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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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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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Art Is Not a Good Investment

This article was written by in Investing. 10 comments.

A few months ago, art and money were connected in the news when Andreas Gursky’s “Rhein II,” a photograph depicting a still river and walkway, became the highest-valued photograph sold at auction. The buyer paid $4 million to walk away with the larger-than-life print. Art is in the news again today, with one of Edvard Munch’s renditions of “The Scream.” At a recent Sotheby’s auction, “The Scream” was sold for $119.9 million. This price set a record, making “The Scream” the most expensive work of art ever sold at auction.

For those who have the money to spare, art is a popular investment. Trading masterpieces of art among a small subsection of the population, less than 1 percent, is not without criticism, however. Many artists do not live to see their works become valuable, and do not benefit from the high prices sought for their work. I addressed both the criticisms and the benefits of giving art a significant societal value in the article about “Rhein II.”

The Scream - Edvard MunchWhile it may be good for society to value art highly, is it a good investment for any one individual who has millions of dollars to spare?

Well, first of all, there is art accessible at all levels of investment. With research, you might find works available for $50 that could certainly increase in value over time at a rate better than what financial advisers offer as typical long-term stock market returns. Art is not an investment solely for the 1 percent. And with the right buying choices, your smaller investment in living artists has a more direct effect on the artist community.

Investing in art isn’t going to be right for everyone. While some consider art to be one of the best investments outside of real estate, the economy has seen would-be real estate investors struggling when the market isn’t robust. The same is true with art. The market is subject to bubbles, the latest trends play a significant role in determining prices, and you may not be able to sell your art at the price time you need the proceeds. Artists whose work have proven to appreciate and are highly recognized as masters, like Dali and Picasso, have price appreciation almost guaranteed, but the barrier to entry for investments in proven artists is too high for investors without the desire to risk large sums of money.

Outside of artists whose works have proven worth, it’s risky to invest in art with the goal of making a killing between the purchase date and the sale date. Even the best research won’t guarantee performance. To mitigate the chance of loss, when choosing art, find something you like. As long as you enjoy looking at your art collection, you won’t mind as much holding onto it until it has the ability to fetch the price you desire — which may be never. At the auction where “The Scream” sold for $119.9 million, one fifth of the pieces on the auction block failed to sell because no investors were willing to pay the asking prices.

Another problem with investing in art is the due diligence required to avoid scammers and fraud-minded people in the industry. Even experts can be wrong about forgeries. Investments in art are not subject to the same kinds of regulation that allows investors to feel generally safe and confident when investing in stocks and mutual funds.

Unless you have the financial ability to invest in artists whose names you know from high school or your college’s Art History course, you might be better off staying away from investing in art if your purpose is finding the next Rembrandt.

Photo: br1dotcom

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Last week, I acknowledged recent survey findings from the Pew Research Center showing that women are beginning to value success in their careers more than men value their own. It’s a historical twist, brought about by the idea that women entering the workforce is no longer related to a necessity, but an innate desire. Women, as a group, have a higher level of education and are increasingly choosing to pursue a successful career path.

With young children at home needing care and an increasing cost of outsourcing that care, many families need to choose a parent to stay home while the other earns money with an occupation. Women are still subject to compensation inequity — again, as a group — but in an increasing number of families, the wife is out-earning the husband. The choice is often simply financial; whoever earns the most money or has the potential to earn the most continues in their career path, while the other parent stays home to care for the child or children.

Now that more men are staying home to care for their children while their wives concentrate on their careers, it’s easier to shatter one of the long-standing myths about fatherhood. Previously, men who chose to pause their path to career success were judged inadequate to survive in the world of business.

Men are raised to value work as their main source of worth and self-esteem. Society’s underlying message is that men who make sacrifices and choose family over career advancement do it because they can’t succeed at work. But we are at the beginning of an epic shift in cultural norms. More men are finding parenthood meaningful and that is raising the status of fathers. Some men are trading career advancement for time with their family because they value the fulfillment they find in fatherhood, not because they can’t hack it in the job market. More men than ever feel that being a good father is a significant accomplishment in life.

Child and fatherResults from a survey performed last year by the University of Nebraska indicate that 75 percent of men consider being a parent very important, while only 48 percent had the same opinion about having a successful career. It’s possible, however, that there is a new stigma against being overly concerned with financial success, and this psychological aversion to being associated with the stereotypical careerist might prevent people from answering in a survey in a manner the respondent might think reflects poorly on themselves. There’s a tendency, also, to answer surveys as if one is an ideal. In other words, I might answer a survey as if I were an ideal version of myself rather than reflecting a true self-analysis.

Even if that is the case, it reflects the idea that stay-at-home-fatherhood is now a more respected life choice than it has been in the past.

Having a two-income family is still a luxury, and when at least one of the two incomes is significant enough to afford a solid living for a family of three or more, it’s a blessing. Most middle class families, when both parents are working out of necessity, it’s the ability to stay home with the children that is a luxury. It can be a difficult choice, particularly if one parent’s income is roughly equivalent to the cost of day care for his or her child or children.

The argument fails to consider yet another reality of life: one parent, either a father or a mother, struggling to earn an income and take care of one child or more, without a spouse for support.

For men: Would you put your career on hold — possibly forever — if it made more financial sense for you to stay at home with your children?

For women: Would you be willing to pursue your career full steam ahead while your partner develops a closer bond with children through more time spent with them during formative years?

Photo: Chris. P
Fathers Forum, CNN, BabyCenter

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Student Loan Interest Rates Set for Increase

by Flexo
College students

Unless Congress acts soon, student loans subsidized by the government will become significantly more expensive. Mandated interest rates on subsidized student loans will jump from 3.4 percent to 6.8 percent for the 2012-2013 school year. With unemployment still high for recent graduates, increased interest rates will add to the debt burden. Tuition costs are still increasing as ... Continue reading this article…

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More Women Than Men Value Career Success

by Flexo
Career woman

A new survey by the Pew Research Center shows women have surpassed men in placing value on career advancement. Among 18 to 34-year-olds, 66 percent of women consider being successful in a high-paying career or job is one of the most important things or very important, compared to 59 percent of men. In 1997, 56 ... Continue reading this article…

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The Over-Marketization of Social Behavior

by Flexo

Do you reward your children with money for performing well in school? Do you use the promise of an allowance to ancourage appropriate behavior in the family? These are big issues, because they take appropriate behavior and can turn the incentive to financial gain. Children growing up believing that financial gain is the reward for ... Continue reading this article…

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Will You Financially Support Your Parents?

by Flexo

My recent article on Business Insider points out that more families are living in multi-generational households with the recent shaky economy. While we are technically in a recovery period, the effects of the recession are still present in families. Taking care of elderly individuals is an expensive business, and those who did not save expecting ... Continue reading this article…

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