You might recall I wrote an article about “clean investing.” Clean investing means that you have to do as little work as possible which basically means once you put your money into an investment you literally do nothing with the exceptional glance at your account once in a while (monthly or even quarterly is good enough). While the article went into detail about the types of investments you can find out there that are “clean,” today I want to discuss the prospects of actually making a fairly large profit or income from them. Oftentimes when I think of the word “retirement” I cringe because A. I can’t stand how the media and financial industry redefines and preys on people by the use this word and B. I don’t really like to think in terms of living off a mass sum if I choose not to work. Frankly I always want my money working for me and I’d way rather live off the interest, dividends, or whatever monthly income I can generate from my investments. To me, that’s true peace of mind.
So what’s “real money?”
You’ll notice in the title of this article I use the term “real money.” That’s not an arrogance statement. Real money could be $200 a month. When I’m talking about real money I’m referring to whatever amount of money will make your financial life considerably easier. For some people real money could be the knowledge that their monthly healthcare insurance bill will be paid in full. For others real money could mean enough money to cover someone’s monthly nut. Again, those numbers can vary greatly, but I want to emphasize this this is more psychological in nature (as many issues with money are). There’s the practical side of it i.e. how much said expenses actually are and B. does knowing you have the money to pay these expenses (earned passively) help you sleep better? So how much does it take to earn “real money?” For the purposes of this article I’m going to assume that the people reading this have a passive income goal that pays for the entirety of their monthly expenses, whatever that amount may be.
How Much is Enough?
Whatever your goals may be for monthly income, doing it passively should be everyone’s dream but let’s just get something out of the way right off the bat: it takes a TON of principal to do this. Let’s start off fairly small. Let’s say you want to bring in $56,516 a year in passive income. That’s the average salary in the United States as of today (6/25/2019). That’s $4,709 a month. Does anyone out there realize just how much principal you need in your investments to pull that amount? Well, let’s do the math. Let’s say on all of your investments you can average a 3% annual return (I know most people always seem to shoot for 10% or more but that’s unrealistic, 3% should be a minimum considering that you can earn 2.6% on a savings account alone). If you had a million in the bank (which nearly no one in the U.S. has) you’d be earning $30,000 a year in interest. If you had $2 million you’re talking $60,000. So you’d need nearly $2 million in principal just to earn $56,000 a year in passive income. Let’s double that rate of return. If you can get a 6% interest then you’re looking at $1 million in principal. But again, you need ONE MILLION DOLLARS of savings. What about those who are in higher income brackets? The numbers get into the 8 figures and that’s just to live a current lifestyle.
But Who Cares? Live off the Principal Right?
You could be reading this and saying to yourselves, “what’s the big deal though? I can live off my principal.” Sure you can and I don’t disagree if that’s your life choice. But again, attaining 7 figures in principal has proven to be nearly impossible in this country. The reason I keep stressing monthly and annual income is that in my opinion if we shifted our mindset into thinking “how can I earn more per month or per year?” instead of “how can I put away $3 million?” we’d all be much much better off. While both scenarios could very well lead to the same result, one is way less daunting than the other. It’s much easier to have a goal of reaching $4,700 a month than to have the goal of saving $3 million. Wouldn’t you rather have income streams that last forever than putting the pressure on yourself to achieve a giant lump sum? I personally think this is a much better approach.
Get off the retirement train. Get on the income train. Each time you can sock away $1,000 know that that money is contributing to a tiny bit of monthly income and each time you can sock away another $1,000 it grows the income that much more.