The meaning of “passive income”

 

A few days ago I wrote in a forum that a real estate investment (rent a house for example) is a passive investment.
This statement has triggered a series of unpleasant comments to me.
Many argued that a real estate investment was not entirely passive
What does “passive income” mean?
I work 40 hours a week.  If I count travel, I spend 30 minutes to go to work and another 30 to go home. At least two days a week I have to go to customers so instead of 60 minutes I have about 180 minutes. So travel is about 9 hours a week

Often I have to do unpaid overtime say on average 3 hours a week.
This is the time I spend at work:

  • Ordinary work    40 per week
  • Trave 9 hours per week
  • Extraordinary 3 hours

Total 52 hours per week
I do not think my situation is different from that of many of you.

But if you have for example 4 houses with a rent of 500 euros per month.

How long will it take for managing your business? 8 hours a month for each house? 16 hours a month for each house?
So  from my point of view a real estate investment is passive.because the time I waste is very small
Probably things would improve if instead of real estate I had an investment of ETF and apply a strategy “Buy and hold”.

In this case, probably the wasted time ta would be a few hours a month.

From my point of view, financial independence means making money work for you in order to free up enough time to be happier so a real estate investment could be a choice

What I will do when…

These days I’m on vacation at the beach at Caorle a nice place near Venice. The sea is always a source of inspiration. So I started thinking about what I will do when I’ll be financially independent. I would like to take care of start-ups and dedicate my time and my skills to help create new companies. It ‘what I would have liked to do but I did not because I always needed money to carry on with my family and to support me. Working for a startup means the uncertainty of gain and this is a luxury that until now I could not afford

The mith of 4% Safe withdrawal rate

The safe withdrawal rate (SWR) method is one that retirees use to determine how much they can withdraw from their accounts each year without running out of money before reaching the end of their lives. The safe withdrawal rate method is a conservative approach that tries to balance having enough money to live comfortably with not depleting retirement savings prematurely.

The first study come from financial planner William Bengen. Essentially, Bengen tested a variety of withdrawal rates using historical rates of returns for stocks and bonds. He found that 4% was the highest withdrawal rate retirees could use if they wanted their money to last at least 30 years, assuming they invested at least 50% of their savings in stocks. The 4% rule quickly became the default withdrawal rate for retirees who wanted to make sure that their retirement nest egg would be around as long as they were.

But today what withdrawal rate can be reasonable?   I tried to give an answer looking at this site

You can simulate the expected real return of different asset in next 10 years 

As you can see there isn’t an asset  with expected return above 6%. But if you change from expected to historical data expected return are much higher

So with  4% today probably is unrealistic

My vision of Financial Independence

In my opinion there are many different visions of the concept of “financial independece”. You will find many blogs that talk about becoming millionaires in a few years others who will give you tips on how to save and live with little money. In my opinion both these visions are not correct.
Becoming millionaires in a few years is very unlikely, there are no magic recipes.
We live only once. the object of “financial independece” is to improve the quality of life. Today, compared to yesterday we have available new tools such as Peer to peer lending and crypto currencies that can help us integrate with classical instruments (bonds and shares). In the next posts I will tell you my experience

Financial Independence Calculator v2.0

In a previous post  I provide you a sheet. You could calculate how many months until you will achieve financial independence. I modified the previous sheet adding the effect of inflation and the increase in salary. If today I have expenses of 2000 euros it is unrealistic to think that in 10 years these will remain constant. I also expected that salary could increase in future years. I tried to calculate how easy it is to achieve financial independence. I imagined a rate of return on our securities portfolio of 7% inflation 2% and a wage that keeps pace with inflation. This shows that, although an ambitious goal may be, it is not an unreachable goal

you can find the new financial here 

Enjoy!

Financial independence: thinking to quit the rat race

Financial independence mean that you have a passive income (from a porfolio of stocks, bonds or other resources) and you can live without working, or if you prefer you can exit the “rat race”. What does it mean? According to Cambridge dictionarya way of life in modern society, in which people compete with each other for powerand money” This doesn’t mean you have to stop working at all. Probably you like your work in some ways but you don’t like your boss or some way or working or more simply you need more spare time to enjoy your life and do almost what you like. So financial independence doesn’t mean to watch tv all day long,  but get a new vison of work where you do the work you like simply because you like it. Enzo Biagi  one of the most important Italian  journalist  said “I would have been a free journalist too: thank goodness my publishers have never noticed it”. Yes if you are financial independet you can work for free.

Financial Independence Calculator

Financial Independence Calculator

In a previous post  I said that we have financial independence if passive income from our saving are greater than our expenses. To obtain this goal we save every month some money in some financial tools (stock, etf, bound, cryptocurrency…) with a yield. So suppose I have net salary from my job of $2500 and $2000 expenses every month, and I invest all my savings in financial instruments with 0.67% monthly return when will I be financial independent?  In this picture you maintain the money because the passive income are equal to expenses. Only inflation will affect your money. I’ll  be financial independent after 225 months

I provide a financial independence calculator you can freely use here 

Simply change  green cell with your data

First read about financial independence

I recommenced to read this before starting your path to financial independence. “Why should I read Letter on happiness of Epicurus? are you crazy?”. The reason is very simple, because the financial independence is a path towards a better life style. So the first and most important question is “what make me happy?” “What happiness really means?”. Read and think what is real important in your life. Financial independence is only finance and math.

Financial indipendence explained in 3 step

Financial independence is real simple to explain. If you have a job and you are a wise man problably you are in a situation like this

You have a job and income from it, you have expenses (bill, mortage ecc..) and if income > expenses you have saving. Simple

After that you can generate passive income from your saving (es if you buy stock they can generate dividends)  so the picture  can became like that

 

If your passive income = expenses you are financial indipendent so you can live

only from income from your saving without changing life style

 

If this is easy to understand the real question is “how can I achieve financial independence?” This is the main question but this trivial picture has more subtle question