Who doesn’t want to make money while they’re sleeping? Passive income is the wholy grail of cashflow. Many talk about it online, many want it and sadly, there’s also many scams out there.
As we talked about in our Layers of Wealth article, passive income can really speed up the wealth flywheel and increase your lifestyle.
$5000 per month is a good milestone to have. It will provide you a good life in 99.9% of the world, in some places it will even allow you to live a king or queen. But the million dollar question is, how do we get there?
The Basic Formula
The higher your return in percentage of capital (ROI) is, the less capital you need and vice versa, the formula works like this:
Desired Monthly Cashflow * 12 * 100 / ROI = Needed Capital
Assuming a 10% ROI that’s the following
$5000 * 12 * 100 / 10 = $600,000
At a 10% return on your capital per year you would need $600,000 invested to yield $60,000 per year or $5,000 per month (keep in mind, this is before taxes).
Double the ROI to 20% and you would only need $300,000 invested, halve it to 5% and you suddenly need $1,200,000 to get to $5000 monthly cashflow.
Now we all understand the math, let’s see what real life options we have available to yield passive income.
Savings accounts are the best known option and probably the safest to get yield on your money. The only (very big) disadvantage is they yield piss poor returns. The average “high yield” account will only yield about 1%.
If we plug that into the formula we find out we would need a whopping $6,000,000 to get a monthly passive income of $5000. That’s going to take us a long time. Especially with inflation eating away at it.
Another popular option is dividend yield. On average dividends will pay you about 5% of your capital. Keep in mind that to get dividend income, you’ll need to own stocks and they go up and down in value, making this investment more risky than a simple savings account, but with risk comes reward.
5% in the magical formula will return a value of $1,200,000. That’s a lot more feasable than six million, but let’s look a bit further.
Bonds are somewhere in between savings accounts and dividends on the risk curve and also on return. The average bond will yield you 3% at the time of writing.
If you want to make your $5000 passive income entirely from bonds you would need $2,000,000 invested.
Defi returns form staking your crypto might yield you anywhere up to 20% (with some wild but very risky coins even higher) but keep in mind we are getting a lot more risky than the previous options. Crypto (especially altcoins) can be very volatile and in some cases your money is locked for a long period.
Anyway, if you’re bullish on defi and willing to risk it, you could get your desired cashflow by staking about $300,000 in fiat.
If you know what you’re thinking. “But I said passive, this isn’t passive”. Here’s the thing, some online businesses can be made very passive if you put some work in it in the beginning by building it up and outsourcing everything. Especially businesses like content sites, SaaS or subscriptions. Check our article on which online business to pick if the idea interests you.
And best of all, because these business have very little costs, they could yield anywhere up to 40%. That would mean you would only need to invest $150,000 to get a almost-passive cashflow of $5000 per month.
And tell me, what do you think is the most risky, an online business you manage or staking a volatile altcoin where you’re completely dependent on market sentiment, or the Fed, it’s all the Fed.
We’ve explained the formula to you and given you some examples of passive investments. In reality you will of course diversify between all of them to decrease your risk so the ROI will completely depend on how much of each asset you invest in but if you know the expected ROI you can calculate how much capital you need to get $5000 monthly passive cashflow.
We think you should also consider the online business path. It’s not for everybody but if you have the time and interest you could really speed up the wealth process.