The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: rob in cal on October 29, 2016, 09:48:58 AM
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Lets assume the market has a normal type year, yielding say 10% return. In such a year, would you make more money from your passive investments, or from your regular job? In my case it would be pretty close, actually really close had it not been from me adding about 6 hours extra work per week over the last two years. Had it not been for that it would be really close to even, now its maybe 58-42 active over passive.
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Unfortunately it's by FAR active income sources. Being 25 year's old the stash is still pretty small. So although we have about 2X annual expenses saved up already our active vs passive ratio would be about 50:1. So about 98% of what goes into the investments now comes from day jobs and 2% is from re-investing dividends.
Luckily the first few years of the accumulation phase are a lot of fun because you get to see your invested assets grow by leaps and bounds!
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Right now 10% return = $60K and by working I make ~$100K so I am still making more by working. By 2018 I hope it will be more like 10% return = $70K and working part-time = $40K - $50K.
But you know any year I get a 10% return I'll be stoked no matter how it compares to the income from working. ;)
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I don't understand the question. I have never known a market "normal type year" to yield 10%. By "passive income" do you actually mean "income" or do you mean "growth"? There is a difference.
I go to work everyday and earn pretax income of $120k. My gross rental income and dividends combined earn $110k. I consider these my active and passive sources of income. Of course, there are various deductions from each source.
If you mean growth of a portfolio, I have no idea. Nobody shouts prices of my rental properties to me throughout the day, and I do not keep a record of how many shares of XYZ company I owned and their price on January 1st.
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Seeing the forum we are on I would assume most members make more from active income than passive income as most would probably be FIRE at that point.
Personally I am about 14:1 active to passive without counting retirement accounts.
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Based on my pre-tax income, I have 25.5% passive 74.5% active. Using the 4% SWR and savings rate, I think I will hit FIRE around 50-50.
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Seeing the forum we are on I would assume most members make more from active income than passive income as most would probably be FIRE at that point.
+1. If you get to the point where you're making more from passive than active, then you're likely past FIRE (considering in FIRE you only need to cover expenses, not income--and, of course, I can think of exceptions, but in the vast majority of cases, especially for people here).
The OP though asked one question in the title, then gave different assumptions in the post. This lead to confusion in several responses.
Your response addressed the titular question.
In the post, the question became "if your portfolio earned 10%, would you make more money from that, or from your job?"
It is possible to make more money from your portfolio than your job, but not be FIRE yet, due to the 4% rule being lower than the OP's 10% assumption. So there would be a narrow band of individuals who are close to FIRE, but not yet, that this would apply to.
E.g. say you spend 40k/yr, so you need a stache of 1MM at a 4% WR. Say you earn $X/yr. Any stache amount between 10*X and 1MM would qualify you for this (to put real numbers on it, to have that make sense if the X didn't click, say you make 70k.. any stache amount between 700k and 1MM would earn you more than 70k at a 10% return, but you wouldn't be FIRE yet).
So in essence, the OP's titular question depends on passive forms of income.
The question he seems to want to be asking from the main post is... is your stache at least 10 times the amount you make at your job?
Any stache amount > 10x their job amount, at a 10% return assumption will put them in the camp of making more from what the OP calls "passive" income (market gains) than from their job. They may, or may not be FIRE'd yet, if that amount is > 25x their spending (a number unrelated to that income amount).
That seems to be about as simple as I can make what the OP is going for: Who has a portfolio at least 10x their income?
:)
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Since our portfolio is about $680K, that would be about $68K a year. I make 90K a year, so not quite. But, I have had years when my YOY NW increase exceeded my income. For example, in 2014, our NW grew $94K. My income at the time was $85K. Looking forward to the exponential growth in future years that results from a more significant nest egg!
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Active (day job) - 97% of my income
Passive (youtube/twitch/domain parking) - 2% of my income
Passive (taxed account) - 1% but the money is reinvested 100% of the time