What do we want to achieve with passive income? Financial Independence! What is financial independence? It is having enough passive income to be larger than our bills. If we spend $4,000 a month and we get $4,000 a month in dividend and interest, we do not need a job to cover our bills. We can work because we choice to, not because we have to.
Financial Independence to me does not mean being able to afford to travel the world. It is having enough money from my passive income to paying all of our monthly bills. We will consider this our baseline of financial independence. If we wanted to start our own company, take a year off, or write a novel, I know I can afford to pay my bills, eat, and keep my house. Of course, once we achieve this baseline, we will expand it for the fun items.
One of the biggest monthly bills is debt repayment. The cars, student loans, a house, etc. With our goal, we will want to have all our debts paid off. Most of our debt will be paid off within 5 years by paying the monthly bills, except for the house. We will have to figure out how to pay off the house early, but for now, let’s assume it is paid off.
Let’s figure out our monthly expenses. We are going to start with a baseline minimum. While we would work to doing better than minimum, we need a starting point. We estimate we would need:
- Food: $500
- Health Care: $500
- Bills: $500
- Fun / Others: $500
This adds together to $2,000 a month, or $24,000 a year. If we included another $1,000 a month in debt repayments, that would increase what we need by 50%, or $36,000 a year.
We also know a lot of our expenses will be cut if we did not need a job. Most of our clothing expenses is for work. Most of the miles I drive is driving to work. More expensive food is bought because we are working. Therefore, a lot of cost will be reduced with achieving our goal.
How Much Capital?
When investing for passive income, we need to come up with an interest rate. We are going to choose 5% interest rate. A lot of bond, stocks, and notes pay around about 5% interest rate. We take our $24,000 and divide it by 5%, and we get $480,000 of investments needed for our baseline for financial freedom.
Saving the Money
Getting there does not happen overnight. Let break it down into smaller amounts. At 5%, ever $20 we invest will give us $1 a year. All we should do is save or earn $20, 24,000 times. While this is still a large number, it is achievable. If we invest $20, twice a day, we will have $480,000 in 20 years, including the interest.
We do not literally invest $20 a time, because a lot of stock cost more than $20 and we pay for commissions. But we are using that number as a simple way to look at our expenses. Can we reduce our cable bill by $20 a month? Then we can make 1 extra investment per month. If we put $80 into a tax deferred account, we can save $20 in taxes. Instead of going to an $50 restaurant, can go to a $30 restaurant and save the $20.
Create a Passive Income Goal for Financial Independence
We have a few steps to get there.
- Reduce our Bills
- Save Money
- Invest in Dividend Paying Stocks
Of course, we want to achieve our goal much quicker than 20 years. We can save even more. Find higher interest rates. Stock can pay a dividend and go up in value over time. Find some passive income that involves time cost instead of money. Of course, everything has risk, but we are working towards it.
There is a lot of steps between here and there, but we have a goal we have a map to get there. Luckily, we are not starting at square one with savings, but we know we have more work to do. We do not know where we will be in 20 years. Hopefully on a beach relaxing.
Share your passive income goals in the comments below?
You can read of our Yearly Goals Here.