Determining the level of passive income you require on a monthly basis is a very personal decision. A generous passive income for one person may be viewed as insufficient by another, for example.
However, it may be possible to gain an insight into the level of monthly passive income you require by focusing on your desired expenditure. Then, determining the level of risk you are able and willing to take in order to achieve that goal could be a sound idea.
Of course, other considerations such as the sustainability of a passive income, and how long it needs to last, may come into play. They could determine the level of risk that you are willing to take in order to obtain a regular income.
A simple means of deciding how much monthly passive income is enough is to focus on your outgoings. They may be split into necessities, such as housing costs, and discretionary items, such as travel. Together, they provide a rough figure on the level of passive income you will require in order to fund your current lifestyle.
Of course, there may be tax considerations to take into account. This could mean that you need to obtain a passive income which is higher than your monthly outgoings in order to break-even.
Once you have a specific income figure that you need to obtain each month, you can decide where to invest in order to achieve it. Perhaps the most obvious place to invest in order to obtain a passive income at the present time is the stock market. With cash and investment-grade bonds offering low yields, and the property market potentially having an uncertain future, stocks could provide a simple means of generating a regular income.
Clearly, taking more risk when it comes to investing in the stock market could provide a more generous level of income. For example, investing in cyclical companies that offer high prospective dividend growth rates could be a means of generating a larger income return in the long run. By contrast, mature businesses with defensive characteristics could provide a more resilient and robust income outlook.
Deciding how much risk to take in order to obtain your monthly passive income target is likely to be determined by your attitude to risk, as well as your time horizon.
A buying opportunity
With the global stock market having experienced an uncertain period in recent months, there may be a number of appealing buying opportunities. High-quality stocks may now trade on lower valuations, as well as higher yields, thereby making the task of obtaining a regular income easier than it has been in the past.
As such, now could be a good time to focus on dividend stocks. Whatever your monthly income requirements, the stock market could prove to be the simplest and most effective means of achieving it over the long term.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.