Passive Income – How Long Does it Take to Build Up?

By | September 24, 2012

 

A couple days ago, I was wasting some time on twitter, when a good friend Latisha mentioned a goal for passive income on twitter. She mentioned that she was aiming to earn $8,000 a month in passive income and that it’s manageable. While I am just beginning on my journey to build up passive income, it did get me thinking about how I want to earn passive income.

I mentioned to Latisha that we should make a challenge out of it. The first one to $8,000 wins. In all likelihood, it will take us many years or decades to build up this kind of passive income. But, that doesn’t mean that planning the best route to get there is the best way to build up passive income.

What would it take to generate $8,000 a Month in Passive Income?

The first question in figuring out the best route to earn passive income was figuring out what the further implications of making $8k per month from passive income. Let’s take a look at what it means and how much it would take to earn that much money.

Key Point – Earning 8k a month means earning 96,000 a year. Wow!

  • If we could somehow invest in something that would generate a 10% return in dividends, we would need $960,000 invested. While I look at that and think, “It will take me so long to save up $960,000,” I also know that it doesn’t have to be limited to just dividends, nor a 10% return.
  • If I were somehow getting 15% return on my investment, I would only need $640,000 invested. We’re getting closer already.

Let’s say that I don’t want to earn all of my $96,000 a year on dividend or returns from capital that has been invested. What if I do have a business that is generating X number of dollars each month without any time investment from me? What would that look like? How would that change it? Would that make it more reasonable?

I decided to create a fancy chart for you. It begins with the left column. Assuming I made zero from a business income that was managed by someone else, I would need to make $96,000 from dividends on capital invested. I calculate each set of numbers with 10% and 15% as a spectrum. If I wanted to be conservative, I would probably include 5% as well since most investors get about 4-5% on dividend stocks/etfs, but I am trying to figure out the bare minimum it would take to get $8,000 a month. As the business income increases, the need for dividend income decreases to reach the $8,000 per month goal.

Scenario Yearly Business Income Yearly Dividend Income Return on Investment Necessary Capital
1 0 96,000 10% 960,000
2 0 96,000 15% 640,000
3 24000 72,000 10% 720,000
4 24000 72,000 15% 480,000
5 36,000 60,000 10% 600,000
6 36,000 60,000 15% 400,000
7 48,000 48,000 10% 480,000
8 48,000 48,000 15% 320,000
9 60,000 36,000 10% 360,000
10 60,000 36,000 15% 240,000

Highlights:

  • If I could get 15% on that capital invested and earn just $3,000 a month from a business, that would mean only $400,000 invested.
  • The worst case scenario (in this chart) would be a necessary $960,000 and no income from passive income. I already make more than $0 from a business (although I do manage it).
  • The best case scenario (which I didn’t include in the chart) would be that I earn $96,000 from a business that is managed by someone else. I don’t see this happening anytime soon AND if it did, I would probably have more money already saved, so I would reach the $8,000 before the business got to that point. Thus, it’s not the most likely scenario of reaching that goal.

How Long to Get to Save Up Enough Capital?

The next question comes then, how long would it take to build up a large enough nest egg for each scenario shown above? Obviously, the lowest point $240,000 would be the easiest, but it’s not a simple calculation as we need to incorporate compound interest. Here’s a chart with a standard value of investing $20,000 a year while building up a profitable business on the side. This time, I used 6% and 12% as the variables.

Conservative (6%):

Scenario Yearly Business Income Necessary Capital Expected Return Time Until Capital Reached
1 0 960,000 6% 23 Years
2 0 640,000 6% 18 Years
3 24000 720,000 6% 20 Years
4 24000 480,000 6% 15 Years
5 36,000 600,000 6% 18 Years
6 36,000 400,000 6% 14 Years
7 48,000 480,000 6% 15 Years
8 48,000 320,000 6% 12 Years
9 60,000 360,000 6% 13 Years
10 60,000 240,000 6% 9 Years

 

Aggressive (12%):

Scenario Yearly Business Income Necessary Capital Expected Return Time Until Capital Reached
1 0 960,000 12% 17 Years
2 0 640,000 12% 14 Years
3 24000 720,000 12% 15 Years
4 24000 480,000 12% 12 Years
5 36,000 600,000 12% 13 Years
6 36,000 400,000 12% 11 Years
7 48,000 480,000 12% 12 Years
8 48,000 320,000 12% 9 Years
9 60,000 360,000 12% 10 Years
10 60,000 240,000 12% 8 Years

Highlights:

  • These two charts fail to factor in the ability to invest more as the business income increases
  • The 6% difference in capital gain only changes the time frame by 3 years (on the later scenarios) – 6 years (on the earlier, worst case scenario for business income).

Realistically, I expect to build up a business that is generating $3,000 a month in the next two years. If I continue to invest a lot of money over the next 10 years, I could EASILY be living off of passive income, assuming that my business income doesn’t increase more than $3,000 of profit.

Best case scenario, my business income takes off and I am able to invest even more money. If I could generate $5,000 per month, I could have an additional $24,000 to invest to reach the $8,000 a month mark.

As you can see, there are a ton of variables. The bottom line and the huge takeaway for me is that if I am aggressive in investing a lot of my income, I could make this goal a reality a lot sooner than I would think it is possible. Additionally, the possibilities open up with the extra revenue stream of a business.