Passive Income > Active Income

I am an active reader of A Singaporean Stockmarket Investor (ASSI) blog because I am really inspired by AK and his articles. In one of his articles on money management and motivation, an image (left) caught my attention. It was about the end goal of only utilizing your passive income for expenses.

In order to do that, your passive income must be greater than your active income. If you are earning S$100,000 annually (active income), you will need an investment portfolio of S$2 million to generate dividends of S$100,000 (passive income) at 5% yield.

S$2,000,000 * 5% = S$100,000 (annually).

Yes, S$2 million. Seem like a very far goal to reach? Yes. Possible? I strongly believe so.

In order for our passive income > active income to become a reality, we have to take baby steps. Let's start with generating passive income that is greater than your annual savings (from your active income). If we save 10% of our annual active income and invest with a projected yield of 5% annually, it will take approximately 20 years to generate a passive income equivalent to your annual savings.  

Using a S$100,000 annual income as an example, see the table below:

What about re-investing your dividends? It will take 5 years earlier to hit your goal. That is close to 15 years.

Generating Passive Income > Annual Savings

This is a very possible target - to be able to generate passive income that is 10% of your annual income. This example does not factor increase in annual income or savings. We would probably be earning more and decide to save a greater amount.

Well, this is not exactly Passive Income > Annual Income. My point is to start early, invest early and let the power of compounding work for you. To reach the stage of generating passive income equivalent to your annual savings first; is one step closer to Passive Income > Annual Income.

Read: 72, The Magic Number for Compounding Interest