Popularized by Tim Ferris, passive income has become a major topic that wakes the imagination and lust for freedom for a lot of people. The promises are certainly attractive: work hard now, and reap the benefits for the rest of your life. Take a vacation and return back richer than when you left. However, there are few things that people forget when considering if its worth all the time invested.

Passive income flow
Credit: http://www.flickr.com/photos/23024164@N06/7222346312/

Arguably the biggest error relates to how people calculate future income. Let us assume that an article created today will earn you 1$ per month, which according to the averages, is a pretty good income for a single article. A common mistake is to conclude that in 5 years the article would have provided you with a solid 60$ paycheck, for 12$ each year. If you spent a total of 2 hours researching, writing and promoting the article, the hourly salary would 30$. And since the income would never stop, in twenty years the initial work would have provided a total of 240$.

Yet, the very basics of finance tell us that 10$ now is worth more that 10$ tomorrow, or a year from now. The future value is determined by the discount factor, which exemplifies the opportunity cost of an investment. It is set according to the rate of return that could be earned with another instrument of similar risk profile. With online business there's always a risk of the platform becoming obsolete, going bankrupt or losing the audience, so a reasonable discount rate could be around 0,1%/month (or 12,7%/year).

Using this rate, the passive income for the one hour work would accumulate to 11,2$ in a year and about 45$ for five years. Calculating the hourly rate again we can estimate that for each hour we spend on working for our online passive income, we earn 22,5$. If our average commission for an article would have been 0,5$/month, then the hourly rate for five-year income would be 11,25$.

The point here is not to say that good passive or residual income online is impossible to achieve or never worth the time – there are many counter examples. Instead, the suggestion is that residual should be placed in line with other sources of income using the same metrics to evaluate the results of each.