How Much Passive Income Can You Buy With… |
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I’ve been extremely busy the past couple of days. Last night, I was home from work for about an hour before I had to get up and repeat the process again. What’s been keeping me busy? There’s a word deadline Monday, leading me to work more than usual. However, the bigger issue is sports and time zone differences. I only get to see the Red Sox when they are on national TV as they will be for the playoffs. Major League Baseball had the brilliant idea of scheduling the Red Sox / Caliangelesheim Angels game at 6:30PM Eastern - an hour earlier than usual. This means that many Angel fans will miss the game completely. It would be absolutely silly to put the team with the best road attendance and a team in a major city like Los Angeles at prime time.
I know you are probably thinking, “Where is this rant going? Why should I care?” When you break it down, this is simply an example of something that’s important to me. I would love the freedom to work my own hours, but financially I’m not able to do such a thing. There’s a lot written about passive income and alternative income (I can’t call my extra income passive) and this is a great reminder why it’s important. This is also why when I have a small windfall, like I mention yesterday, I mentally try to break it down into passive income terms. Here’s an example:
Let’s pretend that my windfall was for $2500 after taxes - remember, we are talking about a small windfall here. I usually calculate that I can invest that money the stock market and make around 9% a year (using history as a basis). I then subtract inflation (assuming 3%) and investment fees (very small since I would use index funds and commission-free ETFs bought through Zecco). This gives me a number of around 5.5% that I might realistically expect in gains from the $2500 - or $137.50 a year. Of course I have to pay taxes on this income, so I subtract out 25%. This may be lower or higher than actually, but as an example it’s close. This leaves me with $103.12 in investment gains for the year. I break this down by the month and realize that $2500 translates to approximately $8.59 of today’s buying power a month for the rest of my life.
For those who want a shortcut in the math, here you go. Simply multiple the expected gains after inflation and fees (0.055 my case) by the amount left over after taxes (0.75 in my case) and divide by 12. For me, that number is .0034375. So if you start with $100,000, it should generate around $343.75 in gains a month.
I’m sure that $8.59/mo. doesn’t seem like a lot compared to $2500. However, remember that this requires no work from you. If you are careful with your finances, it should continue forever. If you re-invest the money, it continues to grow faster earning more income for life.
My Red Sox story may have a happy ending. My company is a little flexible in the hours that it has. It’s a little unusual to go home at 3:30PM, but in a rare circumstance, people do it. It still feels uncomfortable for me to ask about shifting hours, even if I’ll be working the same amount. The looming deadline on Monday make me concerned that if I slip, I’m going to hear about it for some time… and there’s still a lot to do.
This post deals with: ... and focuses on:Alternative Income
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November 20th, 2007 at 1:07 am
[...] Read the rest of this great post here [...]
October 9th, 2007 at 6:50 am
$9 for every $2500 saved? Thanks, now I’ll go mix some Prozac with my morning coffee.
October 7th, 2007 at 7:23 pm
That’s a useful way to think about saving for the future.
The reverse is also useful: If you raid your savings for $2500, you are losing $8.59/month for the rest of your life.
October 7th, 2007 at 10:52 am
[...] Man at Lazy Man and Money talked about what it takes to get that passive income that everybody [...]
October 7th, 2007 at 7:36 am
That’s a good way to look at a small windfall Lazy Man, as long as you invest each small windfall you get, that can add up to some very nice money in the long run. I try to do the same thing with my windfalls, but I’ve never broken it down like that.
October 7th, 2007 at 6:25 am
[...] Man and Money: Passive income is one of my favorite subjects and Lazy has more to say about it. I agree with him that whatever we’re earning as a side [...]
October 7th, 2007 at 5:31 am
[...] How Much Passive Income Can You Buy With… by Lazy @ Lazy Man and Money. [...]
October 5th, 2007 at 8:32 am
[...] How Much Passive Income Can You Buy With… - Lazy Man does a good job illustrating what it takes to create passive income. A small windfall can actually be shown as a monthly income for life. When you begin to think of things that way, it has far greater meaning. [...]
October 4th, 2007 at 8:40 am
I like to think that way whenever I invest away money or earn extra money through alternate income. I agree that you shouldn’t really call it passive income, nothing is truly passive, there’s always effort that you have to put in somewhere (making the trade through Zecco as an example). It’s simply a matter of how much effort is required that determines the level of passiveness for a particular income stream (for me).