How do we know the directions to someplace if we do not know where we are going? Today, we are going to go through our method of determining our destination and creating our passive income goal. Our overall goal is enough passive income to become financially independent with our dividend stock portfolio. As much fun as researching and buying stocks is, achieving our goal will be a blast. And lucky for me, researching and buying stocks is fun for me, which is why I choice dividend stocks for me.
We have updated Creating our Passive Income Goal here.
Passive Income Goal Math
There are many methods for determining how much we need. These are the steps we are using for ourselves. We can assume a long-term interest rate of 5%. Many sites use 4%, but I am choosing 5%. So if we need $1,000 a year, we take $1,000 / .05 = $20,000 in our account of dividend paying stocks. While we need more than that, it shows the math.
Now we need to determine how much we need a year. It is easier to figure out how much we need a month, since most of my bills are monthly. We will assume we need:
- $500 Food
- $500 Health Care
- $500 Bills
- $500 Fun / Others
This comes up to $2,400 a month. What about debt repayments like cars and student loans? Having those we will the amount we need by a lot. Therefore, we are planning on having all of those paid off by the time we become financially independent.
Now we need to figure out what we need per year. Just take $2,000 per month × 12 months/year = $24,000 per year. Now we will take $24,000 / .05 = $480,000. Now we have our goal to become financially independent. While that is easier said than done, we have a target. And of course, it would be nice to have more $$$, but this is our minimum we want.
So how do we get there. If we save $627 per month for 20 years at a 10% interest rate, we will have $480,000 in 20 years. So now we know our end goal and our monthly goal to get there. If we wanted to get there in 10 years, we would need to save $2,333 a month. Wow, cutting the time in half requires us to save 4X as much money per month.
While there is a lot more steps between here and there, we now have a basic road map. We do not know where we will be in 20 years. Hopefully on a beach relaxing.
In the comments below: What is your passive income goal?