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According to Wikipedia, the definition of passive income is:
“Income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.”
I have a few forms of passive income myself. Namely, each month I receive dividends from stock index funds and REITs (real estate investment trusts), neither of which requires any active work from me to earn. Dividends simply land in my investment accounts each month like clockwork.
These dividends aren’t enough to cover all of my lifestyle expenses, though, which is why I also earn need to earn active income from my day job as a data scientist.
The beauty of passive income is that I don’t have to do anything to earn it, which makes it a highly enjoyable income stream.
Conversely, to earn income from my day job I have to commute to an office, sit in meetings, work on projects I don’t find meaningful, go through performance reviews, and deal with office politics. While I don’t loathe my day job, I certainly don’t love it.
If I had to create a chart that summarizes my feelings towards active and passive income, it would look something like this:
Based off this chart, the path to financial security and happiness seems obvious: I just need to generate enough passive income to cover all of my lifestyle expenses.
But there is one massive flaw with passive income: it takes a long time to generate.
For example, if I invest $100,000 in a stock index fund with a 3% annual dividend yield, I’ll receive $3,000 each year in dividends. This would be a purely passive income stream. But while this is a nice chunk of cash, it’s not life changing. I would still be dependent on income from a day job to cover all of my expenses.
If instead I invested $1 million in a stock index fund with the same annual dividend yield, I’d receive $30,000 each year in dividends. This amount would be life changing. But the problem is that it would likely take me a decade or longer to save up $1 million.
This brings up one advantage of active income that often gets overlooked: active income doesn’t take as long to generate as passive income.
For example, I could earn $30,000 from my day job in a little under six months, which is a heck of a lot quicker than the 10 years needed to save up $1 million and generate the same $30,000 from passive income.
But the obvious drawback of this active income is that requires me to work at a day job I don’t love.
If only there was a way to combine the enjoyable nature of passive income with the timeliness of active income…
Enjoyable Active Income
Enter enjoyable active income, or EAI, for short.
I define EAI as:
“Income resulting from active work that an individual finds enjoyable.”
Some examples of enjoyable active income for me include blogging and stats tutoring.
To earn income from both of these sources, I have to actually put in work. I have to sit at a desk and type blog posts and I have to actively seek out tutoring clients and spend time helping them understand stats topics.
Fortunately I enjoy both of these activities, which makes them both forms of enjoyable active income. If I had to put EAI on the chart from earlier, it would look like this:
Enjoyable active income is the hack that allows you to earn income in a way that isn’t miserable and that doesn’t require grinding it out at a job you hate for a decade or more to have the means to generate it.
Enjoyable Active Income Differs from One Person to the Next
Before I share how you can generate EAI, I should mention that EAI looks different for everyone. What I find enjoyable is likely different from what you find enjoyable.
Not everyone likes blogging or stats tutoring as much as I do. Fortunately, there are virtually an unlimited amount of ways you can earn income doing something you find enjoyable.
Over at Collecting Wisdom, I’ve interviewed people who have generated income in a variety of different ways they enjoy including building profitable websites, doing freelance writing, doing freelance genealogical consulting, and selling graphic designs online.
There are many different ways to generate EAI and it may simply require you to experiment a bit to find out what works for you.
How to Generate Enjoyable Active Income
There is one book that I’ve found particularly useful in my own search for enjoyable active income: So Good They Can’t Ignore You by Cal Newport.
According to Cal, the way to build an enjoyable active income stream is to:
1. Avoid the common advice to “follow your passion.”
2. Develop rare and valuable skills.
3. Never give up control of your work.
Avoid the common advice to “follow your passion.”
“Many of us have bought into the cliché ‘pursue your passion.’ For many, that is terrible advice. In your 20s, you may not really know what your best skills and opportunities are. It’s better to pursue learning, personal discipline, and growth.” -Chris Anderson, Tribe of Mentors
Most young people, especially fresh college grads, are told to “follow their passion” so they “will never work a day in their life.” Unfortunately for most young people, this is terrible advice. Just because you love playing the bongo drums in your free time doesn’t mean you should move to New York and attempt to make a living from it.
Newport points out that many people mistakenly think they’ll be content with their job (and thus their income stream) as soon as they find that one thing they’re passionate about. What most people fail to realize, though, is that the things you tend to enjoy and become passionate about are the things that you’re good at.
And the things you’re good at are simply the things that you spend time practicing and working on.
Newport cites one study from the book:
“Hours spent in serious study of the game was not just the most important factor in predicting chess skill, it dominated the other factors.
The researchers discovered that the players who became grand masters spent five times more hours dedicated to serious study than those who plateaued at an intermediate level.
The grand masters, on average, dedicated around 5,000 hours out of their 10,000 to serious study. The intermediate players, by contrast, dedicated only around 1,000 to this activity.”
Personally I’ve experienced this phenomenon with writing code and creating interactive data visualizations. When I first started learning how to write code a few years ago, I hated it. It was difficult and unenjoyable.
However, the more I wrote, the better I got and the more I began to feel a sense of mastery. This made coding so much more fun because when an idea for a visual popped into my head, I suddenly had the skill set to write the code needed to make it come to life. And the better I got, the more I entered a flow state when I wrote code as opposed to feeling like it was pure drudgery.
Develop rare and valuable skills
Another crucial aspect of developing an enjoyable income stream is to develop rare and valuable skills. This is what allows you to earn good money from your work.
And as a rule of thumb, the harder a skill is to learn, the more income you can earn. Keep in mind that most people quit easily when they’re faced with problems they don’t know how to solve. This is especially true when it comes to learning a new programming language or any other difficult skill. That’s an advantage for you. More quitters = less competition.
The more rare and valuable your skills, the more income you can earn. This inherently makes an income stream more enjoyable.
Never give up control of your work
Newport shares one final tip for creating an enjoyable income stream: never give up control of your work.
When your skill set reaches a certain level, the demand for your skills and your time skyrockets. Whether you work as a freelancer or as an employee at a company, people will begin to demand more of your time and your assistance.
Once you reach this point, it’s important that you maintain control over your work and your time. If you’re not careful, you may say “yes” to too many people and accrue too many obligations to the point where your work is no longer enjoyable.
Remember, it’s not always about earning the most money. It’s more important that you maintain control and freedom over your work so that it remains enjoyable and not burdensome.
On the Road to Full-Time EAI
I’m on the road to earning full-time enjoyable active income myself. Through this blog, my two other sites, and my stats tutoring, I typically cover 60-70% of my total expenses each month. Once that number consistently reaches 100% and higher, I’ll contemplate quitting my full-time day job to go full-time on my current side hustles.
For me, building up my net worth also plays an important role in making my transition to earning full-time EAI. The higher my net worth, the more savings I have to fall back on if any of my side hustle income streams dried up unexpectedly. Fortunately, through a high-salaried job and a bit of frugality, I’ve been able to save up nearly $120k across various investment accounts which gives me a nice savings cushion to fall back on if I need it.
For anyone out there who is wondering if there’s an alternative to saving up enough money to never work again, the answer is yes. Although it can take time, effort, and discipline to develop an enjoyable active income stream, the benefits are enormous. You can gain freedom from your cubicle without $1 million in the bank and you can start working on your own terms much sooner.
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
Although the bulk of his net worth is invested in index funds, his favorite place to invest in individual stocks is M1 Finance, a site that allows you to build a custom portfolio of stocks for free.
His favorite way to save money each month on his recurring bills is by using Trim, a free financial app that negotiates lower cable, internet, and phone bills with any provider on your behalf.
His favorite micro-investing app is Acorns, a free financial app that takes just 5 minutes to set up and allows you to invest your spare change in a diversified portfolio.
His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.
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