This So-Called Source of Passive Income Is Nothing More Than a Trap

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There’s one passive income option it pays to steer clear of. Read on to learn more. [[{“value”:”

Having extra money at your disposal can do your finances a world of good. It could make it easier to put money in your savings account, pay bills, and splurge on fun experiences like vacations.

Getting a side hustle could be one path toward extra money, but it may not be such a desirable one, since it requires you to put in the time working a second job. Instead, you may be more interested in generating passive income.

One option you may be looking at is a multilevel marketing business (MLM). These require some upfront work, but they can evolve into a passive income stream under the right circumstances. However, before you sign up, recognize that not only are MLMs hard to make money from, but they can end up basically blowing up in your face.

The big problems with MLMs

If you’re not familiar with MLMs, they basically go like this. You sign up to sell a given product, whether it’s face cream, candles, or clothing, directly to other people. You’re then tasked with recruiting sales people to work under you to build your own team of sorts.

If your underlings earn commissions from their sales, you get a cut of them. Eventually, you may be able to earn money by simply sitting back and snagging a portion of your sales team’s commissions without having to go out and sell anything yourself.

It sounds great in theory, but there are some big problems with this plan.

First, many of the MLMs that are accessible to side hustlers have you selling overpriced products that are beyond the average consumer’s reach — think $80 bottles of wrinkle serum or $45 leggings. It’s hard to get budget-conscious people to buy these products when there are much cheaper versions available on Amazon or at Walmart.

Second, with MLMs, a lot of people only end up making decent money if they’re able to build a large, successful team. But that takes time, and it also boils down to a lot of luck. So it’s by no means a given that you’ll earn a meaningful amount of extra cash.

Finally, to be good at selling whatever product you sign up for, you need to be pretty aggressive. In doing so, you could end up alienating the people you try to sell to, whether it’s family members, friends, neighbors, or acquaintances you know through different activities. The people in your bowling league, for example, may not take kindly to feeling pressured to buy things when they’re trying to have a fun night out.

A better way to earn passive income

While a MLM could earn you some extra income without you having to do actual work if you end up assembling a nice-sized team, it could also backfire on you. The reason? Some of these companies require you to shell out the money for inventory and then sell it to get paid back and profit. If you’re not successful, you could end up losing money instead of earning it passively.

Plus, if you’re unable to build a successful team, you’ll have to put in a lot of hours selling products on your own to make money. If your goal is to earn income passively, that doesn’t exactly count.

A better approach is to try to cut expenses or work a side hustle that comes with guaranteed pay. For example, if you get a weekend job at a local retailer paying $18 an hour, you’re guaranteed that money no matter what.

Once you’ve earned some extra money, you can use it to generate passive income by investing it or using it to open a CD. You can even earn a nice amount of extra income in a regular savings account based on today’s rates.

However, savings account rates aren’t guaranteed, whereas CD rates are. So if you’re going to keep your money in the bank rather than in an investment portfolio, you may want to favor CDs.

Don’t fall into a money trap

To make a decent amount of money in passive income, you need to have a decent amount to begin with. A $500 CD with a 12-month term and 5% APY will only pay you $25. That’s not exactly a life-changing amount to earn in a year.

But the more money you’re able to save and invest, the more passive income you can enjoy. So instead of getting caught up in an MLM, put in the time to work a side hustle for a limited period, or live a scaled-back lifestyle for a year. From there, you can sit back and enjoy the free money your bank or brokerage account pays you.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Maurie Backman has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.

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