Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. Hey guys, how's it going? I'm uh, looking forward to talking about, uh, I'm sure a topic you've heard pop up before and that's passive income. It's always a catchy topic, I guess. And, uh, sounds, sounds really appealing, but we're going to talk about, you know, the pros and cons. I think a lot of times you hear about the pros of it. So I'm going to try to cover both sides of the equation and shed a little bit more light on it. Hopefully give you a little bit more of the trade-offs there. And I think with, with passive income, I guess the reason I'm covering this, I see it's come up so often in, uh, conversations we have with clients or potential clients, uh, in medicine.
Speaker 1 00:01:11 And I think typically we see this sort of, uh, you know, backwards thinking almost, um, it's not, um, and you can see, you know, if you look online, you read a lot about it. Um, you're going to kind of see this idea coming through as well. Um, and so I wanted to, you know, that's why I'm bringing it up is cause I see it happening coming up so often in a lot of times the thinking around it or how it works, uh, the thinking of how it works is a lot of times backwards. Um, and so at minimum I want to kind of try to straighten that out, uh, so that you're, you know, it's not necessarily a bad thing. Uh, it can be a great thing, but you want to go in with eyes wide, wide open and that's that's my goal for today is just to kind of give you the backstory on that.
Speaker 1 00:01:58 Okay. So before we get into it, let's clarify when I say passive income, what am I talking about? I know that sounds kind of cool. It's like, okay, you know, income passively, you know, if I can do that, that sounds great. Uh, but like I kind of implied in the intro. Um, you know, it, it can, it definitely has lots of downsides that oftentimes are overlooked and a lot of cases, it can cause more harm than good. Doesn't have to be that way. But, but I think the awareness and understanding of, you know, these pros and cons and how it works, uh, before you get kind of drawn into that shiny object appeal aspect, um, I think that's the way to go. So passive income, you know, the definition is basically like earning income without putting in labor or, you know, with less labor or work.
Speaker 1 00:02:52 So income with minimal work, you know, compared to active income. That's what most of you guys that are in, in medicine. I mean, that's what you do is you're used to that. Most professions, you work, you're trading dollars for hours, you work hours, you get paid dollars. And so working for income, you put in the time you get paid active labor. So that's active income, passive income is kind of the opposite of that is you work or I'm sorry, you don't work. And you earn income in its most pure form. You don't work in, you earn income. So like I said, that sounds if you, if you could choose say you got door number one and it's like, uh, work for income door, number two is get paid while you sleep. Which one are you gonna choose? Obviously, you know, everybody can, everybody's gonna pick door number two.
Speaker 1 00:03:41 It's like, well, shoot, if I can get, if I can earn income while I'm sleeping, I'll take that deal all day long. So, you know, that's the draw of passive income now I think a good question is how come everybody doesn't do it? I think, you know, like I said, there's more to the story. So the other thing too is if I've talked about this before, but like this should be like so far, what I'm saying should be, or when you hear about it, if it's just as simple as what I've said so far, I think you're too good to be true. Uh, alarm bells should be going off there. It's like, if it's, if it's as simple as that, like there's got to be, you should be asking yourself, like there's gotta be more to the story than just that. I mean, it can't be that simple.
Speaker 1 00:04:23 So we're going to talk about, talk about that more and hopefully give you, give you a little bit more of the downside and a hand upside. So I think the biggest, the biggest missing piece here is when you, if I were to bullet down, like a lot of times when people talk about passive income, really what they mean is it's maybe less, a little less work or, I mean, oftentimes it's just, it's when they say passive income, it's really still requiring work. So that's just confusing. It's um, um, I was reading an article about passive income. This is, this is one of another reason I decided to cover this. I was reading an article about passive income. One of the examples, uh, shared was, um, doing, uh, like medical surveys on the side. So like a side hustle and that's about as active as you can get.
Speaker 1 00:05:15 So that is not passive income, but a lot of times it's kind of like defined as passive income. So I think, I think that's the biggest missing piece here is that most of the time, or really there's the passive income is not, is rarely completely passive. Um, and so we'll talk about that a little bit more. So let's, let's clarify, there's a few different. So in reality, um, it's not as simple as like active income versus passive income in reality, there's, there's a lot of different flavors of this. Uh, so, but if we were to boil it down into, I think a couple of different, better definitions, I would look at it like you either have earned income or on labor. And so that's kind of like, that's, that's like active income. You work, you get paid simple. And then on the flip side you have what's called unearned income or income from investments.
Speaker 1 00:06:11 So, you know, you're, you might be thinking, well, how, how do you get income without earning it? So this would be, you know, the, the most pure example of this would be like, you have a mutual fund or stock and it pays a dividend. And that, um, that is income it's you did not spend a minute of your time doing anything with it so that I can, I can kind of get behind that being passive income because you did not spend any time on it, but I think it's better to look at it, like, um, return on your investment, because the reason you didn't have to spend any time on it is because you have invested money in taking risks on your money. And that's a different flavor of, you know, earning income. So I like to look at it like, like I said, two forms of income, you got working for your labor and then working, putting your investments to work.
Speaker 1 00:07:08 So those are two different ways to earn income is income from labor or time and income from assets or investments. And I think, you know, when you can kind of look at it like that, I think it makes a little bit more sense. Um, cause a lot of times when people are talking about passive income, they're really talking about like still working for labor, uh, which is it's, it's two, it's confusing and misleading. So let's, let's go through maybe a few examples. I already gave one about, um, investing in like a stock or mutual fund or something like that. That's I think a good example of the most pure form you're investing in another company, um, your just straight up an investor, you have no responsibility to run the business. It's super passive. When the company pays a dividend, you know, you get income and that's passive.
Speaker 1 00:08:02 Now it is, it's not without responsibility. It is on you to put, to select the investment and decide whether it's lousy or not. And, you know, decide when to swap it out or something. But it's, so this is, I would say this is the most common form of, you know, investing, earning income passively, but it's not it's I would say it has less shiny object appeal. It's not super exciting. And you know, the return potential is good, but it's not like home run. It's hard to, it's just kind of the same old thing you've always heard, but that doesn't mean it's bad. It's just kinda is what it is. So that's investing in companies, um, if you're a pure investor like in a stock or a mutual fund or even, or even a private company that you're say your buddy starting a business and all they need is an investor and no responsibility tied to that.
Speaker 1 00:08:56 That's what I'm talking about is investing in other companies. I think, like I said, I can get behind that being purely passive because there is very little responsibility aside from having to select the investment and decide whether or not it's doing, you know, it's a good investment. Now on another example would be like starting your own business. So let's use real estate as an example because that's definitely the hot topic, probably the most commonly discussed. And so with real estate, like let's say direct ownership. So let's say you're starting, you're going to have a rental property. I would that's, that's more, that's like starting your own business. There's higher risk involved. You typically have a loan, which is leverage, which is makes for much higher risk. People often don't realize how much risk they're taking with those types of, uh, deals. But it comes, you know, when you take risks like that, you have higher much higher return potential, but businesses can become, or, you know, always become needy.
Speaker 1 00:10:01 You know, they require a time. So that's the big difference in this example, you know, you could start any business. It could be in, in, uh, some sort of service within medicine or, you know, any service or any product or whatever you can, you can create a business to do anything. But the gist of it is this example, you're starting your own business versus in the first example, I'm talking about your investing in another person's business. And so with starting your own business, there's, I would say a much higher potential for return, but also much greater risk. But I think that the part that gets murky with starting your own business is it comes with both forms. So going back to the definitions I was talking about earlier, so I'm defining it as income from your labor and that's one first one second one is income from your investments.
Speaker 1 00:10:57 And so when you're starting your own business is unless you've like outsourced everything and you know, hired out a hundred percent of the work. Um, and even then you're going to have to manage it. But when you're starting your own business, it's going to be both. It's going to be working for labor and also investing in an asset. So that's where it gets murky. And a lot of times, you know, people don't quite know what they're getting into, but it, but it can be, like I said, it can be a great, a great deal, but I think key is going in with your, your eyes open. So I think a good example, I see a lot of times happening. So let's say, um, let's say there's, there's a surgeon. She's, we'll call her, uh, uh, Sally surgeon. Um, I'm not, that's all I got here.
Speaker 1 00:11:46 I'm not the that's my, my creative, creative juices are not working today, but Sally surgeon will be her name. And so let's say Sally's working super hard in training. She's not earning much, but it's getting towards the end and ready to start earning a good income. She's also feeling like a tinge of burnout. You know, it's just, it's been a lot of stress and pressure and especially lately, but there's this, you know, maybe light at the end of the tunnel, but you know, a lot of burnout. So she hears about, you know, this passive income sorta thing from a colleague at work and maybe one, maybe there's two of them that she works with. One has like an internet gig making like 60,000 a year of passive income. Um, another one is like in real estate making a lot more than that. And so, I mean, if that, if, if you're in like a, you know, lounge conversation, like a dinner talk, whatever, and you hear like, just that's the, a lot of times what the people kind of describe it as it's like, I got an internet business, that's a passive income stream, 60,000 a year.
Speaker 1 00:12:50 It's fantastic. I love it. You typically hear that part of the story or like, or like I have a real estate business. It's great. I could, you know, stop working in my, as a physician and be completely fine. It's generating a ton of income, a ton of passive income. So that's typically what the conversations are like in like the social settings. But I can tell you from working in that and working with people in their finances and you know, the behind the scenes, it's never that simple. There's always more to the story. Um, but I can also see, like, that sounds really appealing. It's like, if you're burned out are ready and you're like, man, it would be nice to have a little bit of like alternative income source. Um, medicine's kind of been stressful and I'm a little nervous about it and, um, you know, feeling a little burnout and, you know, I'm, I want to diversify my income sources, um, and passive income sounds really appealing.
Speaker 1 00:13:44 And you can, you know, you hear those sorts of things on the surface. It's like, that sounds very good. And so maybe, maybe Sally hears that and she's like, okay, well, I'm going to start reading online. The problem with a lot of things, like if you Google passive income or whatever, or start reading about it online, it's it seems like it's really focused on like the appeal of it, the shiny object aspect. And like I said, at the very beginning, and not as much on the pros and cons aspect and it kind of like furthers this whole, you know, desire to get into it. And maybe she takes a course on it and starts to, you know, invest in, uh, you know, educating herself, which is very good. But those sorts of things also kind of further the appeal in a lot of cases. So a lot of this, a lot of the people that write about it and a lot of the people that teach about it have like a vested interest in more people being involved in passive income.
Speaker 1 00:14:40 So in plus they're in it all in, so they they've kind of already drank the Kool-Aid. So you got, you just have to, you know, be aware of this stuff. So, so maybe she starts to make this passive income thing, like a serious goal and is in, you know, in per starts to pursue it. So she, you know, she's learning more, you know, there's, there's lots of ways to invest in real estate, but let's say she w she decided she wants to do real estate syndications as a starting point. So real estate syndications are, so you can listen in on a episode back, um, where we talk about that I'll link to it in the show notes, but real estate syndications are kind of, let's say, so I was giving you the examples of different, um, ways to invest. So investing in other companies versus starting your own business.
Speaker 1 00:15:25 And so investing in other companies. So real estate syndications are more like just investing in other people's companies. So, uh, it's kinda more along that passive end, but there is that responsibility of, you know, knowing what you're getting into and deciding if it's a reasonable decision and, you know, making the call whether or not to get in or out. Um, so that's what, that's what, uh, I would categorize real estate syndications as. So she gets into real estate syndications. It's not as active, it's more, you know, along the lines of passive income, but the, and it makes sense to her. And I, you know, it makes sense to me, there's lots of potential. So she goes all in she's, she's taking all her, um, you know, discretionary income or left. All of her savings is dedicated to, you know, adding more deals and, um, you know, returns are really good on those sorts of things.
Speaker 1 00:16:23 And so she's, she's happy, but, you know, eventually, or inevitably probably the market tanks. So like 2008 was the last big real estate tank. So real estate tanks, big time, she's all in on it. And her deals that she's doing have leveraged, like most syndications do have lots of leverage or debt. And so when you have leverage and things go down, it like amps up the loss big time. So she basically goes to zero or, you know, loses most of her assets in like a super short period of time and go, you know, has put in a ton of money and, you know, time learning and that sort of thing. And it's, it's not accomplishing all of a sudden, it's not at all accomplishing what she had hoped. So in this example, there's all sorts of different variations of this. But in this example, I think Sally was her goal was to, you know, have income, passive income and diversify, you know, have a alternative outside of medicine and real estate made a lot of sense.
Speaker 1 00:17:31 The problem was that, um, that you can't really, first of all, income is when you, when you leverage something like that, income is not nearly as big of a, you got to pay off the debt. And so they don't generate a ton of income until, you know, don't have debt on them. Um, also when you, you can't really go all in like that on something without taking massive amounts of risk and being at risk of this big sort of downturn. And then the other thing is when you're investing, you know, more purely passively like this, um, that's going to eat into the returns in itself because you have to pay for, you know, all the management fees and all that kind of thing. And so it's not that different. Um, you know, maybe you should expect a little bit better returns, but it's not gonna like crush it and you're not going to get like, you know, you typically don't see like home run sorts of situations in that example.
Speaker 1 00:18:29 So, but I think the, the number one issue was so above all that, I think the number one issue in this example was she was pursuing, this was all about the money. So it was like she was pursuing real estate strictly to make money. And I think when you, I think that's always, uh, an issue if you're going about a decision with the number one reason, or, you know, worst case, the sole reason to make money. Um, I think that is not a good way to go now. So she, she didn't, you know, have on the flip side, ideally she has a solid kind of financial plan, game plan. That's, you know, well thought out and based on values. So just strictly making decisions on money, that's always a bad start. And ideally, you're going about it more taking a look at your values and your goals and saying, okay, how does this fit in to make my life better?
Speaker 1 00:19:27 Uh, instead of saying, how do I make more money in X, Y, Z decision plus on top of that, it started. So this example, wasn't a huge takeaway from her career, but when you decide, even in these more passively oriented examples, when you start to spend time educating yourself, which is important, you have to educate yourself, that's going to pull you away from your most productive use hours as a physician. So physicians make really, really good on average, really good hourly wages, and it's really difficult to replicate or, you know, uh, outpaced that, uh, it's definitely not impossible. It's completely possible, but when you get into unfamiliar areas, it's especially difficult to, you know, have better return for your dollar than in working in your specialty. And so it's common that people don't really think about this time aspect. So I think, you know, the biggest thing is with this passive income idea, there's always going to be some level of time required in, um, in getting to this in, in, in allowing it to be a good use of your resources.
Speaker 1 00:20:45 So it's never passive. So understanding what that time commitment looks like and taking that into consideration as a cost, because your time is super valuable, especially as a physician and realize it's going to be pulling you away from that. Ideally your making the decision to kind of try passive income, not strictly based on money and more based on some other reason, whether it's like a desire to get into something different, um, or change, you know, some change you want to make, or an idea you have that you're passionate about. Those are much better reasons than like I want to make money. So I'm doing this and recognize, I think it's good to recognize that, uh, there are many different flavors of passive income. Uh, it's not as cut and dry as like active versus passive there's direct ownership of a business or investing in a business, your own business, which is going to require more of the time component.
Speaker 1 00:21:48 And then there's investing in other people's businesses, which is going to require less time, but it's still not without responsibility, but, you know, knowing what, you know, whatever example passive income w you know, what that is going to look like time-wise is important because your time is worth a lot of money. Your time is important. And I think more importantly, uh, you know, I think the biggest thing is tying it back to what is your ideal life look like? So that kind of gets into the financial plan. So ultimately, what do you want to do with your time? I mean, I think a good way of thinking of this, instead of saying, okay, you know, shiny objects, passive income, I'm going to make a ton of money without spending time and making a decision based on the money instead of going about it that way.
Speaker 1 00:22:36 Ideally, we're starting from the standpoint of what do I want my life life to look like in an ideal world, maybe even in an independent of money. So let's say you're financially independent. What do you want your life to look like? And so if I think it would be good to say, to at least have this thought exercise, like, would I do X, Y, Z passive income thing? If I were financially independent, you know what? I started real estate business or what I invest in syndications or whatever, if I was financially independent, if I think if the answer is no, that's a really good sign that maybe you ought to think twice about it, because that, you know, that's an indication that you're doing it for money reasons. On the other hand, if your, if your, if your answer is yes to that, then maybe you say, okay, well, you know, does this pull me closer to that ideal life?
Speaker 1 00:23:27 If so, you know, maybe I should take steps forward. Um, and you don't have to jump all in. That's important too is especially early on, like, think about it like training. I mean, you don't just jump into practice. You've got to learn slowly and, you know, ideally take, do the education, try it out a little bit more education, try it out a little more. And that's the way to learn a lot of times through the, the experiences that's the way to learn, you know, like in that example with, uh, you know, Sally surgeon, when you have a big downturn, that's oftentimes when you learn the most, but when you've gone, so all in on it, and it, at that point, it can cost you, you know, everything, and then you don't really have the ability to weather it and have to kind of get out just as a result of being so all in on it.
Speaker 1 00:24:24 So passive income. So it, in, in summary, I think the big takeaway passive income can work really well. Uh, it, it is a, it's not, it does not come without costs. So there's always going to be some level of, um, added responsibility. A lot of, in some cases, it's a lot more time than you realize, but understanding the time and how much requirement you're going to have to put into it is a huge deal. And I would, I would zero in on that, like understanding what that looks like, because the more time you put into it, the more time you're going to have to put into it, like I was saying with the, uh, surveys, doing medical surveys on the side example, like that is not, I mean, that's really just trading dollars for hours just like working in medicine. So it's really not, I would argue that's not at all passive.
Speaker 1 00:25:16 So every type of passive income investment is going to have a little bit different variation of time versus money investment. And so understanding that going in, I think is a, is going to be helpful. So let me know if you have other areas of, um, passive income that you'd want to dig into this. Uh, the intent today was to kind of hit the high points and, and, um, I think passive income, I've tried it myself. Like, you know, I've worked in areas. I have my own business. I mean, it's great. I've owned rental real estate before. Um, it, it can work great, but it's not all, it's rarely as good as it seems from the outside. And there's, you know, if you can go in understanding, you know, the pros and the cons, I think you'll have a heck of a lot better chance at making it work really well for you.
Speaker 1 00:26:10 And that's the goal really? I mean, I want, if you do have a desire to get into an alternative sort of, you know, business, or are starting to earn some additional sources of income, I think that's great. As long as you've put some good thought into it and you've done it for the right reasons. I think that's what matters. All right. Well, thanks for joining me today. And, uh, we'll look forward to chatting again next time as always, thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
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