Passive Income Calculator

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What is Passive Income and Why Does It Matter?

Passive income is money you earn without actively working for it. Unlike a salary where you trade time for money, passive income streams continue generating revenue whether you're working, sleeping, or on vacation. Building multiple passive income sources is the cornerstone of achieving financial independence and retiring early.

The two most popular ways to generate passive income are through dividend-paying investments and real estate rentals. Both have their advantages and can work together to create a diversified income portfolio.

How to Calculate Passive Income

Stock/Dividend Income

For dividend-paying investments, the formula is straightforward:

[\text{Annual Passive Income} = \text{Investment Amount} \times \text{Dividend Yield}]

Where:

  • Investment Amount is the total money invested in dividend-paying stocks or funds
  • Dividend Yield is the annual dividend as a percentage of the stock price

Real Estate Rental Income

For rental properties, calculate net income after expenses:

[\text{Annual Passive Income} = (\text{Monthly Rent} \times 12) - \text{Annual Costs}]

Where:

  • Monthly Rent is the rental income received each month
  • Annual Costs include property taxes, insurance, maintenance, management fees, and other expenses

Calculation Examples

Example 1: Stock Investment

If you invest $10,000 in dividend stocks with a 5% yield:

[\text{Annual Income} = $10,000 \times 0.05 = $500]

Your annual passive income would be $500 per year.

Example 2: Rental Property

If you receive $1,500 per month in rent with $6,000 in annual costs:

[\text{Annual Income} = ($1,500 \times 12) - $6,000 = $18,000 - $6,000 = $12,000]

Your annual passive income would be $12,000 per year.

5 Tips for Building Passive Income

  1. Start Early: The power of compound growth means starting sooner dramatically increases your wealth over time.

  2. Reinvest Dividends: Automatically reinvesting dividends accelerates portfolio growth through compound returns.

  3. Diversify Your Sources: Don't rely on a single stock or property. Spread your investments across multiple assets.

  4. Consider REITs: Real Estate Investment Trusts offer real estate exposure without the hassle of property management.

  5. Calculate Your FIRE Number: Determine how much passive income you need by multiplying your annual expenses by 25 (based on the 4% safe withdrawal rate).

Building passive income takes time and patience, but each dollar invested brings you one step closer to financial freedom and the option to retire on your own terms.

Frequently Asked Questions

Passive income is money earned with minimal ongoing effort. Common sources include dividends from stocks, rental income from real estate, royalties, and interest from savings or bonds.

A common rule of thumb is to have 25 times your annual expenses saved (the 4% rule). Your passive income should cover all your living expenses without depleting your principal.

Average dividend yields for stocks range from 2% to 4%. Yields above 5% may indicate higher risk. REITs and dividend-focused funds often offer higher yields but come with different risk profiles.

Include property taxes, insurance, maintenance and repairs, property management fees, HOA fees, vacancy allowance, and mortgage interest if applicable.

Both have pros and cons. Stocks offer liquidity and lower entry barriers, while real estate can provide higher returns but requires more capital and management. Diversifying across both is often recommended.