There is a hidden benefit to passive income that is easy to overlook. Here is a breakdown of an example scenario and how powerful making any amount of money through passive income sources can be.
Let’s create an example.
Sarah wants to retire in 10 years and decides to spend $40,000 per year post retirement. Following the 4% rule, this puts Sarah at a goal savings of $1,000,000 before she will feel comfortable quitting her job. While working, Sarah decides to buy a rental property and is able to make $200 of pure profit every month. With this newfound passive income, Sarah can do something really cool. Time for a little math.
$200 per month passive income x 12 = $2400 income per year
The $2400 dollars Sarah makes per year from her rental property is equivalent to the returns from investing $60,000, following the 4% rule.
$2400 income per year x 25 (4% rule) = $60,000
This means that instead of retiring with a goal savings of $1,000,000, Sarah should be able to retire with $940,000 year.
$1,000,000 – $60,000 = $940,000 new target goal
On top of this, for the 10 years until she retires, Sarah decides to invest the $200 per month. So after 10 years of investing an additional $200 every month, Sarah can expect to make an additional $33,552 (assuming 7% returns)
This means Sarah will have an extra $33,552 in investments from passive income alone by the time she is ready to retire. From her primary source of income, Sarah will now only need to save $906,448.
$940,000 – $33,552 = $906,448
By Sarah making an additional $200 every month from passive income sources, she is able to slash her FI target goal by a grand total of $93,552.
Now imagine if she was able to make even more through her rental properties and invest the money until she retires. This means in 10 years Sarah will only need to earn this much from her main (non-passive income) job:
$500 per month passive = $766,120 from job
$1000 per month passive= $532,236 from job
$2000 per month passive = $64,471 from job (at this point it would make sense to retire earlier)