The Passive Income You Need To Build Wealth at Any Income Level
Passive income is often presented as a magic way to earn enough each month and eventually you can quit your job. But financial experts say building wealth through passive income isn’t as simple as hitting one universal dollar target.
Here’s what you need to start building passive wealth.
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Start With Enough To Cover One Bill
For someone just beginning to build passive income, experts recommend making the goal tangible rather than targeting an arbitrary percentage of income.
Ralph Estep Jr., a licensed public accountant (LPA) and founder of Saggio Management Group, suggested starting with one bill or recurring expense you pay, such as utilities, car insurance or phone and “build until passive income covers it.”
For most people, he said, that is about $100 to $300 per month.
Crystal Gilmore, CFO of The Spearhead Group, also prefers “milestones” of this kind instead of an all-encompassing passive income goal. She said, once you reach the first milestone, then work toward covering 10% of your essential monthly expenses, then 25%, and eventually 50% or more.
“The real goal is to steadily reduce the percentage of your lifestyle that depends entirely on your next paycheck,” she said.
Focus First on Creating Money To Invest
Estep is clear that for most lower-income households, the idea of passive income “is a pipe dream.” What people who have less money to spare can do is “start to be more intentional with your spending and start to put aside money in investments as a percentage of your income or even a flat dollar amount each month.”
Gilmore agreed that even modest contributions can establish a good habit and add up to income more quickly than you might think.
As Your Income Rises, Turn More of Your Paycheck Into Assets
The role of passive income changes as earnings grow. At a lower salary, it can provide financial breathing room. At a higher salary, the opportunity is to prevent lifestyle creep by directing more income toward investments and other assets capable of generating future income, Estep said.
Gilmore pointed out that a high salary alone does not necessarily make you wealthy and that habits are more effective than just having money to invest.
“The transition happens when you consistently use some of today's active income to create assets that can produce tomorrow's income," she said.
Covering Housing Can Be a Major Wealth-Building Turning Point
A more ambitious milestone is generating enough passive income to cover the rent or mortgage. Estep puts that threshold at more than $1,500 monthly for a typical household. He said this gives a person more power.
“Once the rent or mortgage is covered by something other than your paycheck, you negotiate differently, you tolerate less and a layoff becomes a problem instead of a crisis. For a typical household that is somewhere north of $1,500 a month," he said.
Estep outlined his milestones below:
5 years: $200 to $500 monthly, potentially covering one or two bills
10 years: roughly 20% to 25% of expenses
20 years: enough to cover most core expenses
The Long-Term Goal Is To Make Work Optional
The passive income needed to build wealth isn't defined by salary alone but by habits. The goal is to have enough income-producing assets to support your desired lifestyle without relying entirely on employment. However, Estep also reminds people that “Passive income is slow and boring, and the boring part is the point."
The number driving all of it "is the gap between what you earn and what you spend," he said.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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