Generating $10,000 a month in passive income in any environment is a difficult proposition. Indeed, the sheer amount of capital that is required to generate such a sum is massive, and it’s worth pointing out that very few individuals will likely have the ability to do so.
However, having a big, hairy, audacious goal to go after is what plenty of readers want to consider. Similar to winning the lottery (I haven’t been successful yet), this is a goal that’s going to be unattainable outside of a very select few. But it doesn’t hurt to dream.
The other thing that’s true is that the numbers I’ll provide here can be cut in tenths to give investors an idea of what it would take to generate $1,000 a month, or $100 a month, in passive income over time.
So, let’s get to the numbers.
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What’s the massive number going to be?
There are really two factors that play into the calculations around how much is needed to generate this level of passive income.
The first is the expected yield that investors believe they can receive. I’ve long thought a 5% yield, either in the equity or fixed-income market, is going to be about the highest an investor can generate without putting their capital at too high a risk. Indeed, there’s always risk with any investment, and that’s definitely the case when pursuing higher-yielding investments.
That said, at a 5% yield, and assuming a passive-income need of $10,000 a month (or $120,000 per year), the ultimate level that needs to be invested is $2.4 million.
Of course, for investors looking to generate just an extra $1,000 a month, that works out to $240,000 invested, and so on. Thus, the math can work for any income level, and I should reiterate that the 5% rate is simply a rule of thumb I use when trying to do high-level back-of-the-napkin sorts of analyses like these.
How to generate a 5% yield
The other key question that many may have when reading this is just exactly how one should go about generating higher yield income. In my view, focusing on exchange-traded funds or real estate investment trusts with stable portfolios of either companies or real assets that produce stable and consistent income over time is important.
There are also various high-quality single stocks I think can deliver such yields, but ought to be owned within a basket of high-quality assets. However you go about generating yield (and your effective yield could end up being higher than 5%, which would require less capital up front), it’s up to you.
