2995: [Part 1] Passive Income and Other Money Myths by Leif Dahleen of Physician on Fire on Side Hustles

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[00:00:39] [SPEAKER_00]: This is Optimal Finance Daily, Passive Income and Other Money Myths, Part 1 by Dr. Leif Dahleen of PhysicianOnFire.com

[00:00:51] [SPEAKER_00]: When's the last time you saw a headline highlighting some young person making five figures of passive income a month? Your news feed may not look like mine, but I see these stories on the regular. And I've clicked on them often enough to tell the algorithms that they should feed me more of that same nonsense. Shame on me for being fooled more than once. But each time I click, albeit with skepticism, my suspicions are confirmed.

[00:01:19] [SPEAKER_00]: The person's income is anything but passive. The definition of passive income is about as loose as Al Roker's old slacks. And that's just one example of the numerous money myths that are pervasive in society today.

[00:01:34] [SPEAKER_00]: I also plan to dig on dividend investing, question budgeting and side hustling, attack travel hacking, and more while channeling my inner Andy Rooney.

[00:01:47] [SPEAKER_00]: About passive income.

[00:01:49] [SPEAKER_00]: It's not that passive income doesn't exist. Investors earn passive income when their savings accounts and CDs pay them interest. When a real estate syndication or fund pays a distribution, that's passive income too.

[00:02:03] [SPEAKER_00]: As is the dividend payment that comes from ownership of a stock, bond, or mutual fund.

[00:02:08] [SPEAKER_00]: All of these require capital. That is, money. The more money invested, the more passive income received.

[00:02:17] [SPEAKER_00]: They all require something else to varying degrees, like acquiring at least a little bit of knowledge and doing some due diligence before selecting the investment.

[00:02:27] [SPEAKER_00]: That initial bit of investment can help ensure that a sound investment is chosen and, if done well, should hopefully increase your potential return, lower the potential risk, or both.

[00:02:39] [SPEAKER_00]: Investment income of this kind, while it does require a small amount of knowledge or research initially, is about as passive as it gets.

[00:02:47] [SPEAKER_00]: Not so passive income.

[00:02:50] [SPEAKER_00]: CNBC recently featured a 32-year-old mom who makes $143,000 a month in passive income.

[00:02:59] [SPEAKER_00]: She has a YouTube channel and creates and sells digital products.

[00:03:03] [SPEAKER_00]: Okay, I'm happy for her and her successful business, but what she's earning is active income.

[00:03:10] [SPEAKER_00]: There's also the 33-year-old mom who makes $40,000 a month in passive income and lives on a sailboat.

[00:03:17] [SPEAKER_00]: Now, the headline says she works just two hours a day, but she's also written that she's worked 60-hour weeks and burned out while building up her blog and online business.

[00:03:28] [SPEAKER_00]: I could have been featured myself as a 40-something dad earning $40,000 a month in passive income while traveling the world with his family.

[00:03:37] [SPEAKER_00]: All of that was true a couple of years ago, save for the passive income part.

[00:03:42] [SPEAKER_00]: But I would not have allowed the deception.

[00:03:45] [SPEAKER_00]: Blogging is work.

[00:03:46] [SPEAKER_00]: It's flexible and fun work.

[00:03:48] [SPEAKER_00]: But I doubt there were many weeks where I didn't spend at least 20 hours doing something at least peripherally related to Physician on Fire.

[00:03:57] [SPEAKER_00]: This CNBC feature of a 34-year-old making $49,000 a month in passive income is a little more honest, even if the definition of the word passive escapes them.

[00:04:09] [SPEAKER_00]: The featured side hustler Ryan Hogue says it's a myth that you can earn passive income without putting in the work.

[00:04:16] [SPEAKER_00]: He says, quote,

[00:04:38] [SPEAKER_00]: End quote.

[00:05:41] [SPEAKER_00]: 1. Dividends increase your wealth.

[00:05:45] [SPEAKER_00]: Educated investors understand this to be a false statement.

[00:05:48] [SPEAKER_00]: But the myth persists.

[00:05:50] [SPEAKER_00]: And the proliferation of dividend-focused financial influencers on social media is confounding.

[00:05:57] [SPEAKER_00]: When a dividend is paid out, the net asset value of the stock or fund decreases by the amount of the dividend.

[00:06:04] [SPEAKER_00]: It's a zero-sum event.

[00:06:06] [SPEAKER_00]: Now, that fact can be difficult to see due to daily and minute-to-minute fluctuations of stock prices, which can be influenced by the news of a dividend being more or less than anticipated, often accompanied by additional news about the company and its finances being made public.

[00:06:23] [SPEAKER_00]: In a tax-advantaged account, receiving a dividend has no consequences, and it's essentially a neutral event.

[00:06:30] [SPEAKER_00]: Your account balance doesn't change, and you can reinvest the dividend.

[00:06:34] [SPEAKER_00]: You could see it as a net positive if you need to do some rebalancing, and you seize the opportunity to take the dividend from one asset class to purchase shares in another.

[00:06:45] [SPEAKER_00]: In a taxable brokerage account, however, a savvy investor shuns dividends, especially in the high-earning years in which most physicians will pay both the base 15% and 3.8% NIIT surcharge, state income tax in most states,

[00:07:04] [SPEAKER_00]: and possibly an additional 5% if overall income puts them in the top federal income tax bracket.

[00:07:11] [SPEAKER_00]: When 25% to 35% of the dividend goes to the government, whether it's reinvested or not, I'd rather leave that money invested.

[00:07:21] [SPEAKER_00]: There is a different question about whether or not dividend payers outperform non-dividend-paying stocks,

[00:07:27] [SPEAKER_00]: and these analyses are often fraught with selection bias and cherry-picking of data and timeframes.

[00:07:33] [SPEAKER_00]: It's easy to show that companies that have increased their dividends for 20 years in a row have outperformed those that haven't.

[00:07:41] [SPEAKER_00]: Those are the survivors.

[00:07:43] [SPEAKER_00]: That is the definition of survivorship bias.

[00:07:47] [SPEAKER_00]: Zero people should be surprised by the fact that the companies with strong balance sheets for 20 years are worth more than companies that have struggled.

[00:07:56] [SPEAKER_00]: I've shared my disdain for dividends on this website, and others have sung their praises.

[00:08:01] [SPEAKER_00]: There are some debates to be had.

[00:08:04] [SPEAKER_00]: What cannot be argued, however, is the fact that the U.S. and state governments get their share of your dividends

[00:08:11] [SPEAKER_00]: when you invest outside of tax-advantaged retirement accounts.

[00:08:15] [SPEAKER_00]: Number two, hear that on tomorrow's episode.

[00:08:22] [SPEAKER_00]: You just listened to part one of the post titled Passive Income and Other Money Myths by Dr. Leif Dahlin of PhysicianOnFire.com.

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[00:09:39] [SPEAKER_00]: I've noticed that the term passive income bugs a lot of people.

[00:09:43] [SPEAKER_00]: Because unless you're passively investing in the stock market, there is some effort to set up a passive income stream.

[00:09:51] [SPEAKER_00]: So a more accurate phrase might be front-loaded effort income.

[00:09:55] [SPEAKER_00]: This is where you invest a lot of time and energy in the beginning to set it up,

[00:10:00] [SPEAKER_00]: but over time you're able to exert less effort for more income.

[00:10:03] [SPEAKER_00]: Some examples of front-loaded effort income streams include rental real estate, course creation,

[00:10:11] [SPEAKER_00]: affiliate marketing through a website, and writing a book.

[00:10:14] [SPEAKER_00]: For me personally, I started a business called the Economy Conference.

[00:10:19] [SPEAKER_00]: While economy will never be passive, it has gotten easier over time.

[00:10:24] [SPEAKER_00]: Now that it's well-known and has a good reputation, I spend far less time, energy, and money on sales and marketing.

[00:10:32] [SPEAKER_00]: In fact, for our next event, I didn't need to do any marketing.

[00:10:36] [SPEAKER_00]: While I am savoring the fact that it sold out so easily this year, it wasn't an overnight success.

[00:10:43] [SPEAKER_00]: It took years of on and off grinding to spread the word and build the reputation.

[00:10:48] [SPEAKER_00]: When I think about my corporate career, things were getting harder, not easier over time.

[00:10:55] [SPEAKER_00]: As a salesperson, every time I hit my target revenue number,

[00:10:58] [SPEAKER_00]: my employer would simply increase the number or give me more clients or give me more people to manage.

[00:11:05] [SPEAKER_00]: Being able to control my own metrics of success and allow things to get easier over time

[00:11:11] [SPEAKER_00]: has made me prefer entrepreneurship over employment.

[00:11:16] [SPEAKER_00]: But we're just halfway through the article.

[00:11:18] [SPEAKER_00]: So for now, have a great rest of your day.

[00:11:21] [SPEAKER_00]: And I'll see you tomorrow where we'll finish up this post and where your optimal life awaits.