So how much passive income do you really need before you can proudly say you are financially free? The answer is different for everyone.
Passive income is the result of your money working for you. This means that you do not have to do actual physical work to earn that money every time. You might need to exert effort initially but only get your system set up. Passive income can come from interests and dividends from your investments or profits from businesses you own.
If you’ve tried the educational game Cashflow 101 by Robert Kiyosaki before, you know that the condition for getting out of the rat race is that your passive income should exceed your expenses.
Each individual’s monthly expense is different from the next. It could depend on a number of factors like your lifestyle and the number of your dependents.
If you know how much your annual expense is, then you can calculate a rough estimate of the passive income you need to declare yourself financially free.
Here’s a quick example:
Let’s assume a monthly expense of P20,000.00 which would give an annual expense of P240,000.00 and that passive income comes from different investment instruments like mutual funds and shares of stock.
To be financially free, we need an investment worth an X amount that would generate at least P240,000.00 of annual passive income through interests. Let’s also assume an annual interest of 6% (similar to Landbank’s LTNCD) from your investments.
To find out what X amount is we need simply divide 240,000 by 6% to give an X amount equal to P4,000,000.00. You need to have an investment of at least P4,000,000 earning 6% annual interest after tax if your annual expense is P240,000 if you want your passive income to exceed your expenses. This means that even if you decide to stop working you will still have enough money to support your chosen lifestyle.
Now this simple calculation may be vague because it assumes an annual interest for your investments but what it gives you is a ballpark figure of how much money you need to invest and make it work for you.
As mentioned earlier, this is just a simple example and the figures are different for everybody. You can decide to simplify your life which means your expenses can be smaller and therefore you need less passive income to get out of the rat race. Or you can look for other activities that can give you a higher return for your investments and so give you more passive income for the same invested amount.
Don’t be daunted by X amount you need. It’s never too early to start building your wealth. If you start now, you can reach your goals sooner.
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