How Much You Need to Have Invested to Cover Your Expenses Passively
Cover Your Expenses With Passive Income
Intro
Passive income is a term that’s thrown around a lot. People seem to love it. But what does it actually take to live off of passive income? How much do you need to have invested to be able to cover your everyday expenses? These are the questions I am going to answer in this article.
How To Calculate
For the purpose of these calculations, we are going to look at passive income like dividend and interest payments. Not scaleable income from different side-hustles with unpredictable income. Ben Le Fort explains the difference between the two in-depth in his article — Here!
There are no set-in-stone rates for dividends and other interest-bearing investments so let’s imagine that we get a 4% yearly dividend payout to do our calculations. You can easily adjust these calculations to fit your investments later.
It’s Really Simple
If you wanted to know how much you would need to have invested to make $1000 passively from your 4% yearly yield investments, You should simply divide the $1,000 by 0.04. And that gets you $25,000. You would need to have invested $25,000 to make an extra thousand a year. But if you wanted to get $1000 passively a month, you would need to multiply that 25 grand by 12 and that comes out to $300,000.
Real-life Example
Let’s calculate how much you would need to have invested to cover a standard Netflix subscription that costs $15.99. First, let’s multiply it by 12 to get the costs for a whole year. We get $191.88. And now, let’s divide it by 0.04 — it comes out to $4,979. You would need to have invested about five thousand dollars just to cover a simple Netflix subscription.
To Cover Cost Of Living
This will vary depending on where you live and what lifestyle you lead, but as an example, we will be looking at the average expenses of a household in the US. Statisa.com data shows that the average annual cost of living in the United States in 2020 was $61,334. To cover this amount from passive income we divide 61,334 by 0.04 and we get $1,533,350. Meaning you would need to have invested one and a half million dollars to live an average lifestyle in the United States.
Takeaways
Living from passive income sounds exciting. But for most of us, it’s still a distant dream. And if you want to live from passive income, what you really need to do is focus on ways to earn more actively. And you can look at your expenses from a different perspective. If a Netflix subscription costs $5000 to cover it with passive income, is it still a necessity for you?
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