrepreneurship. Risk and uncertainty are part of the deal. Taking them on is exactly what you are rewarded for.

Life truly is like a book - in order to really get it, you have to read between the lines.

-Nik


About No Sense Friday: Most people live for Friday. Relaxing on the weekend is fine, but we can’t just waste it away every time. That’s why Friday is the most important day to call out things that make no sense. Because in a way, the concept of ‘Friday’ itself makes no sense.

A good life is lived every day, not just once a week.


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