Developing Authority
Developing Authority

August 2018
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Why Passive Income Is like a Leaking Bucket

joshmoronyjoshmorony

Passive income is one of those buzz words touted by many a make money online gurus. It is often portrayed as this dream scenario where you can make a lot of money whilst sipping cocktails on the beach. Despite the overhyped representation of what passive income actually entails, it is a way of working that has generated a lot of happiness (and money) for me… and the sipping cocktails on the beach imagery is not entirely inaccurate.

When you work, you create value. For many people, their income is tied to the work they do. Whether they are working for an employer, working as a freelancer, or even working for themselves, the income they generate is tied directly to the number of hours of work they do. Passive income is about switching the tether between your income and the work you do, to your income and the value you create.

If you don’t find a way to make money while you sleep, you will work until you die. – Warren Buffet

Although I don’t think this quote is a particularly great or accurate one, it does make a good case for passive income. If you are being paid for the number of hours you put in, there is going to be a ceiling on that. Maybe you can get paid $300/hour or more, and maybe you can make a lot of money this way, but it is capped by your time. If you are not working, then you are not earning. As an example, I create books which generate passive income. If I had been paid for the hours I actually worked on the book (if I were writing the book for an employer, for example) I would perhaps make somewhere around $20,000. If I instead get paid for the value I create, I can make an unlimited amount of money over time (by self-publishing the book, for example). In this scenario, I generated over $200,000 in income from the book.

Although passive income has allowed me to generate a lot more money, it isn’t really the important factor in this discussion (I could have sold very few copies of the book and made less money than I would have if I were paid for my time). The important point is that passive income is not about the ability to make money without working, but rather the ability to make money from the value you create. When you work in this manner, it gives you a great deal of control over how and when you “work”.

What does generating passive income look like?

You can just write a book or course or some other kind of product, put it up for sale somewhere, and you will usually generate some passive income. You will earn money independently of the time you put in to actually “working” on it. Even if you end up making less money that you would have if you got paid for your time, it is still passive income.

However, work on the product itself is typically only a small part of it – there is a lot of work before and after the creation of a product that helps to create more value, and more income (even if you aren’t getting paid for it directly).

I like to visualise the work that is done to generate passive income to be like filling a leaking bucket of water. As long as there is water in the bucket you will generate income – the more water the better. As the water is leaking out of the bucket, you can continue to fill up the bucket with more water. In this analogy, you could consider performing value-adding tasks like creating more content to generate more traffic to be filling the bucket with more water. If you don’t continually fill the bucket with water, it won’t instantly empty (so you can go to the beach and have your mojitos), but it will slowly drain over time. Filling the bucket with water isn’t the only task you can perform to keep the water level up, you could also focus on other things like attempting to slow the flow of the leak. For this analogy, you could consider marketing tasks like increasing the lifetime value of your customers by engaging them more as something that would slow the leak.

The tasks you perform to fill the bucket or slow the leak will largely depend on what it is you are selling, and what you prefer to do. Using myself as an example, I create one or two products a year, and the rest of the year I primarily write free content to help build traffic and promote those products. I earn little money directly from this content, but it generates more traffic to my website which generates new customers for my products. In other words, it’s filling my bucket with water. This content also serves to keep my existing customers engaged, which also helps to slow the leak in this analogy.

The approach I use might not suit you. Perhaps instead of supporting one or two premium products with free content, you might focus on releasing a lot of premium content all the time. In this case, you might perform different tasks to keep your passive income generating bucket full, but the basic premise is the same: in order to keep generating passive income you need to keep working.

Focus on work that generates value

The good thing about getting paid for your time is that it doesn’t matter what you are doing with your time. If an employer is paying you, it doesn’t matter if you are doing high-value work on an important project, or you’re performing some useless busywork… you get paid the same either way.

When you are getting paid for the value you create it gives you a lot more freedom to work how and when you want, but it also means that the work you choose to do has a direct impact on the income you will be generating. It is important not to have a mindset of just “putting in the hours”, you need to figure out the best way to use your time to generate the most value. In this manner, you can eventually find a way to work less and earn more.

Let’s consider some “work” I might typically do. Of course, there is the work to create the product itself, but let’s consider some of the other tasks I might perform to help keep my passive income bucket full of water:

  1. Writing a blog post about Ionic
  2. Writing a blog post about Phaser
  3. Improving copy on my sales page
  4. Creating a new email course
  5. Working on the design of my site
  6. Focusing on improving SEO

Not all of these tasks create value equally. Writing blog posts is key to my business, but if I were to write a blog post about Phaser it would mostly be for my enjoyment moreso than “work” to improve my business. I primarily sell books and courses related to Ionic, so Ionic content will bring in relevant traffic. I don’t focus on products for Phaser so if I bring in traffic for my Phaser content, it likely won’t result in increased income. I will potentially create more Phaser products in the future, though, so it does open up more doors for me which is valuable.

Doing things like improving the copy on my sales pages, or working on the design of the site can be valuable work. Better copy and better design can lead to better conversions, but it can also be pointless busy work that achieves nothing. If I spend too much time doing this, and I’m not testing to see if my changes are actually having an impact, then I am wasting a lot of time.

Focusing on improving SEO on the website is usually a very worthwhile task, but again, it is something that can be over optimised and you can end up wasting time on it.

It can be difficult to figure out where your time is best spent, but it is important to keep this at the front of your mind. The amount of time you spend working is irrelevant if you are generating passive income, you need to focus on the value. Taking a nap, going for a walk, or playing a video game is more valuable in the long run than sitting and staring at your screen in a zombie-like state.

What happens when you stop putting in the effort?

A big benefit to generating passive income is that you don’t need to work all the time. This creates a lot of freedom that you can utilise. It is a great feeling to be able to take a 1 or 2 week holiday whenever you want whilst still earning more or less the same amount of money. It is great to be able to just work 2 hours one day if you aren’t feeling it, or work all night if you’re in the zone. It is also great to know that even if you had to stop working completely for an indefinite amount of time (due to unfortunate circumstances, or just personal choice) you will likely be able to continue generating some level of income for months or even years to come.

But… if you stop working the income will dry up eventually. Even if you have a big bucket with a lot of water and a tiny hole, it won’t stay full forever. For the products that I have stopped actively supporting, the revenue generated for those products eventually dropped to near zero income. I think a particularly good case study for this is Nathan Barry.

Nathan Barry was a digital product powerhouse and was actually the inspiration for me to get into this business. He generated hundreds of thousands in revenue for his products but eventually ended up switching his focus to developing ConvertKit (which was a wise choice apparently, because ConvertKit now does almost $1,000,000 in revenue a month). Despite his large following, without him putting work into his books the income eventually dwindled to a fraction of what he was previously earning. At the peak he was earning $300,000 which quickly dropped to a little over $100,000 the following year, and then $23,000. If you would like to read Nathan himself describing the “rise and fall” of his product empire, you should read this article.

As a side note, when I first started following Nathan Barry he just seemed to be in a totally different league, and his numbers seemed absolutely unattainable. I still do think Nathan is in another league, and he’s even gone on to much larger things, but it is interesting to realise that the revenue from my products last year aren’t too far behind Nathan’s at his peak. Something that seemed completely unrealistic just a few years ago is now quite real.

Summary

The main concept that I wanted to point out in this article is that of value being the key component in creating consistent passive income. I also think that whilst the analogy of the bucket leaking water isn’t entirely perfect, it does a reasonable job at explaining the nature of passive income.