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Passive income is the Holy Grail of financial independence. Although modern Western society and capitalism relies on the Puritan work ethic, the idea that labor is a value to society and hard work is the path to a spiritual and successful life, most people would prefer not to trade their time and effort for an opportunity to survive financially.

There are good reasons. The work ethic is designed to benefit employers, not employees. Even though the labor movement worked hard to ensure humane conditions for employees, in the business world, the idea of spending countless hours at the office is rewarded in some working environments. Employees are made to feel guilty about desiring work/life balance, as excellence in an organization is a goal that requires a measure of imbalance. Unwavering dedication to the job above all other priorities is rewarded.

MoneyThis approach might make sense if a job is also a passion, but for the vast majority of people, passions exist outside the office. Families, hobbies, and personal missions all have higher importance on the scale of values, but they often don’t have the ability to provide the financial incentive necessary to make life easier for families, hobbies, and personal missions. When eight or more hours of the day are lacking passion, the results are the tired memes of the ordinary workplace:

  • Is it Friday yet?
  • I can’t wait to get out of here.
  • She’s retiring this year; she’s lucky.
  • My coworkers are so annoying.
  • The boss expects too much and then raises the bar when I exceed expectations.
  • I can’t get anywhere in this job.

The list goes on.

It’s no wonder at all people view the idea of passive income as salvation. Rather than trading in effort and time for a paycheck, your assets generate income while you sit back and relax, spend time with your family, and pursue your less lucrative passions.

Passive income exists, at least from a tax standpoint. Income from a rental property or from a partnership where you aren’t actively involved is considered passive income. The IRS treats this type of passive income differently than other income, even if that income comes in the form of dividends from an investment portfolio, what some might also call “passive income.” The truth is that all income requires active involvement, but perhaps it’s a matter of degree.

The IRS considers income from real estate investments passive income, but managing real estate can be a full-time job. Don’t expect to sit back and your investments to thrive, even if you have a management company handling the day-to-day work. In fact, unless you’re able to amass a significant volume of real estate, or if you do most of the work yourself, it’s unlikely the time and effort you spend will be as profitable as you expect.

Expect the same disappointment if you’re looking to dividend income as your path to wealth. If you calculate that you would like to replace $50,000 of your toil-based income, you would need to have $1 million invested in investments paying a 5 percent dividend. (I’m ignoring the difference in income tax just to keep the example simple.) $1 million is a large bank balance, but it is achievable. You can’t, however, just put $1 million in an investment paying a 5 percent dividend and forget about it.

Any investment requires active involvement, starting from the beginning. You need to choose the right investments to start, and you need to monitor your investments over time. Sure, you’re not toiling in the field or wiping sweat off your brow at a construction site, but you are spending time researching your investments. You also need to pay attention to ensure your investments continue to perform. Companies decide to cancel their dividends without so much of a warning, so you should follow the company’s financials to be aware of any signs of trouble before the executives decide to reinvest profits, if any, rather than continue the distribution to shareholders.

When it comes to letting your money earn your income, nothing beats bonds. Suze Orman and financial planners offer advice to the general public, extolling the virtues of investing in a portfolio made almost entirely of stocks, but if you look at Suze’s own portfolio, which is designed not to increase value over time in exchange for risk but to generate income year after year, she invests primarily in bonds. (Her investment was in bonds as of a few years ago according to her own admission in a news story. I don’t know whether this is still the case, but it’s likely.)

Taking a step back, while Suze — and many other investors, but she is a good example — invests her portfolio for passive income, she’s not sitting back and relaxing with her life. While she may have money managers who handle her investments for her, she still trades her time and effort for an income.

Are you seeking the Holy Grail of passive income?

Photo: Raido Kaldma
Wealthy Turtle

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The best place to learn solid financial behavior is at home. Although a kid’s environment at school and among peers is important in his or her development, the biggest influence on a growing child’s set of values is the behavior of the parents. Parents are role models, so in a perfect world, they are best suited to solve young adults’ lack of preparedness for handing the world from a financial perspective.

Parents, on the other hand, are often ill-equipped for this responsibility, so public school teachers are left to pick up the slack for parents who can’t or won’t be the role models necessary. The lessons aren’t difficult, but financial behavior is so embedded in life at home, poor models there can easily undo any lessons taught in a school environment. Although New Jersey updates its public school curriculum standards a few years ago to require 2.5 credits in financial, economic, business, and entrepreneurial literacy, the typical class is not going to be effective for establishing solid financial behavior.

Eighth gradePrograms that teach financial literacy need to get creative. If there’s ever a chance for the banking industry to get involved with its future customers at an early age, this is it. Capital One sees the benefit in teaching young children how to use its products and is sponsoring the “Finance Park” program, coordinated by the non-profit organization Junior Achievement.

Finance Park is a mobile program for middle school students. After a few preparatory lessons in the classroom, the students visit one of these mobile stations and a Capital One bank branch. Students are assigned a family situation (single, married, with or without children, etc.) and a job, and are faced with simulations requiring financial decisions that have consequences. Due to a lack of preparedness in real life, most people learn how to manage their money “on the job.” But even in real life, the consequences of poor financial decision-making can be somewhat removed from the decisions themselves. The distance between cause (overspending, for example) and effect (not being able to afford a house due to high debt levels, for example) are so separated that learning on the job isn’t always effective as quickly as it would need to be.

Simulations can bring the cause and effect relationship into focus.

Capital One’s presence is significant in this program. The official name of the initiative is the “Capital One Junior Achievement Finance Park” with the necessary trademark symbols. Corporate involvement doesn’t stop with Capital One. There are more co-branded programs which one might expect to see corporations training young consumers to be life-long customers, in New Jersey alone:

Elementary school grades

  • Our Nation® Sponsored by United Technologies
  • JA More than Money™ (After-school Program) Sponsored by HSBC

Middle school grades

  • JA Global Marketplace™ Sponsored by MasterCard Worldwide
  • JA Economics for Success™ Sponsored by the Allstate Foundation
  • JA America Works Sponsored by Pitney Bowes & The Literacy and Education Fund

High school grades

  • JA TITAN (Internet based) Sponsored by Oracle
  • JA Economics™ Sponsored by the MetLife Foundation
  • JA Exploring Economics™ Sponsored by the MetLife Foundation
  • JA Banks in Action™ Sponsored by the Citi Foundation
  • JA Business Ethics™ Sponsored by Deloitte
  • JA Careers with a Purpose™ Sponsored by HCA & John Templeton Foundation

Junior Achievement programs in other states have different partnerships.

Shareholders are often impressed with corporate involvement in positive social initiatives and happy when companies are beneficiaries of tax incentives for charitable spending. I am concerned about the effect of branding in education lessons for eighth-graders. Corporations should not be involved with the education of children, but these corporations have money to devote to programs like Finance Park. If it weren’t for corporate sponsorship, programs like these would likely not exist.

Corporations have been involved with public education since the 1920s, but the trend has increased in recent years. As the United States falls behind other countries in education, citizens look to blame this country’s public school system. We look to corporations that create charter schools as an alternative, with the idea that schools with a better funding source, corporate profits rather than taxpayer money, will help solve the educational crisis. Results show that charter schools have mixed results when compared with public schools.

The lessons in personal finance are important, so it’s a good thing that kids are getting the exposure to real-life simulations. Can it be done without corporate involvement and indelible branding at an impressionable age?

Photo: daveparker
Junior Achievement Finance Park, Stanford CREDO study

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In April, LIMRA, a think-tank for the financial industry, completed a survey intended to focus on the savings and investment preferences of those living and working in the United States. After receiving responses from 2,697 Americans, a representative sample of the country, LIMRA was able to determine that 49 percent of the country is not saving for retirement. Additionally, more than half of Americans between the ages of 18 and 34, at 56 percent, are not saving for retirement.

Saving for retirement — and receiving the associated tax benefits through typical investment types like 401(k) plans and IRAs — requires a public trust in the financial industry. On one side, financial planners, investment salespeople and brokers, columnists, and bloggers are encouraging the use of financial products that, through both apparent and hidden fees, enriches the industry, while on the other side, investment firms are the beneficiaries of massive taxpayer bailouts and frequently in the news for using taxpayer money for paying their executives bonuses that defy the laws of gravity.

Wall StreetIt may be true that the reason many Americans do not save for retirement is ignorance. There are typical excuses for not saving for retirement, such as the lack of good, seemingly trustworthy information about the options that are available, the lack of knowledge about the benefits of investing in 401(k) plans and IRAs, or the belief that during tight personal economic times, not a cent is available to save for the future. After the recession, however, many people just see the financial industry as unworthy of trust. Organizations like LIMRA, working for the industry and promoting financial products, are unlikely to bring this attitude to the public attention.

The industry is more interested in shaming people unwilling to get on the boats rather than analyzing the leadership capabilities and trustworthiness of the boats’ captains.

I’m saving for retirement with 401(k) plans and IRAs. When possible, I choose plans that have low fees, but the choice is not always up to me. Employees may be able to choose from a selection of investments inside their 401(k) plan, employees can’t choose their company’s 401(k) administrator and broker without a coordinated effort among a large portion of employees. That would be nearly impossible in a large company. Unions are intended to solve some of these issues, but it can often reach the point where being a member of a large union is much like working for a large employer. The power of any individual is limited.

The 401(k) is ingenious for the financial industry, particularly now that it’s automatic. In a perfect world, every single employee is enrolled in a 401(k) plan on their first day on their first job. The investments may not perform well over time, but that’s not particularly relevant for the financial industry. As long as every American is investing a portion of their paycheck every week, two weeks, month, or other period, 401(k) administrators and brokers will continue to thrive. The employee probably benefits when retirement approaches, but that is by no means guaranteed. All you need to do is look at the portion of Americans who planned to retire in recent years but saw their nest eggs trampled on during the recession.

Investors bear the responsibility for changing their risk profile as they near their planned retirement, but there is a mixed message. The financial industry says you need to stay invested in stocks (highly volatile, highly risky) as you approach retirement because most people need their funds to last several decades throughout retirement while at the same time warning people to risk only what they can afford to lose. When people receive conflicting information, making decisions becomes more difficult. And when the conflicting information is coming from the same source — that is, the financial industry — the default reaction is the lack of trust.

Does the financial industry wants to do American citizens a favor by providing options for saving for retirement? No. The financial industry wants its companies to not only stay in business but to profit as much as possible. And to that end, it sells products — investment opportunities — designed to enrich the companies and their shareholders. There’s nothing wrong with this, because consumers will only buy products they need or desire enough. Companies will sell towards that need. And when only half of Americans have discovered retirement savings vehicles like 401(k) plans and IRAs, the industry will resign itself to doing a better job in explaining to the country why their products are needs, not wants.

Saving for retirement is important. For most people, stocks are the only investment type that can grow wealth quickly enough to provide the dream retirement so impressed upon Americans through media. It’s risky, as recent would-be retirees have seen. Thanks to the cognitive dissonance resulting in the understanding that the promotion of retirement is a result of the financial industry trying to increase profits on a large scale rather than corporate concern for the well-being of a nation and the knowledge that Americans must do something drastic to save money in order to fulfill the dream of quitting work, some Americans choose to invest while others would sooner give away their firstborn rather than drink the financial industry’s Kool-Aid.

LIMRA may be right — that most people who do not invest for retirement with 401(k) plans and IRAs have not done so because the industry’s message hasn’t successfully penetrated their consciousness. That may be due in part to a lack of education, but for others, it’s a lack of faith and trust in the industry.

Photo: zoonabar
LIMRA

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Tavis Smiley and Dr. Cornel West have been working hard to bring the issue of poverty into the consciousness of the citizens and political discourse of the United States. As a team, Smiley and West have been touring city to city, speaking to audiences concerned about the increasing wealth gap in this country. Their book, The Rich and the Rest of Us: A Poverty Manifeseto, is the culmination of their observations of American citizens throughout these travels.

While the economy is technically in recovery from the Great Recession, a vast slice of Americans have not experienced a real recovery. A “jobless recovery,” where the beneficiaries of an improving economy are the wealthy while the middle class struggles with unemployment, is not a real recovery. Despite this disadvantage, the prevalence and pervasiveness of poverty is still astonishing. According to Smiley and West, 150 million people in this country are in or near poverty. That number represents one out of every two individuals — half the country.

Tavis SmileyThe issue of poverty, affecting this number of individuals, is bigger than poverty itself. The government tallies 46 million Americans living in poverty according to the 2010 census and the government’s own definitions of poverty. Many more individuals are affected by poverty because they are living dangerously close. Many middle class households, particularly those already living in debt or in a paycheck-to-paycheck situation, are one lost paycheck away from a dangerous financial situation, and many families are already experiencing a personal decline due to the inability to find gainful employment.

Poverty has traditionally been a problem classified as urban or rural. Minorities have been and are disproportionately affected by poverty, but poverty is not a suburban problem, too. With white, middle-class families now facing the issue of poverty, whether by losing a job or being dangerously close to not being able to afford their homes, the issue is gaining more attention. While poverty is making life difficult for an increasing number of Americans, those in or seeking office, whether Democrats or Republicans, are not concerned. In order to receive a voice in political discourse, you need money. While the United States may have been founded on the ideals of freedom and liberty, these have generally only been granted to an elite selection of its inhabitants. The distribution of social power is expanded only by revolution among the disenfranchised.

Smiley and West contacted Consumerism Commentary with an interest in speaking to me about these issues — to defend their position, and to open my eyes to the realities faced even by the middle class in this country, many of whom are the “new poor.” We arranged an interview for the Consumerism Commentary Podcast, airing Sunday, May 13. Unfortunately, Dr. West was unable to participate in the interview at the last minutes as he was in New York waiting for a verdict after a conviction related to a political protest in that city. Tavis Smiley was able to participate, but our time together was short. We weren’t able to address all the questions I had prepared, but the discussion was valuable.

Listen to the entire discussion with Tavis Smiley, podcast host Jay Frosting, and myself, Luke Landes, once it is available this weekend. Smiley is the host of Tavis Smiley on PBS and The Tavis Smiley Show on Public Radio International. Update: Listen to the podcast here.

In the interview, Smiley dispelled many of the myths about poverty. One such myth is the idea that those in poverty are entirely to blame for their financial situation.

On Consumerism Commentary, I’ve written that taking personal responsibility for your decisions, financial and otherwise, plays the biggest role in achieving financial security and independence. This is today’s American promise: “Anyone can make it in America.” The media love rags-to-riches stories, even if it doesn’t reflect a reality for the majority of Americans. It’s true that this country’s brand of capitalism is favorable to the situations European immigrants left behind. Religious intolerance, a caste system based on ancestry, and an economic system wherein generally only the first-born male would have rights to any property drove pioneers to create a new society or join a country with a promise to create a better life for yourself. Never mind that doing so displaced others who occupied the land here.

Even in this new society, you had to be a member of the elite to receive the rights as endowed. Not everyone begins on equal footing. The lack of early educational opportunities throughout this country is one of the strongest causes of generational poverty. As Smiley addresses in the podcast, Washington state is the home to large multi-national corporations, providing a huge advantage to those who reside in Washington thanks to the tax these companies pay. The educational opportunities in Washington state far outshine the opportunities in Washington, D.C., for example. Until a quality education for the entire country is given priority, generational poverty will continue to exist.

In the interview, we also address the issue of austerity. The concept of reducing the deficit and national debt is and should be a high priority for policymakers, but the timing of austerity measures, such as reducing funding to societal programs, is just as important. Smiley argues that we cannot cut the budget for these important issues when the economy is not “flowing,” saying that the budget is being balanced on the backs of poor people. Budgets are moral documents, and you can determine a country’s real priorities by evaluating where the money is going. If this country does not address the economy for the 99 percent — those who have seen no benefit from this “jobless recovery” — rather than the “1 percent,” Smiley warns of the downfall of the United States as a world leader.

No empire in the history of the world that at some point did not falter or fail. Every empire had its day. Americans don’t want to think we could be dangerously close to the edge… Poverty is the moral and spiritual issue of our time.

Time did not permit us to explore all the topics I would have liked to cover in the interview with Tavis Smiley. For example, I would have liked to talk more about the Occupy movement and getting a national stage for the issue of poverty. In recent weeks, civil rights are again receiving national attention, from the perspective of same-sex marriage. Not to minimize that issue of equal treatment under the law for all individuals, poverty deserves the same attention from our nation’s leaders.

Be sure to subscribe to the Consumerism Commentary Podcast to hear the interview with Tavis Smiley, where we address more topics related to poverty than are outlined above, as soon as it is available. Be sure also to read The Rich and the Rest of Us: A Poverty Manifesto. Update: The interview is now available as a podcast here.

Photo: DC Central Kitchen

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Wealthy Families Apply for Private School Financial Aid

by Flexo

There is a perception among many families that private elementary and high schools are worth the costs of tuition even though public school is comparatively free to attend (not including taxes and bake sales). That’s a debate that will never end. Parents, who always want what’s best for their children, will take advantage of every ... Continue reading this article…

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How to Work Out Without Over Working Your Budget

by Guest Author

This is a guest article by Jennifer Calonia, Junior Editor at GoBankingRates. In the article, the author offers suggestions for staying fit without breaking the bank. It’s that time again: Beach season is fast approaching and franchise gym promotions are in full swing to lock you and your checking account into a pricey workout regimen. ... Continue reading this article…

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Consumers Want Easier Online Payments

by Flexo
MasterCard credit card

Yes, it’s frustrating to need to reach for my wallet and type in my credit card number every time I want to complete a purchase online. According to a recent MasterCard and Harris Interactive survey, 58 percent of consumers agree with me. Consumers even abandon their online shopping carts when the check-out process requires too ... Continue reading this article…

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Facebook IPO Approaching: Will You Buy Shares?

by Flexo
Facebook

A few weeks ago, a Consumerism Commentary reader asked me on Facebook whether it would be a good idea to purchase shares of Facebook at $48 a piece. I do not give stock buying advice, but I mentioned that shares had recently been sold for $44.10 on the secondary market, so if someone were to ... Continue reading this article…

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